UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27550
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RAC Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Texas 75-2561052
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 West Mockingbird Lane, Dallas, Texas 75247
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(Address of principal executive offices)
(Zip Code)
(214) 630-6006
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16901 Dallas Parkway, Suite 200, Dallas, TX 75248
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Former name, former address and former fiscal year, if changed
since last report)
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
----- -----
There were 11,249,570 shares of voting common stock and 2,220,338 shares of
non-voting common stock, $.01 par value outstanding as of June 30, 1996.
1
RAC FINANCIAL GROUP, INC.
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
-----
Condensed Consolidated Balance Sheets -
September 30, 1995 and June 30, 1996................. 3
Condensed Consolidated Statements of Income-
Three Months and Nine Months Ended
June 30, 1995 and June 30, 1996...................... 4
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
June 30, 1995 and June 30, 1996...................... 5
Notes to Condensed Consolidated Financial
Statements........................................... 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations....................... 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................ 15
SIGNATURE ............................................. 17
2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
September 30,1995 June 30, 1996
----------------- -------------
Cash and cash equivalents. . . . . . . $ 2,486 $ 2,337
Loans held for sale, net . . . . . . . 19,435 165,740
Excess servicing receivable. . . . . . 29,744 116,753
Subordinated certificates held
for sale. . . . . . . . . . . . . . . 1,313 16,527
Receivable from trusts . . . . . . . . 2,572 10,970
Other assets . . . . . . . . . . . . . 5,792 10,526
-------- --------
Total assets . . . . . . . . . . . . $ 61,342 $322,853
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and
accrued liabilities . . . . . . . . $ 6,937 $ 14,804
Warehouse financing facilities
with affiliates . . . . . . . . . . 18,530 142,830
Term line of credit. . . . . . . . . 9,249 37,069
Notes payable. . . . . . . . . . . . 872 1,120
Subordinated notes payable to
affiliates. . . . . . . . . . . . . 8,002 7,003
Allowance for possible credit
losses on loans sold. . . . . . . . 3,907 27,382
Deferred tax liabilities, net. . . . 2,111 11,451
------- -------
Total liabilities. . . . . . . . . . 49,608 241,659
------- -------
------- -------
Commitments
Stockholders' Equity:
Preferred stock Series A, non-voting,
$1 par value, 8% cumulative dividend:
Authorized - 300,000
Issued and outstanding shares - 100,000
as of September 30, 1995 and 0 as of
June 30, 1996 . . . . . . . . . . 100 --
Preferred stock Series B, non-voting,
$1 par value, 8% cumulative dividend:
Authorized, issued, and outstanding shares -
2,300,000 as of September 30, 1995 and 0 as of
June 30, 1996 . . . . . . . . . . 2,300 --
Common stock, $0.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares -6,700,000
as of September 30, 1995 and 11,249,570 as of
June 30, 1996 . . . . . . . . . . 75 112
Non-voting common stock, $0.01 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 1,474,402 as
of September 30, 1995 and 2,220,338 as of
June 30, 1996 . . . . . . . . . . 15 22
Additional capital. . . . . . . . . . 3,627 54,831
Retained earnings . . . . . . . . . . 5,617 26,229
------- -------
Total stockholders' equity. . . . . 11,734 81,194
------- -------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . $ 61,342 $322,853
--------- -------
--------- -------
See accompanying notes.
