1
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 September 30, 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 No 0-21075
FIRST ENTERPRISE FINANCIAL GROUP, INC.
--------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3688499
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Davis Street, Suite 1005, Evanston, Illinois 60201
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 866-8665
________________________________________________________________________________
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.01 par value, 5,265,335 shares outstanding as of October 31,
1996.
2
FIRST ENTERPRISE FINANCIAL GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. FINANCIAL STATEMENTS
Balance Sheets........................................ 3
Statements of Income.................................. 4
Statements of Cash Flows.............................. 5
Notes to Financial Statements......................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 11
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS..................................... 19
Item 2. CHANGES IN SECURITIES................................. 19
Item 3. DEFAULTS UPON SENIOR SECURITIES....................... 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................... 19
Item 5. OTHER INFORMATION..................................... 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 19
SIGNATURES............................................ 20
INDEX OF EXHIBITS..................................... 21
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
------------ ------------
ASSETS
Cash................................................................................... $ 1,437,825 $ 1,703,320
Restricted cash........................................................................ 4,203,895 --
Finance receivables:
Net principal balance.............................................................. 97,114,910 59,495,368
Unamortized contract acquisition discount.......................................... -- --
Unearned insurance commissions..................................................... (50,128) (189,737)
------------ ------------
Automobile finance receivables..................................................... 97,064,782 59,305,631
Allowance for credit losses........................................................ (8,024,609) (5,010,919)
------------ ------------
89,040,173 54,294,712
Property and equipment - at cost....................................................... 1,098,641 881,713
Repossessed assets..................................................................... 820,775 542,841
Deferred tax asset..................................................................... 1,176,000 --
Other assets........................................................................... 2,597,625 988,194
------------ ------------
TOTAL ASSETS................................................................... $ 100,374,934 $ 58,410,780
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Senior debt............................................................................ $ 35,061,000 $ 43,267,000
Notes payble - securitized pool........................................................ 41,055,443 --
Subordinated debt...................................................................... -- 8,354,541
Accounts payable - dealers............................................................. 2,474,764 1,937,710
Other accounts payable and accrued expenses............................................ 2,737,099 1,577,189
Other liabilities...................................................................... 494,208 460,271
------------ ------------
Total liabilities.............................................................. 81,822,514 55,596,711
Common stock warrants.................................................................. -- 649,300
Stockholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 5,265,335 and 2,062,080 shares issued
and outstanding at September 30, 1996 and December 31, 1995, respectively....... 52,653 20,621
Class B common stock, $.01 par value, non-
voting; 2,262,080 shares authorized;
917,625 issued and outstanding at
December 31, 1995............................................................... -- 9,176
Additional paid-in capital......................................................... 13,707,431 1,201,718
Retained earnings ................................................................. 4,792,336 1,328,405
Guaranteed loans of stockholders................................................... -- (395,151)
------------ ------------
Total stockholders' equity..................................................... 18,552,420 2,164,769
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............................................................ $ 100,374,934 $ 58,410,780
============ ============
The accompanying notes are an integral part of these statements.
