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ASFI > SEC Filings for ASFI > Form 10-K on 13-Dec-2013All Recent SEC Filings

Show all filings for ASTA FUNDING INC

Form 10-K for ASTA FUNDING INC


13-Dec-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Caution Regarding Forward-Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption "Risk Factors" contained in this report and elsewhere herein. The following should be read in conjunction with our annual financial statements contained elsewhere in this report.

Overview

We are primarily engaged in the business of acquiring, managing, servicing and recovering on portfolios of consumer receivables, and, through Pegasus Funding, LLC, and BP Case Management, LLC, funding of personal injury and matrimonial litigation claims, respectively.

Consumer Receivables

The consumer receivable portfolios generally consist of one or more of the following types of consumer receivables:

charged-off receivables - accounts that have been written-off by the originators and may have been previously serviced by collection agencies;

semi-performing receivables - accounts where the debtor is making partial or irregular monthly payments, but the accounts may have been written-off by the originators; and

performing receivables - in limited circumstances accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past.

We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our investment after servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.

We purchase receivables from credit grantors and others through privately negotiated direct sales, brokered transactions and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:

our relationships with industry participants, financial institutions, collection agencies, investors and our financing sources;

brokers who specialize in the sale of consumer receivable portfolios; and

other sources.

Litigation Funding

In December 2011, we entered into a joint venture with PLF pursuant to which we purchase interests in personal injury claims from claimants who are a party to personal injury litigation, with the expectation of a settlement in the future. Through the joint venture, we advance, to each personal injury claimant, funds on a non-recourse basis, at an agreed upon interest rate, in anticipation of a future settlement. The interest purchased by us in each claim consists of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant's claim. Open case revenue is estimated, recognized and accrued at a rate based on the expected realization and underwriting guidelines and facts and circumstances for each individual case.


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When a case is closed and the cash is received for the advance provided to a claimant, revenue is recognized based upon the contractually agreed upon interest rate and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant.

In May 2012, we entered into a joint venture with Balance Point Management. The joint venture, through a newly-formed indirect subsidiary, Balance Point, provides non-recourse funding to claimants in matrimonial actions. Such funds can be used for legal fees, expert costs and necessary living expenses. The venture will receive an agreed percentage of the proceeds received by such claimant upon final resolution of the case. Balance Point's profits and losses will be distributed 60% to us and 40% to Balance Point Management, after the return of our investment, on a case by case basis, and after a 15% preferred return to us. Should the preferred return be less than 15% on any $5 million tranche, the 60%/40% profit and loss split would be adjusted to reflect our priority to a 15% preferred return.

Critical Accounting Policies

We account for our investments in consumer receivable portfolios, using either:

The interest method; or

The cost recovery method.

As we believe our extensive liquidating experience in certain asset classes such as distressed credit card receivables, consumer loan receivables and mixed consumer receivables has matured, we use the interest method when we believe we can reasonably estimate the timing of the cash flows. In those situations where we diversify our acquisitions into other asset classes in which we do not possess the same expertise or history, or we cannot reasonably estimate the timing of the cash flows, we utilize the cost recovery method of accounting for those portfolios of receivables.

We account for our investment in finance receivables using the interest method under the guidance of ASC 310. Static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. We currently consider for aggregation portfolios of accounts, purchased within the same fiscal quarter, that generally have the following characteristics:

same issuer/originator;

same underlying credit quality;

similar geographic distribution of the accounts;

similar age of the receivable; and

same type of asset class (credit cards, telecommunications, etc.).

After determining that an investment will yield an adequate return on our acquisition cost after servicing fees, including court costs, which are expensed as incurred, we use a variety of qualitative and quantitative factors to determine the estimated cash flows. The following variables are analyzed and factored into our original estimates:

the number of collection agencies previously attempting to collect the receivables in the portfolio;

the average balance of the receivables;

the age of the receivables (as older receivables might be more difficult to collect or might be less cost effective);

past history of performance of similar assets - as we purchase portfolios of similar assets, we believe we have built significant history on how these receivables will liquidate and cash flow;

number of months since charge-off;


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payments made since charge-off;

the credit originator and their credit guidelines;

the locations of the customers as there are better states to attempt to collect in and ultimately we have better predictability of the liquidations and the expected cash flows;

financial wherewithal of the seller;

jobs or property of the customers found within portfolios-with our business model. Customers with jobs or property are more likely to repay their obligation and conversely, customers without jobs or property are less likely to repay their obligation; and

the ability to obtain customer statements from the original issuer.

We will obtain and utilize as appropriate input including, but not limited to, monthly collection projections and liquidation rates, from our third party collection agencies and attorneys, as further evidentiary matter, to assist us in developing collection strategies and in modeling the expected cash flows for a given portfolio.

