UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES
OUTSTANDING AT
CLASS AUGUST 31, 2000
----- ---------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
JULY 31, 2000
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2000 and
July 31, 2000 ..................................................... 3
Consolidated Statements of Operations for the Three Months
Ended July 31, 1999 and 2000 ...................................... 4
Consolidated Statement of Shareholders' Equity for the Three Months
Ended July 31, 2000 ............................................... 5
Consolidated Statements of Cash Flows for the Three Months Ended
July 31, 1999 and 2000 ............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports On Form 8-K .................................. 23
SIGNATURES ................................................................. 23
2
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 2000 AND JULY 31, 2000
APRIL 30, JULY 31,
2000 2000
--------------- ------------
(AUDITED) (UNAUDITED)
ASSETS
Receivables Held for Investment,
net................................ $ 235,954,788 $252,428,816
Receivables Acquired for Investment,
net................................ 21,888,454 18,364,029
Investment in Trust Certificates..... 5,848,688 4,947,845
Cash and Short-Term Investments,
including restricted cash of
$23,411,293 and $25,014,630........ 25,520,158 27,505,881
Accrued Interest..................... 3,313,630 3,432,576
Assets Held for Sale................. 1,007,256 1,079,041
Other Assets:
Funds held under reinsurance
agreement..................... 3,842,641 4,075,036
Deferred financing costs and
other assets, net of
accumulated amortization and
depreciation of $3,133,823 and
$3,609,201.................... 5,818,338 5,493,610
Deferred income taxes
receivable, net............... 64,875 187,763
--------------- ------------
Total assets............... $ 303,258,828 $317,514,597
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Term Notes...................... $ 151,104,279 $133,591,819
Acquisition term facility....... 26,211,787 20,183,815
Warehouse credit facilities..... 77,544,889 115,315,669
Working capital facility........ 13,300,000 13,300,000
Other Liabilities:
Accounts payable and accrued
liabilities................... 4,444,984 4,047,175
Current income taxes payable.... 527,042 455,674
--------------- ------------
Total liabilities.......... 273,132,981 286,894,152
--------------- ------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares authorized,
5,566,669 and 5,566,669 issued
and outstanding............... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 11,655,362 12,149,960
--------------- ------------
Total shareholders'
equity................... 30,125,847 30,620,445
--------------- ------------
Total liabilities and
shareholders' equity..... $ 303,258,828 $317,514,597
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 2000
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JULY 31,
----------------------------
1999 2000
------------ --------------
Interest Income...................... $ 9,609,333 $ 10,989,191
Interest Expense..................... 3,879,688 5,090,998
------------ --------------
Net interest income........ 5,729,645 5,898,193
Provision for Credit Losses.......... 1,156,174 1,979,650
------------ --------------
Net Interest Income After Provision
for Credit Losses.................. 4,573,471 3,918,543
------------ --------------
Other Income:
Servicing....................... 404,001 203,828
Late fees and other............. 507,341 640,235
------------ --------------
Total other income......... 911,342 844,063
------------ --------------
Operating Expenses:
Servicing fees.................. 434,572 --
Salaries and benefits........... 2,194,578 2,393,348
Other interest expense.......... 226,833 331,387
Other........................... 1,522,663 1,258,977
------------ --------------
Total operating expenses... 4,378,646 3,983,712
------------ --------------
Income Before Provision for Income
Taxes.............................. 1,106,167 778,894
------------ --------------
Provision (Benefit) for Income Taxes:
Current......................... 675,869 407,184
Deferred........................ (272,118) (122,888)
------------ --------------
Total provision for income
taxes.................... 403,751 284,296
------------ --------------
Net Income........................... $ 702,416 $ 494,598
============ ==============
Basic and Diluted Net Income per
Common Share....................... $0.13 $0.09
============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 2000
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------------- -------------- --------------
Balance, April 30, 2000.............. $5,567 $ 18,464,918 $ 11,655,362 $ 30,125,847
Net income...................... -- -- 494,598 494,598
------- -------------- -------------- --------------
Balance, July 31, 2000............... $5,567 $ 18,464,918 $ 12,149,960 $ 30,620,445
======= ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 2000
(UNAUDITED)
1999 2000
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 702,416 $ 494,598
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 1,035,272 1,206,829
Provision for credit
losses................... 1,156,174 1,979,650
Charge-offs, net of
recoveries............... (913,761) (1,828,256)
(Increase) decrease in:
Accrued interest
receivable............... (598,192) (118,946)
Restricted cash............ 878,397 (1,603,337)
Deferred financing costs
and other assets......... (361,127) (83,442)
Funds held under
reinsurance agreement.... (364,037) (232,395)
Due from servicer.......... 14,065,957 --
Deferred income taxes
receivable, net.......... (272,118) (122,888)
Increase (decrease) in:
Accounts payable and
accrued liabilities...... 124,597 (397,809)
Current income taxes
payable.................. 589,787 (71,368)
--------------- ---------------
Net cash provided by
operating
activities.......... 16,043,365 (777,364)
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of Receivables Held for
Investment.................... (37,238,579) (39,026,822)
Principal payments from
Receivables Held for
Investment.................... 15,821,137 21,576,767
Principal payments from
Receivables Acquired for
Investment.................... 5,844,281 3,524,425
Principal payments from Trust
Certificates.................. 1,689,076 900,843
Purchase of furniture and
equipment..................... -- (45,811)
--------------- ---------------
Net cash used in
investing
activities.......... (13,884,085) (13,070,598)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Warehouse credit
facilities............... 31,524,980 40,414,935
Working capital facility... 5,365,000 --
Principal payments made on --
Term Notes................. -- (17,512,460)
Warehouse credit
facilities............... (16,203,196) (2,644,155)
Working capital facility... (5,000,000) --
Acquisition term
facility................. (9,177,516) (6,027,972)
--------------- ---------------
Net cash provided by
financing
activities.......... 6,509,268 14,230,348
--------------- ---------------
Increase (Decrease) in Cash and
Short-Term Investments............. 8,668,548 382,386
Cash and Short-Term Investments at
Beginning of Period................ 4,028,236 2,108,865
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 12,696,784 $ 2,491,251
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 3,686,941 $ 4,889,932
Income taxes............... 86,082 478,552
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 2000
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its direct and indirect subsidiaries (collectively
referred to as the Company) is principally involved in the business of acquiring
and holding for investment retail installment contracts and promissory notes
secured by new and used automobiles and light trucks (receivables) originated by
factory authorized franchised dealers. As of July 31, 2000, approximately 28
percent of Receivables Held for Investment had been originated in Texas. The
Company currently operates in 26 states.