3
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -------------------
1995 1996 1995 1996
---- ---- ---- ----
Revenues:
Gains on sales of loans, net of costs but
before provision for possible credit losses . . . . . . $12,092 $41,322 $18,184 $89,815
Interest . . . . . . . . . . . . . . . . . . . . . . . . 893 6,704 1,673 $10,761
Servicing income . . . . . . . . . . . . . . . . . . . . 297 1,040 698 2,674
Other income . . . . . . . . . . . . . . . . . . . . . . 322 2,310 923 5,392
--- ----- ---- ------
Total revenues . . . . . . . . . . . . . . . . . . . . . 13,604 51,376 21,478 108,642
Expenses:
Salaries and employee benefits . . . . . . . . . . . . . 2,578 9,383 5,984 22,542
Interest . . . . . . . . . . . . . . . . . . . . . . . . 879 3,751 1,462 8,610
Other operating. . . . . . . . . . . . . . . . . . . . . 2,226 8,458 4,986 17,320
Provision for possible credit losses . . . . . . . . . . 1,606 14,058 2,256 26,561
----- ------ ----- ------
Total expenses . . . . . . . . . . . . . . . . . . . . . 7,289 35,650 14,688 75,033
----- ------- ------ ------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 6,315 15,726 6,790 33,609
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . (2,345) (5,976) (2,660) (12,771)
------ ------ ------ -------
Net income . . . . . . . . . . . . . . . . . . . . . . . $3,970 $9,750 $4,130 $20,838
------ ------ ------ -------
------ ------ ------ -------
Net income per share of common stock . . . . . . . . . . . . . . . . $ 0.39 $ 0.70 $ 0.39 $ 1.70
------ ------ ------- --------
------ ------ ------- --------
Weighted average common shares and common equivalent shares
outstanding . . . . . . . . . . . . . . . . . . . . . . 10,148 13,840 10,148 12,206
------ ------ ------- --------
------ ------ ------- --------
See accompanying notes.
4
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Nine Months
Ended June 30,
---------------------
1995 1996
---- ----
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . $ 4,130 20,838
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Provision for possible credit losses . . . . . 2,256 26,561
Depreciation and amortization. . . . . . . . . 280 522
Gain on sales of loans . . . . . . . . . . . . (19,149) (94,037)
Changes in operating assets and liabilities:
Excess servicing receivable amortization . . 294 7,280
Loans originated or acquired . . . . . . . . (196,891) (909,102)
Principal collected and proceeds from
sale of loans. . . . . . . . . . . . . . . 186,201 785,069
Accrued interest receivable. . . . . . . . . 233 (1,298)
Excess servicing receivable, net . . . . . . (2,670) (180)
Receivable from trusts . . . . . . . . . . . (3,564) (9,749)
Subordinated Certificate held for sale . . . - (15,215)
Other assets . . . . . . . . . . . . . . . . (34) (3,582)
Accounts payable and accrued expenses. . . . 982 6,446
Deferred tax liability . . . . . . . . . . . 1,894 9,340
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES. . . . . (26,038) 177,107)
--------- ---------
INVESTING ACTIVITIES:
Cash from acquisition. . . . . . . . . . . . 525 252
Purchases of equipment and leasehold
improvements. . . . . . . . . . . . . (325) (785)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES. . . 200 (533)
--------- ---------
FINANCING ACTIVITIES:
Borrowings on warehouse financing
facilities, net. . . . . . . . . . . . . . 8,635 102,440
Borrowings on term line of credit. . . . . . 5,135 27,820
Borrowings (repayments) on notes
payable, net . . . . . . . . . . . . . . . 5,713 (796)
Proceeds from repayments of subordinated
notes payable to affiliates. . . . . . . . 7,175 (1,000)
Preferred stock issued (redeemed). . . . . . (200) (2,400)
Common stock issued. . . . . . . . . . . . . 450 51,211
Distributions. . . . . . . . . . . . . . . . (2,167) -
Preferred stock dividends. . . . . . . . . . (27) ( 265)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . 24,714 117,010
INCREASE (DECREASE) IN CASH. . . . . . . . . . (1,124) (630)
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . 3,433 2,967
--------- ---------
Cash and cash equivalents at end
of period. . . . . . . . . . . . . . . . . $ 2,309 $ 2,337
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid during the period . . . . . . $ 1,441 $ 8,610
--------- ---------
--------- ---------
See accompanying notes.
5
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the year ended September 30, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
September 30, 1995 included in RAC Financial Group, Inc.'s registration
statement on Form S-1 for its initial public offering of common stock.
