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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 OCTOBER 31, 1996
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 DECEMBER 6, 1996
----- ----------------
COMMON STOCK -- $.001 PAR VALUE 5,566,669
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.,
AND SUBSIDIARIES
FORM 10-Q
OCTOBER 31, 1996
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1996 and
October 31, 1996..................... 3
Consolidated Statements of Operations
for the Three Months and
Six Months Ended October 31, 1995 and
1996................................. 4
Consolidated Statement of
Shareholders' Equity for the Six
Months Ended October 31, 1996........ 5
Consolidated Statements of Cash Flows
for the Six Months Ended
October 31, 1995 and 1996............ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 18
SIGNATURES................................... 19
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1996 AND OCTOBER 31, 1996
APRIL 30, OCTOBER 31,
1996 1996
--------------- ------------
(UNAUDITED)
ASSETS
Receivables Held for Investment,
net................................ $ 96,263,092 $109,560,386
Cash and Short-Term Investments,
including restricted cash of
$3,048,148 and $2,518,003.......... 6,649,417 6,116,137
Other Receivables:
Due from servicer............... 5,266,531 6,431,124
Accrued interest................ 1,613,953 1,763,229
Assets Held for Sale................. 1,912,050 1,786,329
Other Assets:
Funds held under reinsurance
agreement..................... 2,830,689 1,240,469
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $446,603 and $536,874...... 828,613 1,048,696
Federal income tax receivable... 295,523 90,500
--------------- ------------
Total assets............... $ 115,659,868 $128,036,870
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Secured credit facilities....... $ 91,048,636 $102,432,154
Other Liabilities:
Due to dealers.................. 806,634 553,832
Accounts payable and accrued
liabilities................... 1,692,942 1,320,589
Current income taxes payable.... 193,434 --
Deferred income taxes payable... 125,472 378,332
--------------- ------------
Total liabilities.......... 93,867,118 104,684,907
--------------- ------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares authorized,
5,566,669 and 5,566,669,
shares issued and
outstanding................... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 3,322,265 4,881,478
--------------- ------------
Total shareholders'
equity..................... 21,792,750 23,351,963
--------------- ------------
Total liabilities and
shareholders' equity....... $ 115,659,868 $128,036,870
=============== ============
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 AND SIX MONTHS ENDED OCTOBER 31, 1995 AND 1996
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
---------------------------- ----------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1995 1996 1995 1996
----------- ----------- ----------- -----------
Interest Income...................... $ 3,332,995 $ 4,577,626 $ 6,259,687 $ 9,077,657
Interest Expense..................... 1,282,717 1,668,225 2,491,726 3,228,822
----------- ----------- ----------- -----------
Net interest income........ 2,050,278 2,909,401 3,767,961 5,848,835
Provision for Credit Losses.......... 120,000 401,367 220,000 760,974
----------- ----------- ----------- -----------
Net Interest Income After Provision
for Credit Losses.................. 1,930,278 2,508,034 3,547,961 5,087,861
----------- ----------- ----------- -----------
Other Income:
Late fees and other............. 131,654 145,645 226,711 317,594
----------- ----------- ----------- -----------
Operating Expenses:
Servicing fees.................. 264,608 382,211 503,808 734,525
Salaries and benefits........... 418,794 498,927 798,700 1,117,430
Other........................... 580,161 500,903 1,015,605 1,098,047
----------- ----------- ----------- -----------
Total operating expenses... 1,263,563 1,382,041 2,318,113 2,950,002
----------- ----------- ----------- -----------
Income Before Provision for Income
Taxes.............................. 798,369 1,271,638 1,456,559 2,455,453
----------- ----------- ----------- -----------
Provision for Income Taxes:
Current......................... 212,231 323,569 332,076 643,380
Deferred........................ 75,410 140,608 192,285 252,860
----------- ----------- ----------- -----------
Total provision for income
taxes.................... 287,641 464,177 524,361 896,240
----------- ----------- ----------- -----------
Net Income........................... $ 510,728 $ 807,461 $ 932,198 $ 1,559,213
----------- ----------- ----------- -----------