On October 2, 1998, the Company completed the acquisition of First
Investors Servicing Corporation (FISC) formerly known as Auto Lenders Acceptance
Corporation. Headquartered in Atlanta, Georgia, FISC was engaged in essentially
the same business as the Company and additionally performs servicing and
collection activities on a portfolio of receivables acquired for investment as
well as on a portfolio of receivables acquired and sold pursuant to two asset
securitizations. As a result of the acquisition, the Company increased the total
dollar value on its balance sheet of receivables, acquired an interest in
certain Trust Certificates related to the asset securitizations and acquired
certain servicing rights along with furniture, fixtures, equipment and
technology to perform the servicing and collection functions for the portfolio
of receivables under management. The Company performs servicing and collection
functions on loans originated from 31 states on a Managed Receivables Portfolio
of $296.3 million.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
Company's financial position as of July 31, 2000, and the results of its
operations for the three months ended July 31, 1999 and 2000, and its cash flows
for the three months ended July 31, 1999 and 2000.
The consolidated financial statements for the interim periods have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information not misleading. These financial statements should be read
in conjunction with the audited consolidated financial statements included in
the Company's 2000 Annual Report on Form 10-K filed July 21, 2000.
DERIVATIVES. In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an Amendment of FASB Statement No. 133." The Company will
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adopt SFAS No. 133 concurrently with SFAS No. 138 effective for its fiscal year
beginning May 1, 2001. Management has not yet quantified the impact of adopting
SFAS No. 133 on the consolidated financial statements. However, the Statement
could increase volatility in earnings.
RECLASSIFICATIONS. Certain reclassifications have been made to the fiscal
2000 amounts to conform with the fiscal 2001 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, JULY 31,
2000 2000
--------------- ---------------
Receivables.......................... $ 231,696,539 $ 248,191,637
Unamortized premium and deferred
fees............................... 6,392,243 6,522,567
Allowance for credit losses.......... (2,133,994) (2,285,388)
--------------- ---------------
Net receivables................. $ 235,954,788 $ 252,428,816
=============== ===============
Activity in the allowance for credit losses was as follows:
FOR THE THREE MONTHS
ENDED JULY 31,
--------------------------------
1999 2000
--------------- ---------------
Balance, beginning of period......... $ 1,529,651 $ 2,133,994
Provision for credit losses.......... 1,156,174 1,979,650
Charge-offs, net of recoveries....... (913,761) (1,828,256)
--------------- ---------------
Balance, end of period............... $ 1,772,064 $ 2,285,388
=============== ===============
4. RECEIVABLES ACQUIRED FOR INVESTMENT
Loans purchased at a discount relating to credit quality were included in
the balance sheet amounts of Receivables Acquired for Investment as follows as
of April 30, 2000 and July 31, 2000:
APRIL 30, JULY 31,
2000 2000
--------------- ---------------
Contractual payments receivable from
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net of excess cash
flows to be sold...................... $ 31,198,093 $ 24,686,467
Nonaccretable difference................ (5,387,268) (3,037,945)
Accretable yield........................ (3,922,371) (3,284,493)
--------------- ---------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................... $ 21,888,454 $ 18,364,029
=============== ===============
The carrying amount of Receivables Acquired for Investment are net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
determined that it would be unable to collect.
NONACCRETABLE ACCRETABLE
DIFFERENCE YIELD
------------- -----------
Balance at April 30, 2000............... $ 5,387,268 $ 3,922,371
Accretion.......................... -- (837,205)
Eliminations....................... (2,149,996) --
Reclassifications.................. (199,327) 199,327
------------- -----------
Balance at July 31, 2000................ $ 3,037,945 $ 3,284,493
============= ===========
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nonaccretable difference eliminations represent contractual principal and
interest amounts on loans charged-off for the period ended July 31, 2000. The
increase in accretable yield includes a reclassification from nonaccretable
difference for cash flows expected to be collected in excess of those previously
expected.
5. DEBT
The Company finances the acquisition of its receivables portfolio through
three warehouse credit facilities. The Company's credit facilities provide for
one year terms and have been renewed annually. Management of the Company
believes that the credit facilities will continue to be renewed or extended or
that it would be able to secure alternate financing on satisfactory terms;
however, there can be no assurance that it will be able to do so. In January
2000, the Company issued $168 million in asset-backed notes ("Term Notes")
secured by a pool of receivables. Proceeds from the note issuance were used to
repay outstanding borrowings under the various revolving credit facilities.
Substantially all receivables retained by the Company are pledged as collateral
for the credit facilities and the Term Notes.