In May 1996, 800,000 common shares of the Company were issued in exchange
for all of the outstanding common stock of Mortgage Plus, Incorporated (MPI),
in a transaction accounted for as a pooling of interests. MPI was
subsequently renamed FIRSTPLUS Financial West, Inc. (FIRSTPLUS West). As
such, the consolidated financial information of the Company has been restated
to include the accounts of FIRSTPLUS West for all periods presented. As
FIRSTPLUS West was a Subchapter S corporation prior to the pooling with RAC,
its retained earnings activity (net income (loss) and distributions) on a
separate company basis has been reclassified to additional capital. Prior to
the acquisition, FIRSTPLUS West operated on a fiscal year end of April 30.
FIRSTPLUS West's prior years financial statements have been combined with the
Company's financial statements without recasting the periods presented,
except for the financial information as of and for the nine months ended
June 30, 1996 and 1995.
All tabular information is presented in thousands.
2. LOANS HELD FOR SALE
Loans held for sale consist of the following:
As of As of
------------------ ---------------
September 30, 1995 June 30, 1996
------------------ ----------------
First lien mortgages . . . . . . . . $ 28 $ 17,535
Construction Loans . . . . . . . . . --- 2,448
Second Lien Title I Loans. . . . . . 7,203 9,701
Second Lien Conventional Loans . . . 14,066 133,581
--------- ----------
Subtotal. . . . . . . . . . . . . 21,297 163,265
Participations sold. . . . . . . . . (902) (30)
Allowance for possible
credit losses . . . . . . . . . . . (888) (1,616)
Net purchase premiums (discounts) on
Conventional loans . . . . . . . (72) 4,121
--------- ----------
Total . . . . . . . . . . . . . . $ 19,435 $165,740
--------- ----------
--------- ----------
6
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1996
3 ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The activity in the allowance for possible credit losses is summarized as
follows:
Year Ended Nine Months Ended
------------------ -----------------
September 30, 1995 June 30, 1996
------------------ -----------------
Balance, beginning of period . . . . $ 325 $ 4,794
Allowance from FIRSTPLUS
Financial acquisition . . . . . . . 160 -
Provision for possible credit losses 4,452 26,561
Charge offs, net . . . . . . . . . . (143) (2,357)
--------- ----------
Balance, end of period. . . . . . . $ 4,794 $ 28,998
--------- ----------
--------- ----------
Components of Allowance:
Allowance for possible
credit losses . . . . . . . . . $ 888 $ 1,616
Allowance for possible
credit losses on loans sold . . 3,907 27,382
--------- ----------
Total . . . . . . . . . . . $ 4,795 $ 28,998
--------- ----------
--------- ----------
4. EXCESS SERVICING RECEIVABLE
The activity in the Excess Servicing Receivable is summarized as follows:
Year Ended Nine Months Ended
------------------ -----------------
September 30, 1995 June 30, 1996
------------------ -----------------
Balance, beginning of period . . . . $ - $29,744
Acquired in acquisitions . . . . . . 1,686 198
Excess servicing gains . . . . . . . 30,065 94,037
Excess servicing write-off . . . . . (969) (409)
Amortization . . . . . . . . . . . (488) (6,817)
Receivable reclassified to
Receivable from Trust . . . . . . . (550) --
--------- ----------
Balance, end of period . . . . . . . $ 29,744 $ 116,753
--------- ----------
--------- ----------
7
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1996
5. OTHER ASSETS
Other assets consist of the following:
As of As of
------------------ -------------
September 30, 1995 June 30, 1996
------------------ -------------
Goodwill, net . . . . . . . . . . . $ 477 $ 431
Furniture, equipment and leasehold
improvements, net . . . . . . . . . 1,278 3,797
Prepaids and other . . . . . . . . . 4,037 6,298
--------- ----------
Total . . . . . . . . . . . $ 5,792 $ 10,526
--------- ----------
--------- ----------
6. GAINS ON SALES OF LOANS
The gains on sales of loans and the related cost is as follows:
Three Months Ended Nine Months Ended
----------------------- --------------------------
June 30 June 30
----------------------- --------------------------
1995 1996 1995 1996
------- ------- ---------- --------