3
4
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------- ------------
Finance charges and interest............................ $4,787,957 $2,352,315 $ 11,803,661 $6,587,758
Interest expense........................................ 1,574,699 929,375 4,464,920 2,748,903
------------ ------------ ------------- ------------
Net interest income............................. 3,213,258 1,422,940 7,338,741 3,838,855
Provision for credit losses............................. 325,000 -- 950,000 --
------------ ------------ ------------- ------------
Net interest income after provision
for credit losses.............................. 2,888,258 1,422,940 6,388,741 3,838,855
Other income:
Servicing income.................................... 1,423,007 943,219 3,990,495 2,364,886
Insurance commissions............................... 997,793 405,178 2,405,560 1,014,161
Fees and other income............................... 435,224 217,176 1,111,509 427,536
Gain on sale of finance receivables................. -- -- 524,343 --
------------ ------------ ------------- ------------
Total other income.............................. 2,856,024 1,565,573 8,031,907 3,806,583
------------ ------------ ------------- ------------
Income before operating expenses................ 5,744,282 2,988,513 14,420,648 7,645,438
Operating expenses:
Salaries and employee benefits...................... 2,265,202 1,359,887 6,203,214 3,640,409
Rent expense........................................ 140,798 94,244 370,334 252,861
Depreciation and amortization....................... 93,882 61,498 262,438 174,062
Professional services............................... 222,399 156,519 476,866 319,943
Other expenses...................................... 947,502 526,992 2,470,376 1,334,864
------------ ------------ ------------- ------------
Total operating expenses........................ 3,669,783 2,199,140 9,783,228 5,722,139
------------ ------------ ------------- ------------
Income before income taxes and
extraordinary item.............................. 2,074,499 789,373 4,637,420 1,923,299
Income taxes............................................ 922,000 15,000 1,940,000 45,000
Deferred income tax effect of
S corporation termination........................... -- -- (267,000) --
------------ ------------ ------------- ------------
Net income before extraordinary item............ $1,152,499 $774,373 $ 2,964,420 $1,878,299
------------ ------------ ------------- ------------
Extraordinary item from early extinguishment
of debt, net of income taxes........................ 149,789 -- 149,789 --
------------ ------------ ------------- ------------
Net income...................................... 1,002,710 774,373 2,814,631 1,878,299
============ ============ ============= ============
Pro forma net income per share.......................... $0.20 $0.13 $0.58 $0.33
============ ============ ============= ============
Pro forma weighted average number of common
and common equivalent shares outstanding............ 5,693,504 5,399,837 5,693,504 5,323,139
============ ============ ============= ============
The accompanying notes are an integral part of these statements.
4
5
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
-------------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
Net income.......................................... $2,814,631 $1,878,299
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization..................... 407,897 241,107
Provision for credit losses....................... 950,000 --
Deferred income taxes............................. (909,000) --
Deferred income tax effect of
S corporation termination....................... (267,000) --
Gain on sale of finance receivables............... (524,343) --
Accretion of contract acquisition
discount........................................ -- (127,797)
Changes in assets and liabilities:
Restricted cash................................... (4,203,895) --
Repossessed assets................................ (277,934) (87,983)
Other assets...................................... (1,085,088) (438,833)
Accounts payable and
accrued expenses................................ 1,115,476 1,192,145
Income taxes payable.............................. 1,423,488 --
Other liabilities................................. 429,088 (258,429)
----------- -----------
Total adjustments............................... (2,941,311) 520,210
----------- -----------
Net cash provided by (used in)
operating activities............................ (126,680) 2,398,509
Cash flows from investing activitites:
Automobile installment contracts
purchased......................................... (89,694,110) (49,453,539)
Proceeds from sale of automobile
installment contracts............................. 31,665,399 24,777,933
Principal collections on automobile
installment contracts............................. 22,333,250 15,615,860
Principal collections on timeshare
receivables....................................... -- 266,323
Capital expenditures................................ (479,366) (449,297)
----------- -----------
Net cash used in
investing activities............................ (36,174,827) (9,242,720)
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Nine months ended September 30,
-------------------------------
1996 1995
------------ -------------
Cash flows from financing activities:
Borrowings under senior debt.......................................................... $80,635,000 $34,695,000
Payments on senior debt............................................................... (88,841,000) (31,119,000)
Proceeds from issuance of securitized notes........................................... 45,087,652 --
Payments on securitized notes......................................................... (4,032,209) --
Proceeds from issuance of subordinated debt........................................... 4,500,000
Payments on subordinated debt......................................................... (8,500,000)
Proceeds from issuance of
common stock........................................................................ 11,686,569 180,605
Payments on repurchase of
common stock........................................................................ -- (6,666)
Dividends paid........................................................................ -- (1,193,841)
----------- -----------
Net cash provided by
financing activities.............................................................. 36,036,012 7,056,098
----------- -----------
INCREASE (DECREASE)
IN CASH...........................................................................
Cash at beginning of period............................................................. 1,703,320 714,445
----------- -----------
Cash at end of period................................................................... $1,437,825 $ 926,332
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................................................ $4,578,808 $ 2,569,930
Income taxes........................................................................ 1,364,437 34,100
Supplemental schedule of non-cash financing activities:
Increase in additional paid-in capital resulting from tax benefit
in conjunction with the exercise of common stock warrants........................... $ 842,000 --
The accompanying notes are an integral part of these statements.