FIRC CREDIT FACILITY. Borrowings under the FIRC credit facility were
$59,540,000 and $56,000,000 at April 30, 2000 and July 31, 2000, respectively,
and had weighted average interest rates, including the effect of facility fees
and hedge instruments, as applicable, of 6.21 percent and 7.20 percent as of
such dates. The current term of the FIRC credit facility expires on September
30, 2000. The Company is currently in discussions with its lenders regarding the
renewal and extension of this facility. Management considers its relationship
with the lenders under this facility to be satisfactory and has no reason to
believe that this credit facility will not be renewed. If the facility was not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. At April 30, 2000 and July 31, 2000, the
Company had borrowings of $18,004,889 and $34,713,840, respectively, outstanding
under the commercial paper facility at weighted average interest rates,
including the effect of program fees, dealer fees and hedge instruments, as
applicable, of 7.33 percent and 7.39 percent, respectively. The current term of
the FIARC commercial paper facility expires on October 14, 2000. If the facility
was not extended, receivables pledged as collateral would be allowed to
amortize; however, no new receivables would be allowed to be transferred from
the FIRC credit facility. The Company is currently in discussions with its
lenders regarding the renewal and extension of this facility. Management
considers its relationship with the lenders under this facility to be
satisfactory and has no reason to believe that this credit facility will not be
renewed. If the facility was not renewed however, or if material changes were
made to its terms and conditions, it could have a material adverse effect on the
Company.
FIACC COMMERCIAL PAPER FACILITY. At July 31, 2000, borrowings were
$24,601,829 under the FIACC commercial paper facility, and had a weighted
average interest rate of 7.26 percent, including the effects of program fees and
hedge instruments. There were no outstanding borrowings at April 30, 2000. The
current term of the FIACC commercial paper facility expires on December 31,
2000. If the facility was not extended, no new receivables could be transferred
to FIACC and the receivables pledged as collateral would be allowed to amortize.
The Company presently intends to seek an extension of this arrangement prior to
its expiration.
TERM NOTES. On January 24, 2000, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174% asset-backed notes ("Notes").
The Notes are secured by a pool of automobile receivables totaling $174,968,641,
which were previously owned by FIRC, FIARC and
9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIACC. Proceeds from the issuance, which totaled $167,967,690 were used to repay
all outstanding borrowings under the FIARC and FIACC commercial paper
facilities, to reduce the outstanding borrowings under the FIRC credit facility,
to pay transaction fees related to the Note issuance and to fund a cash reserve
account of 2% or $3,499,373 which will serve as a portion of the credit
enhancement for the transaction. The Notes bear interest at 7.174% and require
monthly principal reductions sufficient to reduce the balance of the Notes to
96% of the outstanding balance of the underlying receivables pool. The final
maturity of the Notes is February 15, 2006. As of April 30, 2000 and July 31,
2000, the outstanding principal balance on the Notes was $151,104,279 and
$133,591,819, respectively and had weighted average interest rates, including
the effect of surety bond fees and hedge instruments, as applicable, of 6.99
percent and 7.48 percent, respectively. A surety bond issued by MBIA Insurance
Corporation provides credit enhancement for the Note holders. Additional credit
support is provided by the cash reserve account, which equals 2% of the original
balance of the receivables pool and a 4% over-collateralization requirement. In
the event that certain asset quality covenants are not met, the reserve account
target level will increase to 6% of the then current principal balance of the
receivables pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with Variable Funding Capital Corporation ("VFCC"), an affiliate of First
Union National Bank, to finance the Company's acquisition of FISC.
Contemporaneously with the Company's purchase of FISC, FISC transferred certain
assets to FIFS Acquisition, consisting primarily of (i) all receivables owned by
FISC as of the acquisition date, (ii) FISC's ownership interest in certain Trust
Certificates and subordinated spread or cash reserve accounts related to two
asset securitizations previously conducted by FISC, and (iii) certain other
financial assets, including charged-off accounts owned by FISC as of the
acquisition date. These assets, along with a $1 million cash reserve account
funded at closing serve as the collateral for the bridge facility. The facility
bears interest at VFCC's commercial paper rate plus 2.35 percent and expired on
August 14, 2000. Under the terms of the facility, all cash collections from the
receivables or cash distributions to the certificate holder under the
securitizations are first applied to pay FISC a servicing fee in the amount of 3
percent on the outstanding balance of all owned or managed receivables and then
to pay interest on the facility. Excess cash flow available after servicing fees
and interest payments are utilized to reduce the outstanding principal balance
on the indebtedness.
On August 8, 2000, the Company entered into an agreement with First Union
to refinance the acquisition facility. Under the agreement, a partnership was
created in which FIFS Acquisition serves as the general partner owning 70
percent of the partnership assets and First Union Investors, Inc., an affiliate
of First Union, serves as the limited partner owning 30 percent of the
partnership assets (the "Partnership"). Pursuant to the refinancing, the
Partnership issued Class A Notes in the amount of $19,204,362 and Class B Notes
in the amount of $979,453 to VFCC, the proceeds of which were used to retire the
acquisition debt. The Class A Notes will bear interest at VFCC's commercial
paper rate plus 0.95 percent per annum and will amortize on a monthly basis by
an amount necessary to reduce the Class A Note balance as of the payment date to
75 percent of the outstanding principal balance of Receivables Acquired for
Investment as of the previous month end. The Class B Notes will bear interest at
VFCC's commercial paper rate plus 5.38 percent per annum and will amortize on a
monthly basis by an amount which will vary based on excess cash flows received
from Receivables Acquired for Investment after payment of servicing fees,
trustee and back-up servicer fees, Class A Note interest and Class A Note
principal, plus collections received on the Trust Certificates. Once the Class B
Notes have been paid in full,
10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
all cash flows received after payment of Class A Note principal and interest,
servicing fees and other costs, will be distributed to the Partnership for
subsequent distribution to the partners based upon the respective partnership
interests. The amount of the partners' cash flow will vary depending on the
timing and amount of the residual cash flows. Subsequent to the closing of this
financing, the Company will account for First Union's limited partnership
interest in the Partnership as a minority interest.