Excess servicing gain. . . . . . . . . . . . . . . . . $18,600 $43,949 $25,873 $94,573
Gain sharing on loan sales . . . . . . . . . . . . . . (4,631) - (7,201) (536)
-------- ------- -------- --------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . 13,969 43,949 18,672 94,037
Gain on whole loan and bulk sales. . . . . . . . . . . 1,325 4,369 3,298 10,682
-------- ------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . 15,294 48,318 $21,970 $104,719
Residual Interest Income . . . . . . . . . . . . . . . - 1,577 - 2,874
(Premium) discount, net. . . . . . . . . . . . . . . . (1,933) (6,050) (919) (12,899)
Transaction costs. . . . . . . . . . . . . . . . . . . (1,269) (2,523) (2,867) (4,879)
-------- ------- -------- --------
Gains on sales of loans (before provision for possible
credit losses) . . . . . . . . . . . . . . . . . $12,092 $41,322 $18,184 $ 89,815
-------- ------- -------- --------
-------- ------- -------- --------
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
JUNE 30, 1996
Loans held for sale increased from $19.4 million as of September 30, 1995
to $165.7 million as of June 30, 1996, an increase of $146.3 million or 752.8%.
This increase was primarily due to the increased utilization of larger warehouse
facilities (executed in June, 1995), which allowed for substantial growth in
loan originations. The growth in volume was also due, in part, to the expansion
of loan products offered by the Company since September 30, 1995.
In May 1996, 800,000 common shares of the Company were issued in exchange for
all of the outstanding common stock of Mortgage Plus, Incorporated (MPI), in a
transaction accounted for as a pooling of interests. MPI was subsequently
renamed FIRSTPLUS Financial West, Inc. (FIRSTPLUS West). As such, the
consolidated financial information of the Company has been restated to include
the accounts of FIRSTPLUS West for all periods presented. As FIRSTPLUS West was
a Subchapter S corporation prior to the pooling with RAC, its retained earnings
activity (net income (loss) and distributions) on a separate company basis has
been reclassified to additional capital. Prior to the acquisition, FIRSTPLUS
West operated on a fiscal year end of April 30. FIRSTPLUS West's prior years
financial statements have been combined with the Company's financial statements
without recasting the periods presented, except for the financial information as
of and for the nine months ended June 30, 1996 and 1995.
The Company's excess servicing asset increased from $29.7 million on
September 30, 1995 to $116.8 million at June 30, 1996, an increase of $87.0
million or 292.5%. This increase was due to the significant increase in the
amount of loans securitized from October 1, 1995 through June 30, 1996 ($427.2
million), and the elimination of sharing arrangements for securitizations which
closed subsequent to September 30, 1995.
The Company's warehouse facilities are its primary source of funding for
loan originations. As of September 30, 1995, the Company had outstanding
balances of $18.5 million owed to warehouse lenders at an approximate 9.25% rate
of interest. As of June 30, 1996 the Company had outstanding balances of $142.8
million owed to warehouse lenders at an approximate 6.6% rate of interest. This
represents a $124.3 million warehouse line balance increase from September 1995
to the June 1996 balance owing, or a 670.8%. The Company renegotiated the
interest rate on its warehouse lines of credit in April 1996, effective February
1, 1996. Currently, the rates are approximately 1.25%, over the thirty-day U.S.
Federal Funds Rate or 1.25% over the Company's warehouse lender's parent's
thirty-day commercial paper rate.
Accounts payable and other accrued liabilities increased from $6.9 million
as of September 30, 1995 to $14.8 million as of June 30, 1996. This represents
a $7.9 million increase over the period, or 113.4%. This increase was
primarily a result of increased payables for federal and state income taxes,
securitization costs (which will be subsequently refinanced with the Company's
term line lender) and increased liabilities for salary and infrastructure costs
associated with the significant increases in loan volume during the quarter
ended June 30, 1996.