Preferred Stock Dividends............ (22,033) -- (50,033) --
----------- ----------- ----------- -----------
Net Income Allocable to Common
Shareholders before Redemption of
Preferred Stock.................... 488,695 807,461 882,165 1,559,213
Premium Paid Upon Redemption of
Preferred Stock.................... (160,000) -- (160,000) --
----------- ----------- ----------- -----------
Net Income Allocable to Common
Shareholders after Redemption of
Preferred Stock.................... $ 328,695 $ 807,461 $ 722,165 $ 1,559,213
=========== =========== =========== ===========
Net Income Per Common Share before
Redemption of Preferred Stock...... $0.12 $0.15 $0.22 $0.28
=========== =========== =========== ===========
Net Income Per Common Share after
Redemption of Preferred Stock...... $0.08 $0.15 $0.18 $0.28
=========== =========== =========== ===========
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 SIX MONTHS ENDED OCTOBER 31, 1996
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------------- ------------ --------------
Balance, April 30, 1996.............. $5,567 $ 18,464,918 $ 3,322,265 $ 21,792,750
Net income...................... -- -- 1,559,213 1,559,213
------- -------------- ------------ --------------
Balance, October 31, 1996............ $5,567 $ 18,464,918 $ 4,881,478 $ 23,351,963
======= ============== ============ ==============
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 SIX MONTHS ENDED OCTOBER 31, 1995 AND 1996
(UNAUDITED)
1995 1996
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 932,198 $ 1,559,213
Adjustments to reconcile net
income to net cash used in
operating activities --
Depreciation and
amortization expense..... 484,753 799,614
Provision for credit
losses................... 220,000 760,974
Charge-offs, net of
recoveries............... (216,073) (630,761)
(Increase) decrease in:
Accrued interest
receivable............... (314,952) (149,276)
Restricted cash............ 766,999 530,145
Deferred financing costs
and other................ (231,235) (289,725)
Funds held under
reinsurance agreement.... (582,974) 1,590,220
Due from servicer.......... (1,380,117) (1,164,593)
Deferred income tax
asset.................... 192,285 --
Federal income tax
receivable............... -- 205,023
Increase (decrease) in:
Due to dealers............. 27,463 (252,802)
Accounts payable and
accrued liabilities...... (15,168) (372,353)
Due to shareholders........ (46,667) --
Current income taxes
payable.................. (502,023) (193,434)
Deferred income taxes
payable.................. -- 252,860
--------------- ---------------
Net cash provided by
(used in) operating
activities.......... (665,511) 2,645,105
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables......... (32,436,986) (35,391,364)
Principal payments from
receivables................... 15,717,581 21,395,234
Purchase of furniture and
equipment..................... (45,493) (35,628)
--------------- ---------------
Net cash used in
investing
activities.......... (16,764,898) (14,031,758)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on
secured debt.................. 27,602,242 31,354,444
Principal payments made on --
Secured debt............... (14,967,609) (19,970,926)
Unsecured debt............. (5,000,000) --
Proceeds from issuance of common
stock, net of issuance costs.. 18,466,818 --
Redemption of preferred stock... (960,000) --
Preferred stock dividends
paid.......................... (50,033) --
--------------- ---------------
Net cash provided by
financing
activities.......... 25,091,418 11,383,518
--------------- ---------------
Increase (Decrease) in Cash and
Short-Term Investments............. 7,661,009 (3,135)
Cash and Short-Term Investments at
Beginning of Period................ 1,517,438 3,601,269
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 9,178,447 $ 3,598,134
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 2,518,526 $ 3,055,713
Income taxes............... 834,100 631,791
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
OCTOBER 31, 1995 AND 1996
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 secured by new and used
automobiles and light trucks (receivables) originated by factory authorized
franchised dealers. As of October 31, 1996, approximately 48 percent of
receivables held for investment were located in Texas. The Company currently
operates in 17 states.
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 October 31, 1996, and the results of its
operations for the three months and six months ended October 31, 1995 and 1996,
and its cash flows for the six months ended October 31, 1995 and 1996.
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.