WORKING CAPITAL FACILITY. The Company also maintains a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that is utilized for working capital and general corporate purposes. The
facility was increased from $10 million to $13.5 million in December, 1999. At
April 30, 2000 and July 31, 2000, there was $13,300,000 outstanding under this
facility. The current expiration of the facility is September 30, 2000. If the
lender elected not to renew, any outstanding borrowings would be amortized over
a one-year period. The Company is currently in discussions with its lenders
regarding the renewal and extension of this facility. Management considers its
relationship with the lenders under this facility to be satisfactory and has no
reason to believe that this credit facility will not be renewed. If the facility
was not renewed however, or if material changes were made to its terms and
conditions, it could have a material adverse effect on the Company.
INTEREST RATE MANAGEMENT. The Company's secured credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured Term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates which do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate was fixed at 5.565% on a notional
amount of $120 million. The swap agreement expired on January 12, 2000. In
connection with the issuance of the Notes, the Company entered into a swap
agreement with Bank of America pursuant to which the Company pays a floating
rate equal to the prevailing one month LIBOR rate plus 0.505% and receives a
fixed rate of 7.174% from the counterparty. The initial notional amount of the
swap was $167,969,000 which amortizes in accordance with the expected
amortization of the Notes. Final maturity of the swap is August 15, 2002.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million ("Class A swap")
pursuant to which the Company's interest rate is fixed at 4.81 percent; and, the
second in the initial notional amount of $24.9 million ("Class B swap")
pursuant to which the Company's interest rate is fixed at 5.50 percent. The
notional amount outstanding under each swap agreement amortizes based on an
implied amortization of the hedged indebtedness. Class A swap has a final
maturity of December 30, 2002, while Class B swap matured on February 20, 2000.
The Company also purchased two interest rate caps which protect the Company and
the lender against any material
11
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increases in interest rates which may adversely affect any outstanding
indebtedness which is not fully covered by the aggregate notional amount
outstanding under the swaps. The first cap agreement ("Class A cap") enables
the Company to receive payments from the counterparty in the event that the
one-month commercial paper rate exceeds 4.81 percent on a notional amount that
increases initially and then amortized based on the expected difference between
the outstanding notional amount under Class A swap and the underlying
indebtedness. The interest rate cap expires December 20, 2002 and the cost of
the cap is amortized in interest for the period. The second cap agreement
("Class B cap") enables the Company to receive payments from the counterparty
in the event that the one-month commerical paper rate exceeds 6 percent on a
notional amount that increases initially and then amortizes based on the
expected difference between the outstanding notional amount under Class B swap
and the underlying indebtedness. The interest rate cap expires February 20, 2002
and the cost of the cap is imbedded in the fixed rate applicable to Swap B.
Pursuant to the refinance of the acquisition facility on August 8, 2000, the
Class B cap was terminated and the notional amounts of the Class A swap and
Class A cap were adjusted downward to reflect the lower outstanding balance of
the Class A Notes. The amendment or cancellation of these instruments resulted
in a gain of $486,500 to the Company which will be recognized over the life of
the Class A Notes as an offset to Class A Note interest expense. In addition,
the two remaining hedge instruments were assigned by FIFS Acquisition to the
Partnership.
6. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the three months ended July 31, 1999 and 2000,
are as follows:
FOR THE THREE MONTHS
ENDED JULY 31,
------------------------
1999 2000
----------- -----------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share....... 5,566,669 5,566,669
Effect of dilutive stock options...... -- 55
----------- -----------
Weighted average shares outstanding
for diluted earnings per share..... 5,566,669 5,566,724
=========== ===========
For the three months ended July 31, 1999 and 2000, the Company had 138,000
and 136,945, respectively, of stock options which were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive for the period presented.
7. SERVICING
From its inception until July 1999, the Company was a party to a servicing
agreement with General Electric Capital Corporation ("GECC") under which GECC
performed certain loan servicing and collection activities with respect to the
Company's portfolio of Receivables Held for Investment. Servicing fees were paid
monthly to GECC based on the number of receivables being serviced during the
period plus certain reimbursable expenses including legal and third party
recovery costs. Due from servicer primarily represents unremitted principal and
interest payments and proceeds from the sale of repossessed collateral. In July
1999, the Company elected to terminate the servicing agreement with GECC in
connection with the transfer of the servicing and collection activities on the
receivables to the Company's internal servicing and collection platform.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended July 31, 2000 was $494,598, a
decrease of 30% from that reported for the comparable period in the preceding
year of $702,416. Earnings per common share were $0.09 for the three months
ended July 31, 2000, compared to $0.13 per common share for the prior year
period.
NET INTEREST INCOME
The continued profitability of the Company during this period has been
achieved by the growth of the Receivables Held for Investment, income from
servicing activities and effective management of net interest income. The
following table summarizes the Company's growth in receivables and net interest
income (dollars in thousands):
AS OF OR FOR THE
THREE MONTHS ENDED
JULY 31,
----------------------
1999 2000
---------- ----------
Receivables Held for Investment:
Number.......................... 17,267 20,322
Principal balance............... $ 200,314 $ 248,192
Average principal balance of
receivables outstanding during
the three-month period........ 188,669 240,183
Receivables Acquired for Investment:
Number.......................... 4,459 3,089
Principal balance............... $ 43,101 $ 24,228
Securitized Receivables(1):
Number.......................... 5,801 3,769
Principal balance............... $ 48,402 $ 23,904
Total Managed Receivables Portfolio:
Number.......................... 27,527 27,180
Principal balance............... $ 291,817 $ 296,324
- ------------
(1) Represents receivables previously owned by FISC which were sold in
connection with two asset securitizations and on which the Company retains
the servicing rights to those receivables.