We acquire accounts that have experienced deterioration of credit quality between origination and the date of our acquisition of the accounts. The amount paid for a portfolio of accounts reflects our determination that it is probable we will be unable to collect all amounts due according to the portfolio of accounts' contractual terms. We consider the expected payments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio coupled with expected cash flows from accounts available for sales. The excess of this amount over the cost of the portfolio, representing the excess of the account's cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the expected remaining life of the portfolio.

We believe we have significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. We acquire these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that we believe our estimated cash flow offers us an adequate return on our acquisition costs including servicing expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers from whom we have little or limited experience, we have the added benefit of soliciting our third party collection agencies and attorneys for their input on liquidation rates and at times incorporate such input into the price we offer for a given portfolio and the estimates we use for our expected cash flows.

As a result of the current challenging economic environment and the impact it has had on collections, for the non-medical account portfolio purchases acquired since the beginning of fiscal year 2009, we extended our time frame of the expectation of recovering 100% of our invested capital to a 24-39 month period from an 18-28 month period, and the expectation of recovering 130-140% over seven years from the previous five year expectation. The 2009 time frame of expectations has remained in force for fiscal year 2013. We routinely monitor these expectations against the actual cash flows and, in the event the cash flows are below our expectations and we believe there are no reasons relating to mere timing differences or explainable delays (such as can occur particularly when the court system is involved) for the reduced collections, an impairment is recorded on portfolios accounted for under the interest method. Conversely, in the event the cash flows are in excess of our expectations and the reason is due to timing, we would defer the "excess" collection as deferred revenue.

We use the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no finance income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as finance income when received.


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Results of Operations

The following discussion of our operations and financial condition should be read in conjunction with our financial statements and notes thereto included elsewhere in this report. In these discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all such figures are approximations.

                                                            Years Ended September 30,
                                                        2013           2012           2011
Finance income, net                                       81.0 %         91.2 %         98.7 %
Other income                                              19.0 %          8.8 %          1.3 %

Total revenue                                            100.0 %        100.0 %        100.0 %

General and administrative expenses                       57.1 %         53.1 %         50.5 %
Interest expense                                           3.1 %          5.7 %          7.0 %
Impairments of consumer receivables acquired for
liquidation                                               29.7 %          3.1 %          1.7 %

Income before income taxes                                10.1 %         38.1 %         40.8 %
Income tax expense                                         2.7 %         15.5 %         16.4 %

Net income                                                 7.4 %         22.6 %         24.4 %
Less: net income attributable to non-controlling
interest                                                   0.9 %          0.1 %            - %

Net income attributable to Asta Funding, Inc.              6.5 %         22.5 %         24.4 %

Year Ended September 30, 2013 Compared to the Year Ended September 30, 2012

Finance income. For the year ended September 30, 2013, finance income decreased $6.2 million, or 15.4%, to $34.4 million from $40.6 million for the year ended September 30, 2012. The decrease is primarily due to the lower level of portfolio purchases over the last three years and, as a result, an increased percentage of our portfolio balances are in the later stages of their yield curves. During the fiscal year ended September 30, 2013, we acquired $53.5 million in face value of new portfolios at a cost of $3.3 million as compared to $6.0 million of face value portfolios at a cost of approximately $2.5 million, during the fiscal year ended September 30, 2012. Finance income recognized from fully amortized portfolios (zero basis revenue) was $33.2 million for the year ended September 30, 2013 as compared to $36.4 million for the year ended September 30, 2012.

Net collections decreased $15.9 million, or 22.7% to $54.1 million for the fiscal year ended September 30, 2013, from $70.0 million for the fiscal year ended September 30, 2012. During fiscal year 2013, gross collections decreased 21.2% to $85.5 million from $108.5 million for fiscal year 2012, reflecting the lower level of purchases and the age of our portfolios. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $7.1 million, or 18.3% as compared to the same period in the prior year and averaged 36.7% of collections for the fiscal year ended September 30, 2012 as compared to 35.5% in the same prior year period. The higher rate was the result of higher collections (of higher commissioned) out-of-statute paper coupled with increased asset search costs in the current fiscal year.

Further, as we have curtailed our purchases of new portfolios of consumer receivables in the last three fiscal years, finance income was negatively impacted and we expect will continue to be negatively impacted going forward since we have not been replacing our receivables acquired for liquidation. Instead, we focused on reducing our debt and being highly disciplined in our portfolio purchases. We continue to review potential portfolio acquisitions regularly and will purchase such portfolios when we believe the purchase will yield our desired rate of return, as we did with the purchase of a consumer debt portfolio during the fiscal year 2013. There were no accretable yield adjustments recorded during the fiscal years ended September 30, 2013 and 2012.


