Carfinco Announces 2014 Third Quarter Results

TSX: CFN

Readers are referred to the cautionary notes regarding Forward-Looking Statements and Non-IFRS Financial Measures at the end of this release.  All figures are expressed in Canadian dollars.

EDMONTON, Nov. 12, 2014 /CNW/ - Carfinco Financial Group Inc. ("Carfinco" or the "Company") announces financial results for the third quarter ended September 30, 2014.

During the third quarter of 2014 Carfinco Financial Group Inc. ("Carfinco" or the "Company") announced that it entered into an Arrangement Agreement with Banco Santander, S.A. and Santander Holding Canada Inc., a wholly owned subsidiary of Banco Santander, S.A., to acquire Carfinco (the "Arrangement").  Pursuant to the Arrangement each Carfinco shareholder will receive cash consideration of $11.25 for each common share of Carfinco, representing total equity value on a fully diluted basis of approximately $298 million.  Subsequent to the third quarter of 2014, at a special meeting of Carfinco shareholders, the shareholders passed a special resolution approving the Plan of Arrangement, which was announced in a news release dated November 10, 2014.

The Arrangement was approved by 99.71% of the votes cast by shareholders, voting as a single class, present in person or represented by proxy and by 99.61% of the votes cast by shareholders present in person or represented by proxy, excluding the votes required to be excluded in determining minority approval pursuant to Multilateral Instrument 61-101.  Both votes exceeded the required approvals.

Carfinco expects the completion of the Arrangement to occur near the end of the fourth quarter of 2014 or early in the first quarter of 2015.  The timing is dependent on the satisfaction or waiver of certain conditions described in the information circular dated October 3, 2014, which was mailed to shareholders and is available on SEDAR at www.sedar.com under Carfinco's profile. The completion of the Arrangement is also subject to the approval of the Court of Queen's Bench of Alberta.

HIGHLIGHTS FOR THE THIRD QUARTER OF 2014

• Earnings per share for the quarter of 17 cents;
• Dividends to shareholders of 12.0 cents per share;
• Return on shareholders' equity of 23.9%;
• Return on portfolio assets of 6.8%;
• Revenue of $25.4 million;
• Record loan originations of $64.4 million;
• Record finance receivables of $269.4 million; and
• 31+ day delinquent accounts for the third quarter of 2014 were 4.6%.

Net earnings in the quarter were $4.4 million, a decrease from the $5.4 million for the second quarter of 2014 and an increase from $4.3 million for the third quarter of 2013.  Significant differences to note are $648,026 in legal fees incurred during the third quarter of 2014 related to acquisitions versus $nil during the second quarter of 2014, and the addition of $825,000 to the allowance for credit losses during the third quarter of 2014 versus $725,000 during the second quarter of 2014.  This increased allowance requirement was a result of the portfolio growth achieved in the current quarter.

The 2014 year to date dividend of 36.0 cents represents a pay-out ratio of 44.7% of distributable cash versus last year's comparable year to date dividend of 36.0 cents equating to a pay-out ratio of 48.3% of distributable cash.

Revenues of $25.4 million for the third quarter of 2014 represented an increase of $1.0 million from the revenues of $24.3 million for the second quarter of 2014 and an increase of $3.9 million from revenues of $21.4 million earned in the third quarter of 2013.

The third quarter of 2014 produced record loan originations of $64.4 million, increasing 19.2% from the previous quarter's loan originations of $54.0 million. The $64.4 million also represents a year over year increase of 38.5% from the $46.5 million in loan originations for the third quarter of 2013.

With record loan originations of $64.4 million, Carfinco was able to achieve finance receivable portfolio growth of $17.2 million in the quarter with finance receivables of $269.4 million. This also represents a $28.5 million increase from the third quarter of 2013.

As the Canadian non-prime auto finance market becomes increasingly competitive with start-up entities entering the market, Carfinco continuously evaluates the competitiveness of our credit policies and programs, as we strive to focus more heavily on the long-term strength of our finance receivable portfolio and future earnings growth potential, rather than short-term gains. Carfinco also continues to add financing programs that are beneficial to both its dealership group and to its business strategy, such as a loyalty program designed to retain its valued customers who have established a positive payment history with Carfinco.

During the quarter, the annualized loss rate on the finance receivables increased to 15.7% from 14.6% in the second quarter of 2014, 15.2% in the first quarter of 2014, and increased year over year from 13.9% in the third quarter of 2013. Historically, the annualized loss rate has ranged from as low as the 11.2% in the second quarter of fiscal 2012 to as high as 20.7%¹ in the second quarter of fiscal 2009, during the height of the economic downturn.  Management estimates the annualized loss rate to range from 13% to 16% on a normalized basis depending on the Company's portfolio mix. The highest annualized loss rates come from our dealer participation program where we retain a minimum 18% reserve on the amount owed to the dealership to offset future losses before the dealership receives any of the reserve amounts.

31+days delinquent accounts for the third quarter of 2014 were 4.6%, an increase from the 3.5% recorded for the second quarter of 2014 and 4.0% recorded for both the first quarter of 2014 and the fourth quarter of 2013.