THREE MONTHS ENDED
JULY 31,
--------------------
1999 2000
--------- ---------
Interest income(1):
Receivables Held for
Investment.................... $ 7,637 $ 9,749
Receivables Acquired for
Investment and Investment in
Trust Certificates............ 1,972 1,240
--------- ---------
9,609 10,989
Interest expense:
Receivables Held for
Investment(2)................. 2,926 4,746
Receivables Acquired for
Investment and Investment in
Trust Certificates............ 954 345
--------- ---------
3,880 5,091
--------- ---------
Net interest income........ $ 5,729 $ 5,898
========= =========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Includes facility fees and fees on the unused portion of the credit
facilities.
13
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
Receivables Held for Investment and the Company's average cost of debt utilized
to fund these receivables, and its net interest margin (averages based on
month-end balances):
THREE MONTHS ENDED
JULY 31,
--------------------
1999 2000
--------- ---------
Receivables Held for Investment:
Effective yield on Receivables
Held for Investment(1)........ 16.2% 16.2%
Average cost of debt(2)......... 6.3 7.9
--------- ---------
Net interest spread(3).......... 9.9% 8.3%
========= =========
Net interest margin(4).......... 10.0% 8.4%
========= =========
- ------------
(1) Represents interest income as a percentage of average Receivables Held for
Investment outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on Receivables Held for Investment less average cost of
debt.
(4) Represents net interest income as a percentage of average Receivables Held
for Investment outstanding.
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest income increased for the three
months ended July 31, 2000 to $5.9 million from $5.7 million for the comparable
period in the preceding year. Net interest income in 2000 represents an increase
of 3% from the same period in 1999.
Changes in the principal amount and rate components associated with the
Receivables Held for Investment and debt can be segregated to analyze the
periodic changes in net interest income on such receivables. The following table
analyzes the changes attributable to the principal amount and rate components of
net interest income (dollars in thousands):
THREE MONTHS ENDED
JULY 31, 1999 TO 2000
----------------------------------
INCREASE (DECREASE)
DUE TO
CHANGE IN
---------------------
AVERAGE
PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE
--------- --------- ---------
Receivables Held for Investment:
Interest income ..................... $ 2,085 $ 27 $ 2,112
Interest expense .................... 877 943 1,820
--------- --------- ---------
Net interest income ................. $ 1,208 $ (916) $ 292
========= ========= =========
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for the 2000 period increased to $10,989
compared with $9,609 for the comparable period in 1999. Interest income on
Receivables Held for Investment increased 28% for the three-month period. This
is due to an increase in the average principal balance of Receivables Held for
Investment of 27% from the 1999 comparable period. Interest income on
Receivables Acquired for Investment and Investment in Trust Certificates
decreased by 37% for the comparable three-month period. The quarterly decrease
is attributable to a
14
reduction in the average principal balances of the Receivables Acquired for
Investment and Investment in Trust Certificates.
INTEREST EXPENSE. Interest expense in 2000 increased for the three-month
period to $5,091 as compared to $3,880 in 1999. Interest expense on Receivables
Held for Investment increased 62% for the three-month period. This is due to an
increase of 30% in the weighted average borrowings outstanding under the Term
Notes and warehouse credit facilities and a 1.6% increase in the average cost of
borrowings. Interest expense on Receivables Acquired for Investment and
Investment in Trust Certificates decreased by 64% for the comparable three-month
period. The decrease is attributable to a reduction in the weighted average
borrowings under the acquisition term facility.
NET INTEREST INCOME. Net interest income increased to $5,898, an increase
of 3%. The increase resulted primarily from the growth in Receivables Held for
Investment offset by the reduction in the contributions to interest income from
the Receivables Acquired for Investment and Trust Certificates and an increase
in the average cost of borrowings.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2000
increased to $1,980 as compared to $1,156 in 1999. The increase was the result
of the growth of the Company's Receivables Held for Investment portfolio and the
related increase in net charge-offs.
SERVICING INCOME. Represents servicing income received on loan receivables
previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3% on the outstanding balance of the principal balance of
securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Under the terms of the
securitizations, the servicer may be removed upon breach of its obligations
under the servicing agreements, the deterioration of the underlying receivables
portfolios in violation of certain performance triggers or the deteriorating
financial condition of the servicer. During the three-month period, servicing
income was $204 compared to $404 for the same period in 1999. Servicing income
continues to decrease as the principal balance outstanding on the
securitizations declines.
LATE FEES AND OTHER INCOME. Late fees and other income increased to $640
in 2000 from $507 in 1999 which primarily represents late fees collected from
customers on past due accounts, collections on certain FISC assets which had
previously been charged-off by the Company and interest income earned on
short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fees consist primarily of fees paid by
the Company to General Electric Credit Corporation ("GECC") with which the
Company had a servicing relationship on its Receivables Held for Investment.
Effective July 6, 1999, the Company began servicing its portfolio in-house and
terminated the General Electric arrangement. Thus, beginning in July 1999, the
Company incurred no third party servicing expenses.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs increased to
$2,393 in 2000 from $2,195 in 1999. The increase is a result of expansion of the
Company's operation as a result of an increase in its receivables portfolio,
expansion of its geographic territory and an increase in staffing levels as a
result of the acquisition of FISC.
OTHER INTEREST EXPENSE. Other interest expense in 2000 increased to $331
for the three-month period as compared to $227 in 1999. The increase was
primarily due to an increase in the three-month average borrowings outstanding
under the working capital facility of $7,666,667 in 1999 to $13,300,000 in 2000
and to an increase of 1.7% in the average interest rate on this facility.