9
Total shareholders' equity at June 30, 1996 was $81.2 million, as
compared with $11.7 million at September 30, 1995, an increase of $69.5
million or 592.0%. During the nine months ended June 30, 1996, the Company
earned net income of $20.8 million and paid preferred stock dividends of
$264,842.
RESULTS OF OPERATIONS
The Company's total revenues increased to $51.4 million during its third
fiscal quarter ended June 30, 1996, from $13.6 million for the comparable
quarter ended June 30, 1995, an increase of $37.8 million or 277.7 %. For the
first nine months of the fiscal year 1996, the Company's total revenues
increased to $108.6 million from $21.5 million during the same period in 1995,
an increase of $87.2 million or 405.8%.
The increase in the volume of loans originated and purchased by the Company
and the increase in the size and scope of the Company's securitization program
throughout fiscal 1995 and continuing into fiscal 1996 was primarily responsible
for this increase in revenues. The Company's securitization transactions
resulted in increased Gain on Sale of Loans. Gain on Sale of Loans increased
because the Company was able to sell a larger volume of loans more efficiently
without reduction for any sharing arrangements in the quarter ended June 30,
1996, when compared to the quarter ended June 30, 1995, as well as for the
associated nine month periods. Interest, servicing and other income also
increased substantially during the June 30, 1996 quarter when compared to the
June 30, 1995 quarter, primarily as a result of the increased quantity of loans
originated, held for sale and serviced by the Company.
The Company's provision for possible credit losses increased by $12.4
million from $1.6 million, (0.6% of loans sold), for the quarter ended June 30,
1995 to $14.1 million (2.1% of loans sold) for the quarter ended June 30, 1996.
The Company's provision for possible credit losses was $26.6 million for the
nine month period ended June 30, 1996, compared to $2.3 million for the same
period in 1995, an increase of $24.3 million. These increases in the provision
for possible credit losses were proportional to the Company's increase in
securitization activity, as adjusted for the increasing percentage of
Conventional loans securitized by the Company throughout the 1995 calendar year,
the removal of the Warehouse Lender's sharing arrangement payment (which
required the Warehouse Lender rather than the Company to reserve for certain
loans), and shifts in the quality of the loans being securitized.
Total expenses including income taxes increased from $9.6 million for the
three months ended June 30, 1995 to $41.6 million for the three months ended
June 30, 1996, an increase of $32.0 million or 332.1%. On a nine-month
basis, the Company's expenses including taxes increased from $17.3 million
for the nine month period ended June 30, 1995, compared to $87.8 million for
the comparable period ended June 30, 1996, an increase of $70.5 million or
406.1%. As a percentage of total revenues, however, total expenses
including taxes increased from 70.8% in the June 1995 quarter to 81.0% in
the June 1996 quarter. Total expenses including income taxes for the
nine-month periods ended June 30, 1996 and 1995 remained constant at 80.8% of
total revenues.
As a result of the above, net income increased from $4.0 million for the
June 1995 quarter to net income of $9.8 million for the June 1996 quarter. This
represents an increase of $5.8 million, or a 145.6% increase. Net income, on a
nine-month basis, increased to $20.8 million for the first nine-month
10
period of Fiscal Year 1996 from $4.1 million for the nine months of Fiscal Year
1995, an increase of $16.7 million or 404.6%. These increases wer primarily the
result of growth in loan production and sale of loans through securitizations
for the respective comparitive periods.
The Company delivered $205.1 million out of $258.5 million in loans in June
30, 1996. During the time period between the securitization's closing and the
last delivery of the $40 million of prefunded loans to the securitizations, the
Five Year Treasury Yield increased from 5.3% to 6.1%.
