Financial Federal Misses Slightly

Financial Federal Corporation’s (FIF - Analyst Report) fourth quarter of fiscal 2009 earnings of 35 cents per share came in two pennies short of the Zacks Consensus Estimate. The earnings for the quarter were also down 29% from 49 cents in the prior-year quarter.

Results were negatively impacted primarily by fewer originations, higher provision for credit losses and increased expenses. However, a significant improvement in net interest margin, decreased cost of debt, and strong liquidity were impressive during the quarter.

Net income for the quarter decreased 27% year-over-year to $8.9 million. Net income for fiscal 2009 came in at $43.1 million, down 14% from $50.1 million in fiscal 2008. Earnings per share for the fiscal year also decreased to $1.72 from $2.01 in the prior year.

Finance receivables originated during the reported quarter, substantially decreased to $60 million from $208 million in the same quarter a year ago. For the full year, finance receivables originated were $488 million compared to $924 million in the prior year. At July 31, 2009, finance receivables outstanding were $1.54 billion, down 21% from $1.94 billion at July 31, 2008.

Net finance income (before provision for credit losses) for the reported quarter decreased 12% year-over-year to $24.6 million. The provision for credit losses increased to $2.4 million from $1.3 million in the prior-year quarter. The increase in provision was a result of increased allowance for credit losses due to higher levels of net charge-offs, delinquencies and non-performing assets.

Net interest margin improved 38 basis points (bps) year-over-year to 6.14% as a result of lower short-term market interest rates. The net yield on finance receivables was 8.92% in the fourth quarter of fiscal 2008 compared to 8.82% in the prior-year quarter. The cost of debt decreased slightly to 4.12% from 4.15% in the prior-year quarter.

Total non-interest expense increased 11% year-over-year to $7.8 million. Expenses increased mostly because of higher non-performing asset costs. The efficiency ratio was 31.6% in the reported quarter compared to 25.0% in the prior-year quarter and the expense ratio was 1.92% compared to 1.42% in the year-ago quarter.

Credit quality continues to deteriorate with net charge-offs rising 12 bps sequentially and 33 bps year-over-year to 0.57% (annualized) of average finance receivables. Non-performing assets rose 198 bps sequentially and 326 bps year-over-year to 5.67% of finance receivables at July 31, 2009.

The company had the ability to prepay $194 million of term notes at par in July and August with a total $425 million conduit. This will result in substantial interest savings based on current LIBOR. Financial Federal’s liquidity remained strong at $410 million.

Return on equity (ROE) for the reported quarter decreased to 7.9% from 11.8% in the prior-year quarter.

Concurrent with its earnings release, the Board of Directors of the company declared a quarterly dividend of 15 cents per share on its common stock. The dividend will be paid on October 23, 2009 to stockholders of record on October 9, 2009.

Though we expect the upcoming results of Financial Federal to benefit from lower funding costs and improved net interest margin, we are concerned with the continuing weakness in originations and anticipate further moderation in credit quality.