Certain reclassifications have been made to the 1995 amounts to conform
with the 1996 presentation.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders after preferred dividends, if any, and
in the case of the three and six months ended October 31, 1995, the premium paid
to the holders of the 1993 preferred stock upon its redemption, divided by the
weighted average number of shares of common stock outstanding, adjusted for a
3-for-1 stock split paid on June 7, 1995. The weighted average common shares
outstanding for the three months ended October 31, 1995 and 1996, were 4,244,928
and 5,566,669, respectively; and for the six months ended October 31, 1995 and
1996, were 3,955,797 and 5,566,669, respectively.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, OCTOBER 31,
1996 1996
-------------- ---------------
Receivables.......................... $ 94,357,356 $ 107,016,460
Unamortized premium and deferred
fees............................... 2,535,863 3,304,266
Allowance for credit losses.......... (630,127) (760,340)
-------------- ---------------
Net receivables................. $ 96,263,092 $ 109,560,386
============== ===============
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORE PROGRAM. At October 31, 1996, the Company had investments in
receivables pursuant to the core program with an aggregate principal balance of
$100,043,006.
Activity in the allowance for credit losses for the six months ended
October 31, 1996, was as follows:
Balance, beginning of period......... $ 630,127
Provision for credit losses.......... 760,974
Charge-offs, net of recoveries....... (630,761)
------------
Balance, end of period............... $ 760,340
============
PARTICIPATING PROGRAM. At October 31, 1996, the Company had investments in
receivables pursuant to the dealer recourse program with an aggregate principal
balance of $6,769,633. The Company was reimbursed by participating dealers for
$8,842 of losses incurred during the six months ended October 31, 1996. During
the six months ended October 31, 1996, excess cash flows of $40,645 were
remitted to the dealers pursuant to this program.
The following table summarizes activity in the dealer reserves for the six
months ended October 31, 1996.
Balance, beginning of period......... $ 765,504
Additions............................ 11,688
Charges to dealer reserve accounts,
net of recoveries.................. (228,797)
Amounts remitted to dealers.......... (2,382)
------------
Balance, end of period............... $ 546,013
============
PORTFOLIO ACQUISITIONS. At October 31, 1996, the Company had receivables
with an aggregate principal balance of $203,821 which were acquired in portfolio
transactions.
4. DEBT
Borrowings under the warehouse credit facility and commercial paper
facility were $43,110,000 and $59,322,154, respectively, at October 31, 1996,
and had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees, and hedge instruments, as applicable, of 6.33 percent
and 6.12 percent, respectively.
The Company's credit facilities bear interest at floating interest rates
which are reset on a short-term basis whereas its receivables bear interest at
fixed rates which are generally at the maximum rates allowable by law which do
not generally vary with changes in interest rates. To manage the risk of
fluctuation in the interest rate environment, the Company enters into interest
rate swaps and caps to lock in what management believes to be an acceptable net
interest spread. However, the Company will be exposed to limited rate
fluctuation risk to the extent it cannot perfectly match the timing of net
advances from its credit facilities and acquisitions of additional interest rate
protection agreements.
On October 22, 1996, the Company completed a $105 million commercial paper
conduit financing through Enterprise Funding Corporation, a commercial paper
conduit administered by NationsBank. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation. It replaced an existing $75 million commercial paper
conduit facility which was provided by Enterprise Funding to another special-
purpose, wholly-owned subsidiary of the Company, F.I.R.C., Inc. Credit
enhancement for the new $105 million facility is provided to the commercial
paper investors by a surety bond issued by MBIA Insurance Corporation.
Borrowings under the commercial paper facility bear interest at
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the commercial paper rate plus a borrowing spread equal to 0.25% per annum.
Additionally, the agreement provides for additional fees based on the unused
amount of the facility and dealer fees associated with the issuance of the
commercial paper. A surety bond premium equal to 0.35% per annum is assessed
based on the outstanding borrowings under the facility. The commercial paper
facility has been initially provided for a term of one year, expiring October
21, 1997. If the facility were not extended, receivables pledged as collateral
would be allowed to amortize; however, no new receivables would be allowed to be
transferred from the warehouse credit facility.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended October 31, 1996 was $807,461, an
increase of 58% from that reported for the comparable period in the preceding
year of $510,728. Net income for the six months ended October 31, 1996 was
$1,559,213, an increase of 67% from that reported for the comparable period in
the preceding year of $932,198. Earnings per common share from operations were
$0.15 and $0.28 for the three and six months ended October 31, 1996,
respectively. All share and per share data has been restated to reflect the 3:1
stock split paid on June 7, 1995, effected in the form of a stock dividend.