6
7
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
First Enterprise Financial Group, Inc., which operates under the name
First Enterprise Acceptance Company (the "Company"), is a specialty finance
company engaged primarily in purchasing and servicing installment sales
contracts originated by automobile dealers for financing the sale of used
automobiles, vans and light trucks.
The unaudited interim consolidated financial statements of the Company, in
the opinion of management, reflect all necessary adjustments, consisting only
of normal recurring adjustments, for a fair presentation of results as of the
dates and for the interim periods covered by the financial statements. The
results for the interim periods are not necessarily indicative of the results
of operations to be expected for the entire year.
The unaudited interim consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and reporting
practices. Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission; however the Company believes the
disclosures are adequate to make the information not misleading. The unaudited
interim consolidated financial statements contained herein should be read in
conjunction with the audited financial statements and notes there to included
in the Company's prospectus dated July 22, 1996 relating to its initial Public
Offering. On July 22, 1996, the Company completed its initial Public Offering
of 1,886,640 shares of common stock.
INCOME TAXES
Since its inception, the Company was an S Corporation under the Internal
Revenue Code of 1986, as amended. As a result, the income of the Company has
been taxed, for federal and certain state and local income tax purposes,
directly to the Company's stockholders, rather than the Company. The Company
terminated its status as an S Corporation effective January 1, 1996 and, as a
result, the Company is now subject to federal and state corporate income
taxation. For purposes of computing pro-forma net income per share for 1995, a
pro-forma income tax provision was calculated on 1995 net income before income
taxes.
EARNINGS PER SHARE
The pro-forma net income per share computations reflect the issuance of
1,886,640 shares of common stock on July 22, 1996, in connection with the
Company's initial public offering (1,500,000 shares issued at a price of $7
per share and 386,640 shares issued for $520,000 in connection with warrant
exercises). The pro-forma computations also reflect the issuance of 282,996
shares of common stock on August 20, 1996, at a price of $7 per share in
connection with the exercise of the over-allotment option by the Underwriters.
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8
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FINANCE RECEIVABLES
Finance receivables are summarized as follows:
September 30, December 31,
1996 1995
----------- -----------
Contractual payments due...................... 131,681,415 $79,422,000
Unearned finance charges...................... (34,566,505) (19,926,632)
----------- -----------
Net principal balance......................... 97,114,910 59,495,368
Unamortized contract acquisition.............. -- --
Unearned insurance commission................. (50,128) (189,737)
----------- -----------
Automobile finance receivables................ 97,064,782 59,305,631
Allowance for credit losses................... (8,024,609) (5,010,919)
----------- -----------
$89,040,173 $54,294,712
=========== ===========
Automobile finance receivables are accounted for on a discount basis and
generally have terms of 24 to 36 months, with a maximum term 54 months.
A summary of the activity in the unamortized contract acquisition
discounts is as follows for the nine months ended September 30, 1996 and 1995:
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
-------- ---------
Balance at beginning of year..................... $ -- $228,617
Additions from new business...................... -- --
Accreted into finance charge income.............. -- (127,797)
Transferred to allowance for credit losses....... -- (100,820)
-------- ---------
Balance at end of period......................... $ -- $ --
-------- =========
A summary of the activity in allowance for credit losses is as follows for
nine months ended September 30, 1996 and 1995:
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
---------- -----------
Balance at beginning of year................................... $5,010,919 $2,562,723
Additions from new business.................................... 9,035,292 5,373,687
Related to finance receivables sold............................ (2,946,826) (2,196,776)
Finance receivables charged off, net of recoveries............. (4,024,776) (2,052,834)
Transfer from unamortized contract
Acquisition Discount...................................... -- 100,820
Provision for credit losses.................................... 950,000 --
---------- -----------
Balance at end of period....................................... $8,024,609 $3,787,620
========== ===========
8
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FINANCE RECEIVABLES - CONTINUED
Servicing Income
Contractual servicing income on sold receivables is recognized over the
life of the related receivables as a percentage of receivables outstanding.
Bonus servicing fees are recognized when earned and are based on the difference
between the yield received by the Company and the sum of the Company's 3%
contractual servicing fee, the yield due to the purchaser and the addition or
reduction necessary to maintain the purchaser's reserve at the required level.
