Aleritas Capital Corp. Q2 2008 Earnings Call Transcript

| About: Brooke Credit (BRCR)

Aleritas Capital Corp. (BRCR) Q2 2008 Earnings Call August 18, 2008 5:00 PM ET

Executives

Jeff Wallace

Robert D. Orr - Chairman and Chief Financial Officer

Michael S. Hess - President, Chief Executive Officer, Vice President and Director

Analysts

Analyst for Michael K. French – Morgan Joseph

Paul Steinborn – Greenfield Investments

Richard Kime – Kensington Management

Operator

Welcome to today’s Aleritas Capital second quarter 2008 earnings call. (Operator Instructions) I would now like to turn the call over to your host, Jeff Wallace.

Jeff Wallace

Welcome and thank you for participating in Aleritas’ second quarter conference call. I’m Jeff Wallace. With me today are Rob Orr, Chairman, and Mike Hess, President.

Before we get started I need to remind everyone that comments made by management today may include certain estimates, projections and other forward-looking statements. These statements speak only as of the date which they are made and are not guarantees to future performance. Actual results may differ materially from those expressed, implied or forecasted in forward-looking statements. Many factors and uncertainties can cause actual results to differ from those indicated in the forward-looking statements which are more fully described in reports and registration statements filed by the company with the Securities and Exchange Commission. Aleritas takes no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks. Aleritas provides a detailed discussion of risk factors and periodic SEC filings and you are encouraged to review these filings closely.

With that I’d like to turn the call over to Rob Orr, Chairman of Aleritas.

Robert D. Orr

The last 120 days have been challenging but as our results bear out progress has been made. As I previously discussed with many of you when Mike and I arrived on March 31st, Aleritas was dealing with liquidity issues that were largely triggered by the hedge fund refinance transaction. Economic circumstances created uncertainty in the market that made it difficult for Aleritas to complete the loan funding as planned. In other less volatile times their refinance transaction would have likely been completed. As a result of our initiatives and the hard work of all of our personnel for the three months ended June 30th, 2008 the company reported after-tax income of $1.1 million or a gain of $0.04 per diluted share compared to after-tax profit of $3.5 million for the same period in the prior year.

We believe that Aleritas management made the right decisions and implemented the proper strategy that positioned the company for a profitable 2008 second quarter. We are encouraged by the second quarter results and a return to profitability. Mike Hess leads our communications initiative and has been the primary liaison with our participating lenders. I have been the primary liaison with our institutional partners. Although we made significant progress during the second quarter a source of frustration has been delays in the payment of servicing fees to our organization by securitization trusts. Servicing fees total approximately $7 million and the delays have adversely impacted our organization cash flows but we expect resolution soon.

We took our medicine in the first quarter in the form of reserves and are starting to get well in the second quarter. I believe that I can now redirect much of attention to Brooke Capital Corporation in an effort to help it return to profitability in the third quarter. Brooke Capital provides title preservation services for Aleritas Capital securitization trusts so its financial well being is important to us and to our secondary market participants and investors. As of June 30th, 2008 Aleritas Capital has stockholders’ equity exceeding $89 million. We hold any book value per share of approximately $3.05 with a capital asset ratio exceeding 30%. As of August 15th, 2008 the closing price of BRCR stock was $0.48 which represents approximately 14% of the quarter end book value per share.

I’d like to turn the call now over to Mike Hess, our Chief Executive Officer.

Michael S. Hess

We still have work to do but being profitable in the second quarter is a step in the right direction. Communication is key to the continuing of our business relationships and the continuing profitability. Our communication initiative implemented earlier in the year encouraged due diligence and on-site visits by participating lenders, servicers, large investors and others. Our efforts to be transparent have strained resources as we have tried to honor all requests for information on a timely basis.

Aleritas Capital was profitable in the second quarter despite the origination of few if any new loans. Until the credit market improves Aleritas Capital will focus on collection of existing loans and assisting existing borrowers. Our community bank network is how we started and it represents one of the strengths of our organization. We value our relationships which is the reason that I am personally involved in managing those relationships.

With that I’ll turn it back over to Rob.

Robert D. Orr

One more note, although equity for lenders is expensive we continue to move forward with plans to raise additional capital.