 ¹ Presented under previous Canadian GAAP

Return on shareholders' equity for the third quarter of fiscal 2014 was 23.9% versus 30.1% for the second quarter of 2014 and 26.3% for the third quarter of 2013. At the end of the third quarter of 2014 the debt-to-equity ratio was 2.58:1, compared to 2.41:1 at the end of the second quarter of 2014 and 2.30:1 at the end of the third quarter of 2013.  Please review the MD&A for further financial comparisons and information.

Thank you to all our shareholders.

Tracy Graf,
Chief Executive Officer

For additional information relating to the Company, including the Company's financial statements and management's discussion and analysis as at and for the three and nine months ended September 30, 2014 and 2013, please visit www.carfinco.com or SEDAR at www.sedar.com. 

About Carfinco Financial Group Inc. 

Carfinco, through its Canadian and United States subsidiaries (collectively, "Carfinco"), focuses on providing indirect consumer vehicle loans to borrowers unable to obtain financing through traditional lending sources.  A network of select independent and franchise dealerships offer Carfinco's payment plans to their customers who must, along with the vehicle, meet Carfinco's underwriting guidelines. The shares of Carfinco trade on The Toronto Stock Exchange under the symbol "CFN".

Caution Regarding Forward-Looking Statements – This news release contains certain forward-looking statements, including statements regarding the business and anticipated financial performance of the company.  These statements are subject to a number of risks and uncertainties.  Actual results may differ materially from results contemplated by the forward-looking statements.  When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and should not place undue reliance on such forward-looking statements.

Caution Regarding Non-IFRS Financial Measures – Carfinco uses certain measures in this press release which do not have a standardized meaning as prescribed by International Financial Reporting Standards ("IFRS"), and are unlikely to be comparable to similar measures presented by other issuers.  These non-IFRS measures have been presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company but should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS.  Please refer to the Company's management's discussion and analysis as at and for the three and nine months ended September 30, 2014 and 2013 for definitions and reconciliations of these non-IFRS measures to measures prescribed by IFRS. 

Selected Quarterly Information and Key Financial Ratios
($000's for stated value, except percentages, shares outstanding and per share amounts)
									September 30, 2014			December 31, 2013			September 30, 2013
Total revenue									$	25,367		$	24,850		$	21,427
Net earnings									$	4,408		$	5,078		$	4,306
Normalized earnings before taxes									$	6,270		$	7,656		$	7,355
Earnings per share – basic and diluted									$	0.17		$	0.19		$	0.16
Finance receivables									$	269,388		$	244,194		$	240,887
Loan originations									$	64,399		$	45,997		$	46,491
Annualized loss rate										15.7%			14.7%			13.9%
Delinquency percentage										4.6%			4.0%			3.3%
Shareholders' equity									$	74,516		$	68,340		$	66,121
Shares outstanding										26,471			26,471			26,471
Book value per share									$	2.81		$	2.58		$	2.50
Cash dividends per share									$	0.120		$	0.120		$	0.120
Payout ratio										47.4%			47.3%			51.7%
Financial leverage ratio										2.58:1			2.25:1			2.30:1
Return on shareholders' equity										23.9%			30.2%			26.3%
Return on portfolio assets										6.8%			8.4%			7.9%
Return on invested capital										15.6%			18.1%			17.2%
Average portfolio yield										38.9%			41.0%			39.3%
Average cost of borrowing										4.5%			5.1%			5.0%
Operating and other expense ratio
	on portfolio assets									10.2%			10.3%			10.4%

Consolidated Statements of Financial Position
														September 30,		December 31,
														2014		2013
														(unaudited)		(audited)
Assets
Finance receivables													$	269,387,667	$	244,194,281
	Allowance for credit losses													(13,175,000)		(11,475,000)
Finance receivables – net														256,212,667		232,719,281
Cash														1,232,481		1,626,552
Inventories														309,185		314,548
Other assets														1,882,637		2,397,347
Taxes receivable														825,511		-
Equipment														1,093,918		885,217
Goodwill														3,199,452		3,036,169
Intangible assets														1,149,566		1,267,796
Deferred tax assets														1,198,204		971,320
														10,890,954		10,498,949
													$	267,103,621	$	243,218,230
Liabilities
Bank credit facilities													$	186,219,534	$	160,511,596
Accounts payable and accrued liabilities														2,182,799		1,891,534
Subordinated debentures														-		6,174,198
Taxes payable														362,920		249,288
Deferred tax liabilities														302,334		792,302
Deferred dealer obligation														2,537,060		2,927,085
Interest rate swap														132,845		410,147
Deferred lease inducement														122,282		130,872
Contingent consideration														728,183		1,791,178
														192,587,957		174,878,200
Shareholders' Equity
Share capital														51,630,280		51,630,280
Retained earnings														22,228,626		16,571,489
Accumulated other comprehensive income														656,758		138,261
														74,515,664		68,340,030
													$	267,103,621	$	243,218,230