Weighted Average Fair, Isaac and Company scores (a default prediction model
utilized by the Company) for the Conventional loans securitized in the Company's
1996-1 securitization were approximately 656 points, with a standard deviation
of 45 points. Weighted Average Fair, Isaac and Company scores for the
Conventional Loans securitized in the Company's 1995-1 securitization (closed
during the quarter ended June 30, 1995) were approximately 605 points, with a
standard deviation of approximately 67 points. This improvement in loan quality
and consistency reflects the Company's effort to produce a well received and
reliable securitization product. Title One loans securitized in both
securitizations had Weighted Average Fair, Isaac and Company scores of
approximately 625 points and a standard deviation of approximately 67 points.
The Company's servicing (including subserviced loans) loan portfolio had 30
day and over delinquencies of 3.7% of its loans as of June 30, 1996, and 6.6% of
its loans as of June 30, 1995. This decrease was primarily due to increased
loan origination volumes. On a static pool basis, the Company's seasoned
securitizations (those transactions funded more than nine months ago), had a
weighted average 30 day and over delinquency rate of 6.7%.
Gross defaults (before recoveries and Title I insurance claims paid) as
a percentage of the serviced loan portfolio declined from the June 1995
quarter to the June 1996 quarter. Gross defaults for the nine months ended
June 30, 1995 equaled $385,000, or 0.6% of the June 1995 quarterly loan
portfolio. Gross defaults for the nine months ended June 30, 1996 equaled
$4.9 million or 0.7% of the June 1996 loan servicing portfolio. Gross
defaults experienced in the three months and nine months ended June 30, 1996
were primarily the result of lower quality loans defaulting in the 1994-1,
1995-1,1995-2, 1996-1, 1996-2 and 1996-A securitizations. As of June 30,
1996, reserves exceed cumulative defaults in these six securitizations, and
with respect to all other loans in the Company's servicing portfolio. On a
static pool basis, the Company's seasoned securitizations (those transactions
funded more than nine months ago) had a weighted average default rate for the
quarter ended June 30, 1996 of .4%.
On a seasoned pool basis the weighted average prepayment rate for the
Company's seasoned securitizations (those transactions funded more than nine
months ago) was approximately 8.63% for the quarter ended June 30, 1996.
Prepayment rates for newer securitizations and for non-securitized loans on the
Company's balance sheet are not yet sufficient to provide meaningful data
regarding future loan performance.
LIQUIDITY AND CAPITAL RESOURCES
11
The Company's operations require continued access to financing sources.
The Company's primary operating cash requirements include the funding of (i)
loan originations and purchases, (ii) reserve accounts, over collateralization
requirements, fees and expenses incurred in connection with its securitization
transactions, (iii) tax payments due on the Company's reported net income, which
is based in large part on the Company's recognition of Gain on Sale of Loans,
and (iv) ongoing administrative and other operating expenses.
Adequate credit facilities and other sources of funding, which permit the
Company to fund its operating cash requirements and to securitize or sell loans
in the secondary market, are essential to the continuation of the Company's
ability to originate and purchase loans. After utilizing available working
capital, the Company borrows money to fund its loan originations and purchases,
and repays these borrowings as the loans are securitized or sold. Upon the
securitization or sale of loans and the subsequent repayment of the borrowings,
the Company's working capital and warehouse lines of credit again become
available to fund additional loan originations and purchases.
The Company, and its two subsidiaries, First Security Mortgage Corp. and
Mortgage Plus, Inc. (now known as FIRSTPLUS Financial East and FIRSTPLUS
Financial West, Inc., respectively) currently have four major warehouse
financing facilities. These facilities are described below:
1). The Company's largest and most significant facility (the "Warehouse
Lender" facility) is secured by loans originated or purchased by the
Company and bears interest payable monthly at the rate of 1.25% over
the commercial paper rate of the Warehouse Lender's parent (5.4% as of
June 30, 1996). This facility generally has a loan advance rate of
par. This facility was executed in April 1996 and was effective on
February 1, 1996. This facility matures on March 1, 1997.