We will open the call up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Analyst for Michael K. French – Morgan Joseph.

Michael K. French – Morgan Joseph

I just had a question first off about the loan originations, last quarter you expected them to slow to around $5 million to $10 million a month, I’m guessing do we see a bigger slow down than expected?

Robert D. Orr

Second quarter we had almost no loan originations, Jim. It has been extremely difficult so our results don’t reflect any revenues or hardly any revenues from new loan originations.

Analyst for Michael K. French – Morgan Joseph

Do you have any color or any kind of insight you might be able to give on that going forward or is it still unclear?

Robert D. Orr

Jim, that’s going to depend on the markets. Right now, especially with regulators and rating agencies encouraging de-leveraging. It’s just really hard to place loans and of course as we’ve mentioned before our primary source of funding is participating lenders which right now in today’s environment is just very difficult to do. Until credit markets change, until psychology changes I really don’t have much color for that, Jim.

Analyst for Michael K. French – Morgan Joseph

Could you give us an idea of what delinquencies are like in the quarter compared to last quarter?

Robert D. Orr

We did have an increase in delinquencies primarily related to our start up loan portfolio. They primarily resulted, Jim, from two things, one is that we’ve been awful busy around here and we haven’t graduated as many of those as are eligible for graduation and number two is that Brooke Capital Corporation has been focusing all of its recruitment resources on liquidation of troubled agencies and of course the plan we outlined at the last call. We’ve gotten a little bit behind with our startups which has resulted in somewhat of an increase for this last period. Compared to year end I think delinquencies are up about $6 million as compared to year end. Does that sound right, Al? Maybe a little bit more than that, about $16 million since year end.

Analyst for Michael K. French – Morgan Joseph

Also could you just talk a little more about that $7 million in delayed servicing fees, are you expecting that within 60 days?

Robert D. Orr

We’re having very fruitful discussions now with our ABS holders but we do expect, the entire system right now is somewhat nervous and as a result it seems like everything is slower than what we would expect and in the case of our servicing fees ABS holders are just being extremely cautious about those payments. Of course they want to distribute it as much as they can to their investors and they’re not particularly, to the extent that they can delay these payments, they’ve been doing that. But we feel like, Jim, 60 days, 30 days, we feel like the solution is going to happen fairly quickly and to be honest with you, Jim, they have to have happen fairly quickly for us. We have now advanced, and these are out-of-pocket costs for the most part and these are monies that we’ve actually advanced so it’s extremely important to the organization that we do get this resolved pretty soon.

Analyst for Michael K. French – Morgan Joseph

Are you seeing any positives out of the PD Bank renegotiation that you guys announced earlier in the quarter or did you see positives during the second quarter from that?

Robert D. Orr

The overall environment as I said just a minute ago is real nervous and to be quite honest with you, it’s hard to see good things happening right now, Jim, to be quite honest from a general perspective. From an individual perspective, from just our company, yes for instance we’re saving a significant amount of money on non-use fees from the DZ facility. In addition to that you’ll probably notice that we’re also liquidating some of the loans off that portfolio or I think in the agreement we have said we were going to reduce balances which are coming from liquidations. We continue to work closely with DZ and Fifth Third, HBB and all of our major partners here. It’s a very nervous time but yet I believe that we have good working relationships with all of these people.

Analyst for Michael K. French – Morgan Joseph

Is there any way to quantify what you’re saving with DZ?

Robert D. Orr

On the non-use fees?

Analyst for Michael K. French – Morgan Joseph

Yes.

Robert D. Orr

Gosh, I’ll tell you what. It’s going to be real difficult but I’m guessing that it’s $300,000 or $400,000 a year would be thought, Jim. If it’s a very significant amount. DZ was very accommodating and I thought very good in the way that they treated us in understanding that we needed to not be as leveraged as what we have been. So they’ve been very accommodating just helping us get to the point that we need to be.

Operator

Your next question comes from Paul Steinborn – Greenfield Investments.

Paul Steinborn – Greenfield Investments

Just had a quick question on your payables on the participation agreements, I noticed that that continued to rise. Just wondering when these payables mature, what your thoughts on being able to roll them?

