Canadian Subprime Auto Lender Says It Improved Annual Earnings

July 10, 2009

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RED DEER, Alberta — Despite reporting a net loss in the fourth quarter earnings, RIFCO, a non-prime finance company serving the Canadian auto industry, posted a triple-digit gain in its fiscal-year 2009 income.

More specifically, annual revenue was approximately $13.6 million for the fiscal year ending March 31, up 78.7 percent from the previous year. Meanwhile, net income was $1.42 million, a 162.2-percent upswing from 2008.

Furthermore, the number of credit-applications processed was up 51 percent to 16,165, while loan originations climbed 53.7 percent to $38.3 million.

Managed finance receivables came in at $50.6 million, a 67.6-percent increase.

"The success for the year is attributable to many factors. Our board of directors positioned the company well considering the speed at which all economic and financial assumptions were being challenged," officials explained. "Tough strategic decisions regarding product mix, credit quality, loan volumes and credit pricing have proved, in hindsight, to be largely correct ones.

"Our management team and our dedicated staff executed on the business plan. Key investments in infrastructure and systems continued to yield efficiencies," they continued. "Our financial partnerships provided the required funding throughout the year. Due largely to a reduction in competitors, the lender/dealer industry relationships became more balanced than they were in the past years.

"Lastly, while the strength of the Canadian economy deteriorated during the year, unemployment levels did not become seriously elevated until well into calendar 2009," executives added.

Fiscal 2009 also marked the third consecutive year of "solid" profitability for RIFCO, which also passed the $100 million milestone in loan originations.

Looking at the fourth-quarter results, the company reported a net loss of $195,000, compared with net income of $340,000 the prior year.

Quarterly revenue was $2.56 million, down from $2.71 million in the fourth-quarter of 2008. Loan originations dipped 1.6 percent to $7.91 million.

That said, managed finance receivables were up 53.7 percent and applications processed climbed 31.5 percent.

"In Q4, special provisioning totaling an additional $150,000 against future loan loss and $438,000 against future prepayment losses was made," officials explained. "Without these special provisions the company would have reported a profitable quarter."

Looking forward, the company noted: "In keeping a multi year time frame in mind, the company believes that it may be near the most opportune time of the economic cycle in which to originate new auto loans."

As officials explained, in September of 2007, the company began consistently reporting that the market had become "aggressive" and that it was "unprofitable and unsustainable" for risk taking and pricing.

"It is always more convenient to grow originations during the 'peak of the cycle' while eternal optimism reigns and credit quality is being compromised," officials shared. "Loans written during this past euphoric period must still be collected during this current recession. Acting contrary to the marketplace, RIFCO's originations during that period were curtailed as we elected not to match mispriced risk taking."

But with the world "changed," the company suggested that competition in its arena has significantly calmed down.

"The relationship between dealers and lenders was previously unfairly one-sided against the lenders. Relationships are largely more balanced now," officials noted.

"If unemployment is peaking, and new auto loans will be written to those still employed, risk is reduced. If used-car values are bottoming, and new auto loans will be written on vehicles that have already depreciated, risk is reduced," executives continued.

"RIFCO has further tightened its underwriting and yet has seemingly unlimited growth opportunities. Most important, those loans that are underwritten using today's more stringent criteria will perform better than average as the economy improves," they concluded.

AR Canada