The Company also has a $70 million term line (maturing in February
1999), with the Warehouse Lender, which is secured by the Company's
servicing rights and excess servicing receivable. This line of credit
bears interest at the rate of 2.5% over the commercial paper rate of
the Warehouse Lender's parent with principal advances amortized over
60 months. The Term Line may be utilized for any working capital
need; to date, the Term Line has been primarily used to finance the
Company's share of premium costs, cost of issuance and initial reserve
deposits for credit enhancement with respect to its securitization
activities. Up to 65% of the value of the Company's excess servicing
receivable (as calculated by the Warehouse Lender) may be borrowed by
the Company under the terms of the facility.
2.) The Company has a $60 million warehouse facility with Bank One, Texas
(the "Bank One" warehouse facility). This facility was executed in
April 1996, was effective on February 1, 1996 and expires on March 31,
1997. This facility is secured by loans originated or purchased by
the Company. Interest is payable monthly and accrues at 1.25% over
the thirty-day Federal Funds Rate. This warehouse facility has a loan
advance rate generally equal to the lesser of 90% of loan value or 97%
of loan cost, not to exceed par.
3). At June 30, 1996, FIRSTPLUS Financial East, the Company's direct-to-
consumer originator, had $13.7 million outstanding under its $22.5
million in warehouse facilities primarily with Leader Federal Bank of
Bartlett, Tennessee. The facilities bear interest at Leader
12
Federal Bank's prime rate plus 1%. The Company guarantees the
repayment of advances made to First Security under this facility.
4). At June 30, 1996, FIRSTPLUS Financial West, Inc., had $14.4 million
outstanding under its $40 million in warehouse facilities primarily
with Bank United of Texas.
As of June 30, 1996, the Company owed an aggregate of $7.0 million in
Subordinated Notes to BOCP II, BOCP V and Farm Bureau. The Subordinated Notes
were issued with detachable warrants, which were exercised for shares of
Non-Voting Common Stock in February 1996. The Subordinated Notes are secured by
certain assets of the Company, but are subordinated to the Warehouse Lender
facility and the Bank One warehouse facility. Interest is payable quarterly on
the notes. In February 1996, a portion of the proceeds from the Company's
initial public offering were used to pay off $5.5 million of subordinated notes
payable to Farm Bureau. At June 30, 1996, the Company also had certain other
notes payable totaling approximately $1.1 million with various maturities in
excess of one year.
As indicated above, the Company's ability to continue to originate and
purchase loans is dependent, in large part, upon its ability to securitize or
sell its loans in the secondary market in order to generate cash proceeds for
new originations and purchases. The value of and market for the Company's loans
are dependent upon a number of factors, including general economic conditions,
interest rates and governmental regulations. Adverse changes in such factors
may affect the Company's ability to purchase, securitize or sell loans for
acceptable prices within a reasonable period of time. A prolonged, substantial
reduction in the size of the secondary market for loans of the type originated
or purchased by the Company may adversely affect the Company's ability to
securitize or sell loans in the secondary market, with a consequent adverse
impact on the Company's profitability and ability to fund future originations
and purchases.
As a result of the Company's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Company has
operated, and expects to continue to operate, on a negative operating cash
flow basis, which is expected to increase as the volume of the Company's loan
purchases and originations increase and its securitization program grows.
The used $26.0 million of cash in the nine months ended June 30, 1995 and
used $177.1 million of cash in the nine months ended June 30, 1996. The
increase in the use of cash in operations is primarily related to the cost of
an enlarged infrastructure, employee base and the costs that accompany the
Company's securitization strategy (which increases the Gain on Sale of Loans
but reduces the amount of cash received on the sale of loans as compared to
whole-loan sales). The Company completed total securitizations in the amount
of $235.0 million for the year ended September 30, 1995 and $427.2 million
for the nine months ended June 30, 1996. In connection with securitizations,
the Company is required to provide credit enhancements in the form of reserve
accounts. The accumulated amounts of such cash reserves are included on the
Company's balance sheet as "receivable from trusts" and equaled $7.8 million
as of June 30, 1996. These accounts cannot be used by the Company for
operating purposes. The Company's financings and investing activities
provided cash in the amount of $116.5 million for the nine months ended June
30, 1996 and used cash of $24.9 million for the nine months ended June 30,
1995. Cash from financing and investing activities increased primarily due
to additional borrowings related to
13
the Subordinated Notes, the Term Line and other borrowings, which have been used
to fund loan originations, working capital and securitization costs.