Gain or loss on sale of finance receivables is determined by the difference
between sales proceeds and the cost of the finance receivables and adjusted for
the difference, if any, between the estimated future servicing revenues and
normal servicing costs ("excess servicing rights"). The excess servicing
rights, if any, are capitalized and amortized over the expected repayment life
of the sold finance receivables.
NOTE C - SENIOR DEBT AND SUBORDINATED DEBT
Senior debt and subordinated debt consist of the following at:
SEPTEMBER 30,
1996
--------
Senior Debt:
$62,000,000, senior secured Credit Facility, due June 1, 1997,
with interest at the reference rate as defined in the agreement,
plus 1.0%, which was 9.25% at September 30, 1996................. $35,061,000
===========
Borrowings under the Credit Facility are collateralized by all finance
receivables not subject to the securitized pool and certain other assets. The
agreement requires the maintenance of certain financial covenants which
include, among others, ratio of debt to net worth and ratio of reserves to the
finance receivable portfolio. The Company was in compliance with all financial
covenants at September 30, 1996.
Effective October 1, 1996, the Company has renegotiated its Credit
Facility, increasing the commitment to $85 million from $62 million and
reducing the interest rate to prime plus 25 basis points with an option of 250
basis points over LIBOR.
9
10
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - NOTES PAYABLE - SECURITIZED POOL
The Company has entered into a letter of intent with a placement agent for
the issuance of up to $200 million of securitized notes through a wholly-owned
subsidiary. On June 18, 1996, the Company completed a $45.1 million debt
financing consisting of 6.84% fixed rate automobile securitized notes. The
notes were issued by First Enterprise Securitization Corporation, a
wholly-owned special purpose subsidiary of First Enterprise Financial Group,
Inc. The proceeds received by the Company were used to repay indebtedness
under the Credit Facility. Principal and interest on the notes are payable
monthly from collections and recoveries on the pool of finance receivables.
Financial Security Assurance Inc. ("FSA") issued a financial guaranty insurance
policy for the benefit of the noteholders.
The Company is required to establish and maintain cash reserve and
collection accounts with a trustee with respect to the securitized pool of
finance receivables ("restricted cash"). The amounts set aside would be used
to supplement certain shortfalls in payments, if any, to investors. These
balances are subject to an increase up to a maximum amount as specified in the
securitization indenture and are invested in certain instruments as permitted
by the trust agreement. To the extent balances on deposit exceed specified
levels, distributions are made to the Company and, at the termination of the
transaction, any remaining amounts on deposit are distributed to the Company.
The indenture requires the Company to maintain specified delinquency and credit
loss ratios. The Company was in compliance with these covenants at September
30, 1996.
NOTE E - STOCK OPTIONS
The following table summarized the Company's stock option plans for the
nine months ended September 30, 1996.
OPTION PRICE
SHARES PER SHARE
------------- --------------
Option outstanding at December 31, 1995................ 610,891 $1.13 - 1.36
Option changes
Granted................................................ 23,000 7.00
Exercised.............................................. (115,988) 1.13 - 1.36
-------------
Options outstanding at September 30, 1996.............. 517,903 $1.13 - 7.00
=============
The Company intends to continue to apply the provisions of Accounting
Principles Board Option No. 25, "Accounting for Stock Issued to Employees", in
the computation of employee compensation expense. The Company will provide pro
forma net income and income per share disclosures as if the fair value based
accounting method in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," had been used to account for
stock-based employee compensation expense.
NOTE F - SUBSEQUENT EVENTS
On October 7, 1996, at the direction of the Board of Directors, the
Company made the S Corporation Distribution payment in the amount of $2,069,811
to the stockholders of record as of December 29, 1995.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial
condition of the Company at September 30, 1996 as compared with December 31,
1995 and the results of operations for the nine months ended September 30, 1996
and 1995. The financial information provided below has been rounded in order
to simplify its presentation. The ratios and percentages provided below are
calculated using the detailed financial information contained in the unaudited
interim consolidated financial statements, the notes thereto and the financial
data elsewhere in this report.
RECENT DEVELOPMENTS
On July 22, 1996, the Company completed its initial public offering of
1,886,640 shares of common stock (1,500,000 shares issued at a price of $7 per
share and 386,640 shared issued for $520,000 in connection with warrant
exercises). Net proceeds from the offering were used to retire the
subordinated debt and repay borrowings under the Credit Facility.