Consolidated Statements of Earnings, and Comprehensive Income
										Three months ended				Nine months ended
										September 30,		September 30,		September 30,		September 30,
(unaudited)										2014		2013		2014		2013
Financial revenue
	Interest revenue								$	24,149,663	$	20,239,557	$	70,022,755	$	56,457,038
	Fee and servicing income									1,217,445		1,187,433		3,641,766		3,680,086
	Total revenue									25,367,108		21,426,990		73,664,521		60,137,124
Financial expenses
	Interest expense									2,010,080		1,757,536		6,060,927		4,964,342
	Provision for credit losses									11,062,407		8,087,258		30,302,938		21,863,716
	(Gain) loss on interest rate swap									(79,679)		155,372		(277,302)		(111,508)
	Total financial expense									12,992,808		10,000,166		36,086,563		26,716,550
Net financial income before operating
	and other expenses and taxes									12,374,300		11,426,824		37,577,958		33,420,574
Operating and other expenses
	General and administrative									6,920,153		5,574,802		18,378,052		13,349,112
	Depreciation of equipment									89,809		59,538		230,931		157,944
	Amortization of intangible assets									83,445		22,175		247,673		22,175
	Gain on contingent consideration									(472,726)		-		(1,133,016)		-
	Total operating and other expenses									6,620,681		5,656,515		17,723,640		13,529,231
Earnings before taxes										5,753,619		5,770,309		19,854,318		19,891,343
Taxes
	Current									1,622,413		1,514,888		5,414,285		5,371,254
	Deferred (recovery)									(276,704)		(50,985)		(746,826)		(600,833)
	Total taxes									1,345,709		1,463,903		4,667,459		4,770,421
Net earnings									$	4,407,910	$	4,306,406	$	15,186,859	$	15,120,922
Other comprehensive income
Foreign currency translation differences on
	foreign operation									303,763		(179,152)		518,497		(179,152)
Comprehensive income									$	4,711,673	$	4,127,254	$	15,705,356	$	14,941,770
Earnings per share
	Basic and diluted								$	0.17	$	0.16	$	0.57	$	0.59

Consolidated Statements of Changes in Equity
													Accumulated
													other
									Share		Retained		comprehensive
(unaudited)									capital		earnings		income			Total
Balance, December 31, 2012								$	35,119,425	$	8,848,419		$	-	$	43,967,844
	Share issuance, net of costs								16,029,594		-			-		16,029,594
	Share issuance on business
		acquisition, net of costs							481,261		-			-		481,261
	Net earnings								-		20,199,176			-		20,199,176
	Cash dividends on shares								-		(12,476,106)			-		(12,476,106)
	Foreign currency translation
		differences on foreign operation							-		-			138,261		138,261
Balance, December 31, 2013								$	51,630,280	$	16,571,489		$	138,261	$	68,340,030
	Net earnings								-		15,186,859			-		15,186,859
	Cash dividends on shares								-		(9,529,722)			-		(9,529,722)
	Foreign currency translation
		differences on foreign operation							-		-			518,497		518,497
Balance, September 30, 2014								$	51,630,280	$	22,228,626		$	656,758	$	74,515,664

Consolidated Statements of Cash Flows
														September 30,		September 30,
For the nine months ended (unaudited)														2014		2013
Increase (decrease) in cash
Operating activities
	Net earnings												$	15,186,859	$	15,120,922
	Non-cash items included in net earnings													(29,923,145)		(24,789,948)
	Changes in operating assets and liabilities													(30,900,314)		(23,597,300)
	Interest received													49,319,032		40,006,541
	Interest paid													(5,864,003)		(4,730,134)
	Income taxes paid													(6,125,930)		(7,770,761)
Net cash used in operating activities														(8,307,501)		(5,760,680)
Investing activities
	Purchase of equipment													(425,528)		(162,553)
	Purchase of intangible assets													(65,814)		-
	Business combination, net of cash acquired													-		(8,318,557)
Net cash used in investing activities														(491,342)		(8,481,110)
Financing activities
	Advances on bank credit facilities													35,521,394		31,738,880
	Repayments on bank credit facilities													(11,079,777)		(23,250,000)
	Repayments on subordinated debentures													(6,367,505)		-
	Deferred transaction costs													(230,000)		(163,315)
	Proceeds on treasury share issuance													-		17,267,250
	Share issuance costs													-		(1,244,721)
	Cash dividends to shareholders													(9,529,722)		(9,299,532)
Net cash provided by financing activities														8,314,390		15,048,562
Net (decrease) increase in cash														(484,453)		806,772
Cash, beginning of period														1,626,552		459,498
Effects of foreign exchange rate changes on cash held in foreign currency														90,382		38,883
Cash, end of period													$	1,232,481	$	1,305,153

SOURCE: Carfinco Financial Group Inc.

Mr. Tracy A. Graf, CEO & Director of Carfinco Financial Group Inc., Telephone: [phone], Facsimile: 1-888-486-7456, E-mail: [email protected], Web site: www.carfinco.com; The Howard Group Inc.: Jeff Walker, Investor Relations, Telephone: [phone], E-mail: [email protected], Web site: www.howardgroupinc.com