NET INTEREST INCOME
The continued profitability of the Company during these periods has been
achieved by the growth of the receivables portfolio 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
SIX MONTHS ENDED
OCTOBER 31,
---------------------
1995 1996
--------- ----------
Investment in receivables:
Number.............................................. 7,076 9,680
Principal balance................................... $ 77,775 $ 107,016
Average principal balance of
receivables outstanding during
the period......................................... $ 70,004 $ 101,471
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
Interest income(1).................. $ 3,333 $ 4,577 $ 6,260 $ 9,078
Interest expense.................... 1,283 1,668 2,492 3,229
--------- --------- --------- ---------
Net interest income............ $ 2,050 $ 2,909 $ 3,768 $ 5,849
========= ========= ========= =========
- - ------------
(1) Amounts shown are net of yield participations paid to dealers pursuant to
the participating program of $52, $21, $119 and $41, respectively.
10
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 and the Company's average cost of debt, and its net interest margin
(averages based on month-end balances):
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
Effective yield on receivables(1).. 18.3% 17.5% 17.9% 17.9%
Average cost of debt(2)............ 6.8 6.6 7.0 6.6
--------- --------- --------- ---------
Net interest spread(3)............. 11.5% 10.9% 10.9% 11.3%
========= ========= ========= =========
Net interest margin(4)............. 11.3% 11.1% 10.8% 11.5%
========= ========= ========= =========
- - ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
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 and
six months ended October 31, 1996 to $2.909 million and $5.849 million,
respectively, from $2.050 million and $3.768 million for the comparable periods
in the preceding year. Net interest income in 1996 represents increases of 42%
and 55% from the same periods in 1995.
Changes in the principal amount and rate components associated with the
receivables and debt can be segregated to analyze the periodic changes in net
interest income. The following table analyzes the changes attributable to the
principal amount and rate components of net interest income (dollars in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1995 TO 1996 1995 TO 1996
----------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
--------------------- ---------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- --------- --------- ------- ---------
Interest income...................... $ 1,476 $ (232 ) $ 1,244 $ 2,814 $ 4 $ 2,818
Interest expense..................... 444 (59 ) 385 931 (194) 737
--------- ------- --------- --------- ------- ---------
Net interest income.................. $ 1,032 $ (173 ) $ 859 $ 1,883 $ 198 $ 2,081
========= ======= ========= ========= ======= =========
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED OCTOBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for the 1996 periods increased to $4,577
and $9,078 for the respective periods. These results compare with $3,333 and
$6,260 for the comparable periods in 1995 and reflects an increase of 37% and
45%, respectively. The increase in interest income is due to an increase in the
average principal balance of receivables held of 44% and 45%, respectively from
the 1995 to 1996 comparable periods. The increase in average principal balance
of receivables held for the three months ended offset a 0.8% decline in the
effective yield realized on the receivables. The effective yield for the six
months ended was flat relative to the prior period. Management attributes the
decrease in yield to a reduction in financing fees paid by dealers and an
increase in the percentage of receivables on which rate participation is paid to
dealers as incentive to utilize the Company's financing programs.
11
INTEREST EXPENSE. Interest expense in 1996 increased to $1,668 and $3,229
as compared to $1,283 and $2,492 in 1995. The increase of 30% and 30% was due to
an increase in the weighted average borrowings outstanding of 35% and 37%. The
weighted average cost of debt declined 0.2% and 0.4% as compared to 1995,
reflecting a general decline in market rates and the expiration of certain
interest rate swaps during the period.
NET INTEREST INCOME. Net interest income increased to $2,909 and $5,849,
respectively in 1996, an increase of 42% and 55%, respectively over the
comparable 1995 period. During the three months ended, the increase resulted
from the growth of the receivables portfolio which offset a decline of 0.6% in
the net interest spread over the prior year period. During the six month period,
the increase was due to the growth in the receivables portfolio and an increase
in the net interest spread of 0.4%. Additionally, the Company's net interest
margin was favorably impacted by the use of $10.1 million of the proceeds from
the issuance of common stock to purchase new receivables which mitigated the
effects of the net interest spread decline in the three months ended and
positively impacted the net interest margin in the six months ended.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1996
increased to $401 and $761 as compared to $120 and $220 in 1995. The increase
was the result of the growth of the Company's receivables portfolio.