The increased use of securitization transactions as a funding source by
the Company has resulted in a significant increase in the amount of Gain on
Sale of Loans recognized by the Company. For the nine months ended June 30,
1996, the Company recognized Gain on Sale of Loans in the amount of
approximately $63.2 million (net of provision for possible credit losses of
$26.6 million) compared to $15.9 million (net of provision for possible credit
losses of $2.3 million) for the same period in 1995. During the nine months
ended June 30, 1996, the Company recognized Gain on Sale of Loans in the
amount of approximately $27.2 million (net of provision for possible credit
losses of $14.1 million) compared to $3.9 million (net allowance for possible
credit losses of $1.6 million) for the same period ended June 30, 1995. This
Gain on Sale has a negative impact on the cash flow of the Company since the
Company will be required to pay state and federal income taxes on a portion
of such gains and must currently pay securitization costs in the period the
income is recognized, although the Company does not receive the cash
representing the gain until later periods as the related loans are repaid or
otherwise collected. The Company has funded these cash requirements through
the Warehouse Lender's term line facility.
14
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.1 Master Purchase Agreement Between Bear Stearns
Home Equity Trust 1996-1 and FirstPlus Financial,
Inc. dated May 10, 1996
10.2 Custody Agreement among FIRSTPLUS Financial,
Inc., seller and Bear Stearns Home Equity Trust 1996-
1, buyer and Bank One, Texas, N.A., custodian dated May
10, 1996
10.3 Fifth Amendment to Credit Agreement dated June 20,
1996 by and among FIRSTPLUS Financial, Inc., RAC
Financial Group, Inc. and Bank One, Texas, National
Association
10.4 Promissory Note dated June 30, 1996 between
FIRSTPLUS Financial, Inc. and Bank One, Texas,
National Association
15
*10.5 Agreement and Plan of Merger dated May 22, 1996,
among RAC Financial Group, Inc., FIRSTPLUS
Financial West, Inc., Mortgage Plus Incorporated and
the Shareholders
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
* Incorporated by reference from the Company's Current Report on Form 8-K
dated June 14, 1996.
(B)Reports on Form 8-K
On June 14, 1996, the Company filed a Current Report on Form 8-K
reporting the acquisition of Mortgage Plus Incorporated. The financial
statements required by such Form 8-K will be filed by amendment.
16
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.
RAC Financial Group, Inc.
(Registrant)
by: /s/ Eric C. Green
-------------------------------------------
Eric C. Green
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
date: 8/6/96
----------------------
17
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
----------- ---------
10.1 Master Purchase Agreement Between Bear Stearns
Home Equity Trust 1996-1 and FirstPlus Financial,
Inc. dated May 10, 1996
10.2 Custody Agreement among FIRSTPLUS Financial,
Inc., seller and Bear Stearns Home Equity Trust 1996
-1, buyer and Bank One, Texas, N.A., custodian dated
May 10, 1996
10.3 Fifth Amendment to Credit Agreement dated June 20,
1996 by and among FIRSTPLUS Financial, Inc., RAC
Financial Group, Inc. and Bank One, Texas, National
Association
10.4 Promissory Note dated June 30, 1996 between
FIRSTPLUS Financial, Inc. and Bank One, Texas,
National Association
*10.5 Agreement and Plan of Merger dated May 22, 1996,
among RAC Financial Group, Inc., FIRSTPLUS
Financial West, Inc., Mortgage Plus Incorporated and
the Shareholders
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
* Incorporated by reference from the Company's Current Report on Form 8-K
dated June 14, 1996.
18