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Other income. The following table summarizes other income for the years ended September 30, 2013 and 2012:

                                               2013             2012
             Interest and dividend income   $ 1,583,000      $ 1,614,000
             Personal injury fee income       6,438,000        1,647,000
             Matrimonial fee income              34,000          165,000
             Realized (losses) gains            (27,000 )        339,000
             Service fee income                  25,000           92,000
             Other                               (4,000 )         46,000

                                            $ 8,049,000      $ 3,903,000

General and administrative expenses. For the year ended September 30, 2013, general and administrative expenses increased $0.6 million, or 2.4%, to $24.2 million from $23.6 million for the year ended September 30, 2012. The increase is due primarily to increased expenses related to Pegasus Funding, LLC (12 months in fiscal year 2013 compared to nine months in fiscal year 2012) and other corporate initiatives, offset by lower collection expenses of the consumer debt operations which include lower salary and benefit costs, resulting from a headcount reduction in January 2013, and other collection expenses. The costs associated with the collection business decreased 16.0% from fiscal year 2012.

Interest expense. For the year ended September 30, 2013, interest expense decreased $1.2 million or 48.8% to $1.3 million from $2.5 million during the year ended September 30, 2012. The decrease was due primarily to the reduction in the balance of our Receivables Financing Agreement ("Receivables Financing Agreement") with the Bank of Montreal ("BMO") during the year ended September 30, 2013, as compared to the year ended September 30, 2012.

Impairments. We recorded impairments of $12,592,000 during the year ended September 30, 2013 of which $10,148,000 was recorded on the Great Seneca portfolio (i.e. "the Portfolio Purchase"). Impairments of $1,383,000 for the year ended September 30, 2012, as collections on various portfolios were short of expectations.

Income tax expense. Income tax expense of $1.2 million recorded for fiscal year 2013 consists of a $0.9 million current income tax expense and a $0.3 million deferred income tax expense. Income tax expense was lower primarily due to lower pre-tax income. In fiscal year 2012, income tax expense of $6.9 million consisted of a current income tax expense of $3.5 million and a deferred income tax expense of $3.4 million.

Net income. For the year ended September 30, 2013, net income decreased $ 6.9 million to $3.1 million from $10.0 million for the year ended September 30, 2012, primarily reflecting decreased total revenue, increased general and administrative expenses and impairments further offset by lower interest expense and income taxes.

Income attributable to non-controlling interest. Income to non-controlling interests increased to $0.4 million from $31 thousand due to the improvement in the results of the joint venture Pegasus Funding, LLC.

Net income attributable to Asta Funding, Inc. For the year ended September 30, 2013, net income attributable to Asta Funding, Inc decreased $7.3 million to $2.7 million from $10.0 million for the year ended September 30, 2012, primarily reflecting decreased total revenue, increased general and administrative expenses, impairments and income to non-controlling interests partially offset by lower interest expense and income taxes. Net income per diluted share for the year ended September 30, 2013 decreased to $0.21 per diluted share down from $0.70 per diluted share for the year ended September 30, 2012.

Year Ended September 30, 2012 Compared to the Year Ended September 30, 2011

Finance income. For the year ended September 30, 2012, finance income decreased $2.0 million, or 4.7%, to $40.6 million from $42.6 million for the year ended September 30, 2011. The decrease is primarily due to the


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lower level of portfolio purchases over the last two years and, as a result, an increased percentage of our portfolio balances are in the later stages of their yield curves. During the fiscal year ended September 30, 2012, we acquired $6.0 million in face value of new portfolios at a cost of $2.5 million as compared to $19.5 million of face value portfolios at a cost of approximately $7.5 million, during the fiscal year ended September 30, 2011. Finance income recognized from fully amortized portfolios (zero basis revenue) was $36.4 million for the year ended September 30, 2012 as compared to $34.3 million for the year ended September 30, 2011.

Net collections decreased $11.2 million, or 13.8% to $70.0 million for the fiscal year ended September 30, 2012, from $81.2 million for the fiscal year ended September 30, 2011. During fiscal year 2011, gross collections decreased 16.3% to $108.5 million from $129.7 million for fiscal year 2011, reflecting the lower level of purchases, the age of our portfolios and the slowdown in the economy. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $10.0 million, or 20.7% as compared to the same period in the prior year and averaged 35.5% of collections for the fiscal year ended September 30, 2012 as compared to 37.4% in the same prior year period. The lower rate was the result of a one-time $1.3 million charge in the fourth quarter of fiscal year 2011 that impacted commissions and fees.