LATE FEES AND OTHER INCOME. Other income increased to $146 and $318 from
$132 and $227 in 1995. Other income primarily represents interest income earned
on short-term marketable securities and money market instruments, due to the
issuance of common stock in October 1995.
SERVICING FEE EXPENSES. Servicing fee expenses increased to $382 and $735
in 1996 from $265 and $504 in 1995. Since these costs vary with the volume of
receivables serviced, this increase was primarily attributable to the growth in
the number of receivables serviced, which increased by 2,604 from 1995 to 1996.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased to $499 and
$1,117 in 1996 from $419 and $799 in 1995. The increase was primarily due to an
increase in full time employees which was necessitated by the expansion of the
Company's operations.
OTHER EXPENSES. Other expenses decreased to $501 from $580 for the three
months ended and increased to $1,098 from $1,016 for the six months ended. The
decrease for the three months ended was due to a decline in origination volume
for the period relative to the prior year. The overall increase was primarily
due to the expansion of the Company's operations in additional states.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1996, income before
provision for income taxes increased to $1,272 and $2,455 or 59% and 69% from
the comparable periods in 1995. The increase was the result of the increase in
net interest income after provision for credit losses of $578 and $1,540
partially offset by an increase in operating expenses of $118 and $632,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. On October 4, 1995 the Company sold 1.9
million shares of common stock in a public offering and received proceeds of
$19.4 million, net of underwriting discounts and commissions. Approximately $7
million of the proceeds were used to prepay promissory notes plus accrued
interest, to redeem outstanding preferred stock including accrued dividends and
redemption premium, and to pay issuance costs.
12
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 and servicing fees. 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 funds the purchase price of the
receivables through the use of a $55 million warehouse credit facility. The
current warehouse credit facility generally permits the Company to draw advances
up to the outstanding principal balance of qualified receivables. The Company
paid $15.0 million and $35.4 million for receivables acquired for the three and
six months ended October 31, 1996, compared to $18.3 million and $32.4 million
paid in the comparable 1995 period. Receivables that have accumulated in the
warehouse 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 $105 million to fund the Company's investment in
the receivables portfolio. Substantially all of the Company's receivables are
pledged to collateralize these credit facilities.
On October 22, 1996, the Company completed a $105 million commercial paper
conduit financing through Enterprise Funding Corporation, a commercial paper
conduit administered by NationsBank. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). It replaced an existing $75 million
commercial paper conduit facility which was provided by Enterprise Funding to
another special-purpose, wholly-owned subsidiary of the Company, F.I.R.C., Inc
("FIRC"). Credit enhancement for the new $105 million facility is provided to
the commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. Credit enhancement for the replaced $75 million facility was
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 ALPI policy continues to provide
credit enhancement for the $55 million warehouse credit facility.
Receivables originally purchased by the Company are financed with
borrowings under the warehouse credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the commercial paper facility used to repay borrowings
under the warehouse 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 canceled 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 commercial paper facility must be
maintained in a reserve account for the benefit of the creditors and surety bond
provider.
Borrowings under the commercial paper facility bear interest at the
commercial paper rate plus a borrowing spread equal to 0.25% per annum.
Additionally, the agreement provides for additional fees based on the unused
amount of the facility and dealer fees associated with the issuance of the
commercial paper. A surety bond premium equal to 0.35% per annum is assessed
based on the outstanding borrowings under the facility. The commercial paper
facility has been initially provided for a term of one year, expiring October
21, 1997. If the facility were not extended, receivables pledged as collateral
would be allowed to amortize; however, no new receivables would be allowed to be
transferred from the warehouse credit facility.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolio. The Company received
such payments in the amount of
13
$29.8 million and $20.8 million for the six months ended October 31, 1996 and
1995, respectively. Such cash flow funds repayment of amounts borrowed under the
warehouse credit and commercial paper facilities and other holding costs,
primarily interest expense and servicing and custodial fees. During the six
months ended, the Company required net cash flow of $14.0 million in 1996 and
$16.7 million in 1995 (cash required to acquire receivables net of principal
payments on receivables) to fund the growth of its receivables portfolio.