OTHER EXPENSES. Other expenses decreased to $1,259 in 2000 from $1,523 in
1999. The decrease is a result of management's implementation of tighter expense
controls and the
15
leveraging of operating expenses as duplicative costs were eliminated when the
GECC servicing agreement was terminated.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 2000, income before
provision for income taxes decreased to $779 or 30% from the comparable period
in 1999. This change was a result of the decrease in net interest income after
provision for credit losses of $655 offset by a decrease in operating expenses
of $395.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. The Company's business requires
significant cash flow to support its operating activities. The principal cash
requirements include (i) amounts necessary to acquire receivables from dealers
and fund required reserve accounts, (ii) amounts necessary to fund premiums for
credit enhancement insurance, and (iii) amounts necessary to fund costs to
retain receivables, primarily interest expense. The Company also requires a
significant amount of cash flow for working capital to fund fixed operating
expenses, primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables from dealers. The Company paid $39.0 million for receivables
acquired for the three months ended July 31, 2000 compared to $37.2 million paid
in the comparable 1999 period.
The Company funds the purchase price of the receivables through the use of
a $65 million warehouse credit facility provided to F.I.R.C., Inc. ("FIRC") a
wholly-owned special purpose financing subsidiary of the Company. The current
FIRC credit facility generally permits the Company to draw advances up to the
outstanding principal balance of qualified receivables. Receivables that have
accumulated in the FIRC credit facility may be transferred to a commercial paper
conduit facility at the option of the Company. The commercial paper facility
provides additional liquidity of up to $135 million to fund the Company's
investment in the receivables portfolio. Credit enhancement for the warehouse
lenders is provided by an Auto Loan Protection Insurance ("ALPI") policy
issued by National Union Fire Insurance Company of Pittsburgh and reinsured by
the Company's captive insurance subsidiary.
The Company utilized a $135 million commercial paper conduit financing
through Enterprise Funding Corporation, a commercial paper conduit administered
by Bank of America as an additional source of warehouse financing for
Receivables Held for Investment. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). Credit enhancements for the $135 million
facility are provided to the commercial paper investors by a surety bond issued
by MBIA Insurance Corporation. At April 30, 2000 and July 31, 2000, the Company
had borrowings of $18,004,889 and $34,713,840, respectively, outstanding under
the FIARC commercial paper facility.
Receivables originally purchased by the Company are financed with
borrowings under the FIRC credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the FIARC commercial paper facility used to repay
borrowings under the FIRC credit facility. Once receivables are transferred to
the FIARC subsidiary and pledged as collateral for commercial paper borrowings,
the ALPI policy with respect to the transferred receivables is cancelled with
any unearned premiums returned to FIRC. FIARC may borrow up to 90% of the face
amount of the receivables being transferred. In addition, a cash reserve equal
to 1% of the outstanding borrowings under the FIARC commercial paper facility
must be maintained in a reserve account for the benefit of the creditors and
surety bond provider.
The current term of the FIRC credit facility expires on September 30, 2000,
at which time the outstanding balance will be payable in full, subject to
certain notification provisions allowing the Company a period of six months in
order to endeavor to refinance the facility in the event of termination. The
term of the facility has been extended on ten occasions since its inception in
October 1992. The FIARC commercial paper facility was provided for a term of one
year and has
16
been extended to October 14, 2000. If the facility was terminated, receivables
pledged as collateral would be allowed to amortize; however, no new receivables
would be allowed to be transferred from the FIRC credit facility. Borrowings
under the FIRC credit facility were $59,540,000 and $56,000,000 at April 30,
2000 and July 31, 2000, respectively.
The Company also maintains a $25 million commercial paper conduit financing
through Variable Funding Capital Corporation ("VFCC"), a commercial paper
conduit administered by First Union National Bank. The financing was provided to
a special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Capital Corporation ("FIACC") to fund the acquisition of additional
receivables generated by the Company once capacity is reached in the FIRC credit
facility.
FIACC acquires receivables from the Company and may borrow up to 88% of the
face amount of receivables which are pledged as collateral for the commercial
paper borrowings. In addition, a cash reserve equal to 2% of the outstanding
borrowings under the FIACC commercial paper facility must be maintained in a
reserve account for the benefit of the creditors.
The current term of the FIACC commercial paper facility expires on December
31, 2000. If the facility was terminated, receivables pledged as collateral
would be allowed to amortize; however, no new receivables could be transferred
to the facility. At July 31, 2000, borrowings were $24,601,829 under the FIACC
commercial paper facility. There were no outstanding borrowings at April 30,
2000.
In addition to the $225 million in currently available debt facilities
utilized to fund the acquisition of new receivables, the Company also maintains
a $13.5 million working capital facility to be used for working capital and
general corporate purposes. The working capital facility expires on September
30, 2000. If the lenders elect not to renew, any outstandings will be amortized
over a one year period. There was $13,300,000 outstanding under this facility at
April 30, 2000 and July 31, 2000.
The Company is currently in discussions with its lenders regarding the
renewal and extension of the warehouse credit facilities and the working capital
facility. Management considers its relationship with the lenders under these
facilities to be satisfactory and has no reason to believe that these facilities
will not be renewed. If these facilities were not renewed however, or if
material changes were made to the terms and conditions, it could have a material
adverse effect on the Company.
On January 24, 2000, the Company, through its indirect, wholly-owned
subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust") completed
the issuance of $167,969,000 of 7.174% asset-backed notes ("Notes"). The Notes
are secured by a pool of automobile receivables totaling $174,968,641 which were
previously owned by FIRC, FIARC and FIACC. Proceeds from the issuance, which
totaled $167,967,690 were used to repay all outstanding borrowings under the
FIARC and FIACC commercial paper facilities, to reduce the outstanding
borrowings under the FIRC credit facility, to pay transaction fees related to
the Note issuance and to fund a cash reserve account of 2% or $3,499,373 which
will serve as a portion of the credit enhancement for the transaction. The Notes
bear interest at 7.174% and require monthly principal reductions sufficient to
reduce the balance of the Notes to 96% of the outstanding balance of the
underlying receivables pool. The final maturity of the Notes is February 15,
2006. Credit enhancement for the Note holders is provided by a surety bond
issued by MBIA Insurance Corporation. Additional credit support is provided by a
cash reserve account which is equal to 2% of the original balance of the
receivables pool and a 4% over-collateralization requirement amount. In the
event that certain asset quality covenants are not met, the reserve account
target level will increase to 6% of the then current principal balance of the
receivables pool. As of April 30, 2000 and July 31, 2000, the outstanding
principal balance on the Notes was $151,104,279 and $133,591,819, respectively.