Further, as we have curtailed our purchases of new portfolios of consumer receivables in the last three fiscal years, finance income was negatively impacted and we expect will continue to be negatively impacted going forward since we have not been replacing our receivables acquired for liquidation. Instead, we focused on reducing our debt and being highly disciplined in our portfolio purchases. We continue to review potential portfolio acquisitions regularly and will purchase such portfolios when we believe the purchase will yield our desired rate of return. There were no accretable yield adjustments recorded during the fiscal years ended September 30, 2012 and 2011.

Other income. The following table summarizes other income for the years ended September 30, 2012 and 2011:

                                                2012            2011
              Interest and dividend income   $ 1,614,000     $  579,000
              Personal injury fee income       1,647,000              -
              Matrimonial fee income             165,000              -
              Realized gains                     339,000              -
              Service fee income                  92,000         86,000
              Other                               46,000       (108,000 )

                                             $ 3,903,000     $  557,000

General and administrative expenses. For the year ended September 30, 2012, general and administrative expenses increased $1.8 million, or 8.4%, to $23.6 million from $21.8 million for the year ended September 30, 2011. The increase is due primarily to increased professional fees related to acquisition activity and other corporate initiatives, offset by lower collection expenses which include lower salary and benefit costs. In addition, there were increased expenses related to the investment in the personal injury financing unit, Pegasus Funding, LLC.

Interest expense. For the year ended September 30, 2012, interest expense decreased $0.5 million or 15.8% to $2.5 million from $3.0 million during the year ended September 30, 2011. The decrease was due primarily to the reduction in the balance of our Receivables Financing Agreement ("Receivables Financing Agreement") with the Bank of Montreal ("BMO") during the year ended September 30, 2012, as compared to the year ended September 30, 2011. Additionally, the average interest rate during the year ended September 30, 2012 on the Receivable Financing Agreement was 3.76% as compared to 3.75% during the year ended September 30, 2011. Also, we repaid the outstanding borrowings on our subordinated debt during fiscal year 2011.

Impairments. We recorded impairments of $1,383,000 during the year ended September 30, 2012 as compared to $721,000 for the year ended September 30, 2011, as collections on various portfolios were short of expectations.


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Income tax expense. Income tax expense for fiscal year 2012 of $6.9 million consists of a current tax expense of $3.5 million and a deferred tax expense of $3.4 million. The $3.4 million deferred tax expense consists of $1.8 million of federal tax expense and $1.6 million in state deferred expense. The true up adjustments for the fiscal years 2012 and 2011 federal tax returns were not material.

Net income. For the year ended September 30, 2012, net income decreased $0.5 million to $10.0 million from $10.5 million for the year ended September 30, 2011, primarily reflecting increased total revenue offset by increased general and administrative expenses and impairments further offset by lower interest expense and income taxes. Net income per diluted share for the year ended September 30, 2012 decreased slightly to $0.70 per diluted share down from $0.71 per diluted share for the year ended September 30, 2011.

Liquidity and Capital Resources

Our primary source of cash from operations is collections on the receivable portfolios we have acquired. Our primary uses of cash include repayments of debt, our purchases of consumer receivable portfolios, interest payments, costs involved in the collections of consumer receivables, taxes and dividends, if approved. In the past, we relied significantly upon our lenders to provide the funds necessary for the purchase of consumer receivables acquired for liquidation.

Receivables Financing Agreement

In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement, as amended, in order to finance the Portfolio Purchase. The Portfolio Purchase had a purchase price of $300 million (plus 20% of net payments after Palisades XVI recovers 150% of its purchase price plus cost of funds, which recovery has not yet occurred). Prior to the modification, discussed below, the debt was full recourse only to Palisades XVI and bore an interest rate of approximately 170 basis points over LIBOR. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments to the Receivables Financing Agreement as discussed below. The Portfolio Purchase is serviced by Palisades Collection LLC, our wholly owned subsidiary which has engaged unaffiliated subservicers for a majority of the Portfolio Purchase.

Since the inception of the Receivables Financing Agreement, amendments have been signed to revise various terms of the Receivables Financing Agreement. Currently, we are operating under the Settlement Agreement and Omnibus Amendment ("Settlement Agreement").

On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement with BMO as an amendment to the Receivables Financing Agreement. In consideration for a $15 million prepayment funded by the Company, BMO has agreed to significantly reduce minimum monthly payment requirements and the interest rate. If and when BMO receives the next $15 million of collections from the Portfolio Purchase, less certain credits for payments made prior to the consummation of the Settlement Agreement, the Company is entitled to receive the next $15 million in net collections, thus recovering . . .

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