The following table summarizes borrowings under the warehouse credit
facility and the commercial paper facility (dollars in thousands):
AS OF OR FOR THE
SIX MONTHS
ENDED
OCTOBER 31,
--------------------
1995 1996
--------- ---------
WAREHOUSE CREDIT FACILITY:
At period-end:
Balance outstanding............. $ 50,223 $ 43,110
Weighted average interest
rate(1)........................ 6.66% 6.33%
During period(2):
Maximum borrowings
outstanding.................... $ 50,223 $ 55,000
Weighted average balance
outstanding.................... 39,505 48,993
Weighted average interest
rate........................... 6.83% 6.80%
COMMERCIAL PAPER FACILITY:
At period-end:
Balance outstanding............. $ 27,075 $ 59,322
Weighted average interest
rate(1)........................ 7.03% 6.12%
During period(2):
Maximum borrowings
outstanding.................... $ 35,227 $ 59,322
Weighted average balance
outstanding.................... 31,992 49,216
Weighted average interest
rate........................... 7.15% 6.36%
- - ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
INTEREST RATE MANAGEMENT. The Company's credit facilities bear interest at
floating interest rates which are reset on a short-term basis whereas its
receivables bear interest at fixed rates which are generally at the maximum
rates allowable by law which do not generally vary with changes in interest
rates. To manage the risk of fluctuation in the interest rate environment, the
Company enters into interest rate swaps and caps with notional principal amounts
which approximate the balance of its debt outstanding to lock in what management
believes to be an acceptable net interest spread. However, the Company will be
exposed to limited rate fluctuation risk to the extent it cannot perfectly match
the timing of net advances from its credit facilities and acquisitions of
additional interest rate protection agreements. On August 7, 1996, the Company
entered into a new swap agreement with NationsBank of Texas, N.A. pursuant to
which the Company's interest rate exposure is fixed, through August 1997, at a
rate of 5.545% on a notional amount of $100 million. This agreement may be
extended to August 1999, at the sole discretion of NationsBank of Texas, N.A.
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 and effective
collection procedures, (ii) providing recourse
14
to dealers under its participating program for a period of time and thereafter
secured by cash reserves in the event of losses and (iii) insurance against
certain losses from independent third party insurers. As a result of its
recourse programs and third party insurance, the Company is not exposed to
credit losses on its entire receivables portfolio. The following table
summarizes the credit loss exposure of the Company (dollars in thousands):
OCTOBER 31,
-----------------------------------------------
1995 1996
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
Core Program:
Insured by third party
insurer....................... $ 6,901 $ -- $ 3,430 $ --
Other receivables(1)............ 57,469 534(2) 96,817 760(2)
Participating Program................ 13,405 1,089(3) 6,769 546(3)
----------- -----------
$77,775 $ 107,016
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 0.9% 0.8%
Dealer reserves as a percentage of
participating program
receivables........................ 8.1% 8.1%
- - ------------
(1) Represents receivables reinsured by Company's insurance affiliate or
receivables on which no credit loss insurance exists.
(2) Represents the balance of the Company's allowance for credit losses.
(3) Represents the balance of the dealer reserve accounts.
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.
CORE PROGRAM AND PORTFOLIO ACQUISITIONS. Under the core program and for
receivables acquired pursuant to bulk portfolio acquisitions, 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. With the completion of the $105 million commercial paper conduit
financing in October 1996, credit loss insurance and the Company's reinsurance
liability is cancelled upon the transfer of receivables to FIARC utilizing
commercial paper borrowings. Provisions for credit losses of $401,367 and
$760,974 have been recorded for the three and six months ended October 31, 1996,
respectively, for losses which are reinsured by the Company's captive insurance
subsidiary and for losses on receivables pledged as collateral under the
commercial paper conduit facility.
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.
PARTICIPATING PROGRAM. Under the Company's participating program, the
dealer retains the credit risk for a period of time, usually twelve to eighteen
months. In the event of payment
15
default, the dealer is obligated to repurchase the receivable. A specified
portion of the purchase price is set aside in a reserve account to secure
performance of the dealer's repurchase obligation. Receivables purchased from
each dealer are aggregated into pools of specified size for purposes of tracking
the dealer's participation. When the dealer's participation in a pool is
terminated, a portion of the reserve account exceeding a specified percentage is
released to the dealer and the balance is retained in the reserve account to
fund credit losses until all receivables in the pool are paid in full. As a
result of establishing relationships only with franchised dealers and securing
each dealer's repurchase obligation with a funded reserve account, the Company
has incurred no losses under the participating program.