17
On October 2, 1998, the Company, through its indirect, wholly-owned
subsidiary, FIFS Acquisition Funding Company LLC ("FIFS Acquisition"), entered
into a $75 million non-recourse bridge financing facility with VFCC, an
affiliate of First Union National Bank, to finance the Company's acquisition of
FISC. Contemporaneously with the Company's purchase of FISC, FISC transferred
certain assets to FIFS Acquisition, consisting primarily of (i) all receivables
owned by FISC as of the acquisition date, (ii) FISC's ownership interest in
certain Trust Certificates and subordinated spread or cash reserve accounts
related to two asset securitizations previously conducted by FISC, and (iii)
certain other financial assets, including charged-off accounts owned by FISC as
of the acquisition date. These assets, along with a $1 million cash reserve
account funded at closing serve as the collateral for the bridge facility. The
facility bears interest at VFCC's commercial paper rate plus 2.35%. Under the
terms of the facility, all cash collections from the receivables or cash
distributions to the certificate holder under the securitizations are first
applied to pay FISC a servicing fee in the amount of 3% on the outstanding
balance of all owned or managed receivables and then to pay interest on the
facility. Excess cash flow available after servicing fees and interest payments
are utilized to reduce the outstanding principal balance on the indebtedness. In
addition, one-third of the servicing fee paid to FISC is also utilized to reduce
principal outstanding on the indebtedness. The bridge facility expired on August
14, 2000.
On August 8, 2000, the Company entered into an agreement with First Union
to refinance the acquisition facility. Under the agreement, a partnership was
created in which FIFS Acquisition serves as the general partner owning 70
percent of the partnership assets and First Union Investors, Inc., an affiliate
of First Union, serves as the limited partner owning 30 percent of the
partnership assets (the "Partnership"). Pursuant to the refinancing, the
Partnership issued Class A Notes in the amount of $19,204,362 and Class B Notes
in the amount of $979,453 to VFCC, the proceeds of which were used to retire the
acquisition debt. The Class A Notes will bear interest at VFCC's commercial
paper rate plus 0.95 percent per annum and will amortize on a monthly basis by
an amount necessary to reduce the Class A Note balance as of the payment date to
75 percent of the outstanding principal balance of Receivables Acquired for
Investment as of the previous month end. The Class B Notes will bear interest at
VFCC's commercial paper rate plus 5.38 percent per annum and will amortize on a
monthly basis by an amount which will vary based on excess cash flows received
from Receivables Acquired for Investment after payment of servicing fees,
trustee and back-up servicer fees, Class A Note interest and Class A Note
principal, plus collections received on the Trust Certificates. Once the Class B
Notes have been paid in full, all cash flows received after payment of Class A
Note principal and interest, servicing fees and other costs, will be distributed
to the Partnership for subsequent distribution to the partners based upon the
respective partnership interests. The amount of the partners' cash flow will
vary depending on the timing and amount of the residual cash flows. Subsequent
to the closing of this financing, the Company will account for First Union's
limited partnership interest in the Partnership as a minority interest.
Substantially all of the Company's receivables are pledged to collateralize
the credit facilities. Management considers its relationship with all of the
Company's lenders and the Noteholders to be satisfactory and has no reason to
believe that the credit facilities will not be renewed.
The Company's most significant source of cash flow is the principal and
interest payments from the receivables portfolio. The Company received such
payments in the amount of $31.2 million and $23.6 million for the three months
ended July 31, 2000 and 1999, respectively. Such cash flow funds repayment of
amounts borrowed under the FIRC credit and commercial paper facilities and other
holding costs, primarily interest expense and custodial fees. During the three
months ended, the Company required net cash flow of $17.5 million in 2000 and
$21.4 million in 1999 (cash required to acquire Receivables Held for Investment
net of principal payments on receivables) to fund the growth of its receivables
portfolio.
18
INTEREST RATE MANAGEMENT. The Company's secured credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured Term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates which do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate was fixed at 5.565% on a notional
amount of $120 million. The swap agreement expired on January 12, 2000. In
connection with the issuance of the Notes, the Company entered into a swap
agreement with Bank of America pursuant to which the Company pays a floating
rate equal to the prevailing one month LIBOR rate plus 0.505% and receives a
fixed rate of 7.174% from the counterparty. The initial notional amount of the
swap was $167,969,000 which amortizes in accordance with the expected
amortization of the Notes. Final maturity of the swap is August 15, 2002.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million ("Class A swap")
pursuant to which the Company's interest rate is fixed at 4.81%; and, the second
in the initial notional amount of $24.9 million ("Class B swap") pursuant to
which the Company's interest rate is fixed at 5.50%. The notional amount
outstanding under each swap agreement amortizes based on an implied amortization
of the hedged indebtedness. Class A swap has a final maturity of December 20,
2002 while Class B swap matured on February 20, 2000. The Company also purchased
two interest rate caps which protect the Company and the lender against any
material increases in interest rates which may adversely affect any outstanding
indebtedness which is not fully covered by the aggregate notional amount
outstanding under the swaps. The first cap agreement ("Class A cap") enables
the Company to receive payments from the counterparty in the event that the
one-month commercial paper rate exceeds 4.81% on a notional amount that
increases initially and then amortizes based on the expected difference between
the outstanding notional amount under Class A swap and the underlying
indebtedness. The interest rate cap expires December 20, 2002 and the cost of
the cap is amortized in interest expense for the period. The second cap
agreement ("Class B cap") enables the Company to receive payments from the
counterparty in the event that the one-month commercial paper rate exceeds 6% on
a notional amount that increases initially and then amortizes based on the
expected difference between the outstanding notional amount under Class B swap
and the underlying indebtedness. The interest rate cap expires February 20, 2002
and the cost of the cap is imbedded in the fixed rate applicable to Swap B.
