President's Letter |
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Ken Hitzig
In my letter to you last year I spoke of our plan to build on Accord’s 2006 success by increasing earnings in the ensuing year. In what shaped up, however, as a year of economic uncertainty both domestically and globally, Accord found itself faced with challenges that stood in the way of fulfilling its goal. Firstly, the booming Canadian economy flattened out in the fourth quarter and as a result we experienced higher write-offs than usual. Secondly, while our U.S. operations were quite profitable, the accelerated depreciation in the U.S. dollar conversion rate blunted their earnings when expressed in Canadian dollars. Lastly, we had a pyrrhic victory of sorts when we achieved a significant surge in business in the second half of the year. While our outstandings rose to record levels at Dec. 31, 2007, we had to set aside higher allowances for losses. This was in keeping with our long-established practice of prudently keeping our allowances in line with the size of our portfolio. All of these developments had a dampening effect on the Company’s drive toward higher earnings. At the same time, I hasten to add that thanks to the diligent efforts of our employees, officers and directors, the over-all picture for 2007 presented positive signs as we prepared to enter 2008. The volume of receivables processed in 2007 grew 6% to a company record of $1.497 billion. Increased competition, among other things, caused a squeeze on yields which resulted in a reduction in gross revenue of 2% to $28.3 million. The cost of borrowing in 2007 went up to $3.0 million, from $2.4 million the previous year, on higher outstandings. General and administrative expenses, including depreciation, were down slightly to $13.4 million compared with $13.6 million in 2006. We sustained a rise in the provision for credit and loan losses, up from $2.0 million in 2006 to $2.4 million in 2007. Our ratio of losses to revenue for 2007 reached 8.5%, while it was 6.8% in 2006. However, there was a favorable aspect to this. The provision for credit and loan losses consists of two elements: (1) actual charge-offs, net of recoveries, and (2) non-cash changes in allowances for potential losses. Actual charge-offs fell by 12% to $1,815,000 in 2007 from $2,072,000 in 2006 despite a 10% rise in the Company’s total portfolio. The allowances charge rose by $697,000 to $586,000 in 2007, whereas there was a recovery of $111,000 in 2006 (more about this below). Net earnings for 2007 were $6,287,000 or 66 cents per diluted share. This compares with $7,117,000 or 72 cents per diluted share the previous year. Return on average equity was 16.0% in 2007 versus 18.3% in 2006. Revenue from operations in Canada rose to $22.1 million in 2007 compared with $22.0 million in 2006. While we did slightly more business, competitive pressure lowered our yields. The cost of borrowed money was $3.3 million in the latest year versus $2.9 million the previous year. General and administrative expenses, including depreciation, declined to $10.2 million in 2007 from $10.4 million in 2006. Provision for credit and loan losses increased to $2.2 million in 2007 versus $1.3 million in 2006. Net earnings from Canadian operations in 2007 declined to $4,303,000 compared with $4,994,000 in 2006. Our U.S. operations had a satisfactory year as we shifted to larger client loans in 2007, at somewhat lower yields. There was a sharp drop in the provision for credit and loan losses in 2007. The reduction in yield was offset by a more favorable loss experience to produce a slightly better bottom line expressed in U.S. dollars. However the continuing fall of the U.S. dollar against the Canadian dollar in 2007 resulted in a reduction in net earnings to $1,984,000 in 2007 compared with $2,123,000 the previous year. At Dec. 31, 2007, you will note an unprecedented increase of 30% in gross factored receivables and loans (owned receivables), which rose to $106 million compared with $81 million a year earlier. In addition, we had outstanding non-recourse receivables (managed receivables) of $100 million, down somewhat from the previous year-end. We receive commissions to underwrite most of the risks of these receivables in the event of customer default. The total "at risk" portfolio at Dec. 31, 2007 increased by 10% to $206 million from $187 million a year earlier. Overall our business activity in Canada and the U.S. is helping North American business grow. The Company continued and renewed its normal course issuer bid in 2007 and we purchased 41,600 shares for cancellation at a cost of $333,000, or an average of $8.00 per share. Options on 53,000 shares were exercised in 2007 for proceeds of $245,000. The number of common shares outstanding at year-end was 9,454,171, up slightly from 9,442,771 a year earlier. Four quarterly dividends of 5.5 cents per share were paid in 2007. Total dividends amounted to 22 cents per share in 2007 compared with 20 cents in 2006. Looking Forward Competition in the United States and Canada continues to be intense. Our non-recourse business in Canada has seen the withdrawal or reduction of activity by a major competitor and the entry into the market of some newer players. This has caused rate pressure in the market as the newcomers cut rates to put business on their books. This has forced a reduction in our yields in this sector as we compete to retain clients and win new ones, a challenge that no doubt will continue in 2008. Our recourse factoring and asset-based lending business in both the U.S. and Canada are now on a strong upward trend. The U.S. economy began to falter in the fourth quarter of 2007, and there was a softening in the Canadian economy as well, although not as severe. The credit crunch in the U.S. has caused most banks to tighten their loan standards and stampede many marginal borrowers to seek financing elsewhere. Our deal flow in the U.S. (and to a lesser extent in Canada) accelerated in the second half of 2007. Without lowering our credit standards, we have been acquiring new clients at an unprecedented rate. At Dec. 31, 2007 our gross outstanding receivables and loans in Canada stood at $73.1 million. This compares with $60.1 million at Dec. 31, 2006 and represents an increase of 22%. Our U.S. outstandings grew from US$18.2 million at Dec. 31, 2006 to US$33.0 million at Dec. 31, 2007, an increase of 81%. As mentioned above, this explains why our allowance accounts increased by $526,000 in 2007 and the related expense by $697,000. The turmoil in the financial markets will not be resolved quickly. A lot of damage has and is being done and growth in the North American economy will be anemic, if at all, in 2008. Accord has excellent relationships with the private equity firms, as well as accountants, bankers and turnaround management people. We also have very experienced managers on our team and we should be able to capitalize on the opportunities opening up in 2008. My sincere thanks to our employees, officers, directors and shareholders for your support and encouragement. I look forward to seeing you at our Annual Meeting on May 7, 2008. Ken Hitzig
Toronto, Ontario
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“Due to the diligent efforts of our employees,
officers and directors the over-all picture
for 2007 presented positive signs as we
prepared to enter 2008.” 