As a result of a shift in the preference of dealers to sell receivables to
the Company under the core program rather than the participating program, the
participating program accounted for only 6% of the aggregate receivables held by
the Company as of October 31, 1996, representing a 11% decrease from 17% on
October 31, 1995. Management believes that this trend will continue and that the
significance of the participating program by comparison to the core program,
will diminish over future periods.
The following table summarizes the status and collection experience of
receivables acquired by the Company (dollars in thousands):
AS OF OR FOR THE SIX MONTHS ENDED OCTOBER 31,
----------------------------------------------------
1995 1996
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
CORE PROGRAM AND PORTFOLIO
ACQUISITIONS:
Delinquent amount outstanding:
30 - 59 days.................... 92 $ 1,510 129 $ 2,051
60 - 89 days.................... 16 246 31 513
90 days or more................. 30 502 59 1,023
--- --------- --- ---------
Total delinquencies.................. 138 $ 2,258 219 $ 3,587
--- --------- --- ---------
Total delinquencies as a percentage
of outstanding receivables acquired
pursuant to portfolio acquisitions
and the core program............... 2.4% 2.5% 2.5% 2.6%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to portfolio
acquisitions and the core
program(2)(3)...................... -- 1.0% -- 1.4%
PARTICIPATING PROGRAM:
Delinquent amount outstanding:
30 - 59 days.................... 64 $ 685 25 $ 205
60 - 89 days.................... 8 100 2 15
90 days or more................. 20 291 15 175
--- --------- --- ---------
Total delinquencies.................. 92 $ 1,076 42 $ 395
--- --------- --- ---------
Total delinquencies as a percentage
of participating program
receivables........................ 6.0% 6.0% 4.2% 4.7%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to the
participating program.............. -- 0% -- 0%
(FOOTNOTES ON FOLLOWING PAGE)
16
- - ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percent of outstanding receivables acquired in portfolio transactions and
pursuant to the core program are based on gross receivables balances, which
include principal outstanding plus unearned interest income.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed by third-party insurers. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
(3) The percentages have been annualized and are not necessarily indicative of
the results for a full year.
17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
10.29 -- Security Agreement dated as of October 22, 1996 among First
Investors Auto Receivables Corporation, Enterprise Funding
Corporation, Texas Commerce Bank National Association, MBIA Insurance
Corporation, NationsBank N.A., and First Investors Financial
Services, Inc.
10.30 -- Note Purchase Agreement dated as of October 22, 1996 between First
Investors Auto Receivables Corporation and Enterprise Funding
Corporation.
10.31 -- Purchase Agreement dated as of October 22, 1996 between First
Investors Financial Services, Inc. and First Investors Auto
Receivables Corporation.
10.32 -- Insurance Agreement dated as of October 1, 1996 among First
Investors Auto Receivables Corporation, MBIA Insurance Corporation,
First Investors Financial Services, Inc., Texas Commerce Bank
National Association and NationsBank N.A.
10.33 -- Servicing Agreement dated as of October 22, 1996 between First
Investors Auto Receivables Corporation and General Electric Capital
Corporation.
10.34 -- Amended and Restated Credit Agreement dated as of October 30, 1996
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and
as Agent for the financial institutions party thereto.
10.35 -- Amended and Restated Collateral Security Agreement dated as of
October 30, 1996 between F.I.R.C., Inc. and Texas Commerce Bank
National Association as collateral agent for the ratable benefit of
NationsBank of Texas, N.A., individually and as agent for the
financial institutions party to the Amended and Restated Credit
Agreement filed as Exhibit 10.34.
10.36 -- Amended and Restated Purchase Agreement dated as of October 30,
1996 between First Investors Financial Services, Inc. and F.I.R.C.,
Inc.
10.37 -- Amended and Restated Servicing Agreement between F.I.R.C., Inc.
and General Electric Capital Corporation.
27 -- Financial Data Schedule for the Second Quarter October 31, 1996 of
Fiscal Year April 30, 1997.
18
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: December 13, 1996 By: /s/ Tommy A. Moore, Jr.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 13, 1996 By: /s/ Bennie H. Duck
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER
19