Robert D. Orr

Mike is better equipped to address that than I am, but before he starts, Paul, you know from our previous discussions that these increased as a result of that refinance transaction was not fully funded. We’ve been awful busy around here, due diligence requests and many other things but I know that Mike and Brandon, they really turned their attention to the extension of these short term participations over the last several weeks. Mike, do you want to provide a little color here?

Michael S. Hess

We have talked to every one of our participating lenders that have short term and we have either negotiated with them to extend that out to a date certain or they have re-underwrote the credit so they’ll take it as a true sell long term note. We’ve been fairly successful in doing that but the ones that they just feel like there’s more exposure than they want then we’ve been able to extend it out as a short term.

Robert D. Orr

In other words, Paul, we haven’t been able to completely take everything to long term but we have had good success in getting these to, if they won’t go long term, to at least extend out for some period of time, three months, six months or whatever.

Paul Steinborn – Greenfield Investments

How much would you say you have due by the end of the year?

Robert D. Orr

How much by the end of the year?

Paul Steinborn – Greenfield Investments

Yes.

Robert D. Orr

Hold on just a second, Paul, let me collect my thoughts on this. I’m thinking that about half of that long term, if I recall correctly, by the end of the year about half of that long term is due by then and the rest of it 2009. So that’s going to be real close. Mike [inaudible]. I’m sitting here scratching my head, Paul, but that’s going to be pretty close.

Paul Steinborn – Greenfield Investments

So half that $70 million is due by the end of the year?

Robert D. Orr

Yes, it’s about $35 million would be due by the end of the year. That was a little bit higher earlier and we’ve made some progress in this area and that’s why we’re scratching our head here, just trying to figure out just where we were.

Operator

Your next question comes from Richard Kime – Kensington Management.

Richard Kime – Kensington Management

Just have a couple questions, number one if you don’t put on any more loans, can we expect basically, and you don’t have any greater losses than you’ve had in the previous quarter, should we expect about the same operating income for the next quarter?

Robert D. Orr

Richard, what you’ve seen in this quarter is probably pretty representative. Now we did have some expense reductions that were extraordinary but we also had some increases in other expenses such as loan loss reserve that we felt was unusual in the second quarter. So those kind of evened out. It is reasonable to assume what you just said. In other words, something similar to this quarter after quarter if we aren’t originating any new loans but again, overall economic environment here could impact that obviously if we see deterioration in the loan portfolio as a result of economic circumstances or if we end up de-leveraging and selling loans. So there’s things that could impact that and so I’m throwing in some disclaimers here, Richard. But yes under normal circumstances, without increasing in loan loss reserves, this appears to be a level within some sort of tolerable range, this seems to be a level that we would sustain quarter after quarters.

Richard Kime – Kensington Management

Next question is, if you look at your 10-Q you have compensation as a credit, could you explain that? And also the next question would be your G&A went up four times and could you explain that?

Robert D. Orr

That’s what I was just saying, Richard, you dug right into this, thanks. We did have some expenses that turned around and went the other way. One of them was payroll expense. That is primarily as a result of elimination of some deferred compensation packages, some stock brand packages but then we also had increase in other expenses or at least expenses that’s more than historical levels, specifically referring to G&A and this again is one of those things I was talking about is we transitioned, Richard, the second quarter I think overall our expenses ended up where it was probably in a range that could be projected for future months but specific categories are a little bit different. Now, our G&A in particular in previous quarters has been offset by our loan origination loan fees and as a result of those fees reduced our G&A expense. Obviously we didn’t have any originations so that went up. Again, Richard, and I didn’t do a very good job of just explaining this but we believe that our expense levels in this quarter are fairly representative of what future expense levels would be but the individual categories are probably going to be moved around a little bit.

Richard Kime – Kensington Management

If you took those two categories, combine them, they should be about the same?

Robert D. Orr

Yes, they should be about the same but also throw in loan loss reserves, the increase in loan loss reserves, about $2.5 million. If we have normal expenses quarter after quarter then I would think that one could plan on income in these ranges. We still haven’t got to it, second quarter still wasn’t typical. It might have ended up at something we’ve called typical but the individual categories aren’t necessarily that.

Operator

There are no further questions in queue at this time.

Robert D. Orr

We’d like to thank you all for participating this afternoon and have a great afternoon.

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