Pursuant to the refinance of the acquisition facility on August 8, 2000, the
Class B cap was terminated and the notional amounts of the Class A swap and
Class A cap were adjusted downward to reflect the lower outstanding balance of
the Class A Notes. The amendment or cancellation of these instruments resulted
in a gain of $486,500 to the Company which will be recognized over the life of
the Class A Notes as an offset to Class A Note interest expense. In addition,
the two remaining hedge instruments were assigned by FIFS Acquisition to the
Partnership.
19
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. An allowance for credit losses of
$2,285,388 as of July 31, 2000 and $2,133,994 as of April 30, 2000 as a
percentage of the Receivables Held for Investment of $248,191,637 as of July 31,
2000 and $231,696,539 as of April 30, 2000 was .9% at July 31, 2000 and April
30, 2000.
With respect to Receivables Acquired for Investment, the Company has
established a nonaccretable loss reserve to cover expected losses over the
remaining life of the receivables. As of July 31, 2000 and April 30, 2000, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 12.3% and 17.3%, respectively. The decrease is related to several
factors; actual portfolio losses have been less than originally anticipated, the
seasoning of the portfolio and the amount of loan prepayments have been larger
than initially expected. The nonaccretable portion represents the excess of the
loan's scheduled contractual principal and interest payments over its expected
cash flows.
The Company considers a loan to be delinquent when the borrower fails to
make a scheduled payment of principal and interest. Accrual of interest is
suspended when the payment from the borrower is over 60 days past due.
Generally, repossession procedures are initiated 60 to 90 days after the payment
default.
The Company retains the credit risk associated with the receivables
acquired. The Company purchases credit enhancement insurance from third party
insurers which covers the risk of loss upon default and certain other risks.
Until March 1994, such insurance absorbed substantially all credit losses. In
April 1994, the Company established a captive insurance subsidiary to reinsure
certain risks under the credit enhancement insurance coverage for all
receivables acquired in March 1994 and thereafter. In addition, receivables
financed under the Auto Trust, FIARC and FIACC commercial paper facilities do
not carry default insurance. Provisions for credit losses of $1,979,650 and
$1,156,174 have been recorded for the three months ended July 31, 2000, and July
31, 1999, respectively, for losses on receivables which are either uninsured or
which are reinsured by the Company's captive insurance subsidiary.
The allowance for credit losses represents management's estimate of losses
for receivables that may become uncollectable. In making this estimate,
management analyzes portfolio characteristics in the light of its underwriting
criteria, delinquency and repossession statistics, historical loss experience,
and size, quality and concentration of the receivables, as well as external
factors such as future economic outlooks. The allowance for credit losses is
based on estimates and qualitative evaluations and ultimate losses will vary
from current estimates. These estimates are reviewed periodically and as
adjustments, either positive or negative, become necessary, are reported in
earnings in the period they become known.
20
The following table summarizes the status and collection experience of
receivables by the Company (dollars in thousands):
AS OF OR FOR THE THREE MONTHS ENDED JULY 31,
----------------------------------------------
1999 2000
-------------------- --------------------
NUMBER NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days.................... 745 $8,387 364 $4,457
60 - 89 days.................... 97 1,011 87 1,096
90 days or more................. 12 111 137 1,640
--- ------ --- ------
Total delinquencies.................. 854 $9,509 588 $7,193
=== ====== === ======
Total delinquencies as a percentage
of outstanding receivables......... 5.0% 4.8% 2.9% 2.9%
Net charge-offs as a percentage of
average receivables outstanding
during the period(1)............... 1.9% 3.0%
- ------------
(1) The percentages have been annualized and are not necessarily indicative of
the results for a full year.
The total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment and Securitized Receivables was 8.3% and
8.7% as of July 31, 2000 and April 30, 2000, respectively.
FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis included in this report
that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market interest rates; changes in economic conditions; or increases or changes
in the competition for loans. Although the Company believes that the
expectations reflected in the forward-looking statements presented herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk discussion and the estimated amounts generated from the
analysis that follows are foward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the Company of risk-mitigating
strategies such as hedging.
The Company's operating revenues are derived almost entirely from the
collection of interest on the receivables it retains and its primary expense is
the interest that it pays on borrowings incurred to purchase and retain such
receivables. The Company's credit facilities bear interest at floating rates
which are reset on a short-term basis, whereas its receivables bear interest at
fixed rates which do not generally vary with changes in interest rates. The
Company is therefore exposed primarily to market risks associated with movements
in interest rates on its credit facilities. The Company believes that it takes
the necessary steps to appropriately reduce the potential impact of interest
rate increases on the Company's financial position and operating performance.
The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Periodically, the Company will transfer
receivables from a revolving to a term credit
21
facility. Currently, all of the Company's credit facilities in combination with
various swaps bear interest at floating rates tied to either a commercial paper
index or LIBOR.
As of July 31, 2000, the Company had $262.2 million of floating rate
secured debt outstanding considering the effect of swap and cap agreements. For
every 1% increase in commercial paper rates or LIBOR, annual after-tax earnings
would decrease by approximately $1.7 million, assuming the Company maintains a
level amount of floating rate debt and assuming an immediate increase in rates.
22
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Investors Financial Services Group, Inc.
(Registrant)
Date: September 14, 2000 By: /s/TOMMY A. MOORE, JR.
Tommy A. Moore, Jr.
President and Chief Executive Officer
Date: September 14, 2000 By: /s/BENNIE H. DUCK
Bennie H. Duck
Secretary, Treasurer and Chief Financial Officer
23