On August 20, 1996, the Underwriters exercised their 30 day over-allotment
option to purchase 282,996 additional shares of common stock at a price of $7
per share. Net proceeds from the exercise were used to repay borrowings under
the Credit Facility.
Effective October 1, 1996, the Company has renegotiated its Credit
Facility, increasing the commitment to $85 million from $62 million and
reducing the interest rate to prime plus 25 basis points with an option of 250
basis points over LIBOR.
On October 7, 1996, at the direction of the Board of Directors, the
Company made the S Corporation Distribution payment in the amount of $2,069,811
to the stockholders of record as of December 29, 1995.
GENERAL
The Company is a specialty finance company engaged primarily in purchasing
and servicing installment contracts originated by dealers in the sale of
automobiles. The Company derives most of its revenue from (i) finance charges
earned on the installment contracts, (ii) contractual servicing fees and bonus
servicing fees resulting from the sales of certain receivables and (iii) fees
and commissions derived from the sale of ancillary products. The following
table summarizes the Company's sources of revenues,
NINE MONTHS
ENDED SEPTEMBER 30,
1996 1995
---------- ----------
Finance charges from installment contracts.................... 59.5% 63.2%
Interest income from timeshare receivables.................... -- 0.2
Servicing income.............................................. 20.1 22.8
Other fees and commissions.................................... 17.8 13.8
Gain on sale of installment contracts......................... 2.6 --
------ ------
Total......................................................... 100.0% 100.0%
====== ======
Installment contracts are generally purchased from dealers at a discount
from the principal amount financed by consumers which is non-refundable to
dealers ("non-refundable contract acquisition discount"). The amount of the
non-refundable contract acquisition discount is negotiated between the dealers
and the branch managers based on several factors, including the
creditworthiness of the consumers, the value and condition of the automobiles
and the relationship between the amount to be financed and the automobile's
value. The non-refundable contract acquisition discount represents both a
credit allowance and a yield enhancement, with the portion necessary to absorb
credit losses allocated to the allowance for credit losses. The remaining
portion of the
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12
non-refundable contract acquisition discount, if any, is allocated to the
unamortized contract acquisition discount and is accreted into finance charge
income over the estimated life of the installment contracts using the
sum-of-the-months'-digits method which approximates the interest method.
Since August 1995, all of the Company's non-refundable contract acquisition
discount has been allocated to the allowance for credit losses.
For the three and nine months ended September 30, 1996, the weighted
average non-refundable contract acquisition discount was approximately 9.9% and
10.1%, respectively. For the three and nine months ended September 30, 1995,
the weighted average non-refundable contract acquisition discount was
approximately 10.7% and 10.9%, respectively.
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RESULTS OF OPERATIONS:
The following table sets forth certain financial data relating to the Company.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
PORTFOLIO DATA:
Total Portfolio (1)................................. $133,570 $68,662 $133,570 $68,662
Average Total Portfolio (1)......................... 126,495 64,434 108,877 54,330
Average Owned Portfolio (2)......................... 86,836 37,528 69,694 36,914
Average indebtedness (3)............................ 70,548 31,642 59,474 31,587
Number of installment contracts purchased........... 3,578 2,344 11,902 7,072
Installment contracts purchased..................... 27,443 16,742 89,694 49,454
OPERATING DATA:
Owned Portfolio yield (4)........................... 21.94% 24.86% 22.62% 23.86%
Cost of borrowed funds (3).......................... 8.88% 11.66% 10.03% 11.64%
Net interest spread................................. 13.05% 13.20% 12.60% 12.23%
Net interest margin (5)............................. 14.72% 15.04% 14.07% 13.90%
Allowance for credit losses as a
percentage of Owned Portfolio...................... 8.26% 8.63% 8.26% 8.63%
Net charge-offs in the Owned Portfolio as a
percentage of average Owned Portfolio.............. 6.90% 7.96% 7.70% 7.42%
Net charge-offs in the Total Portfolio as a
percentage of average Total Portfolio.............. 6.41% 6.45% 6.62% 6.24%
Operating expenses as a percentage of
average Total Portfolio............................ 11.54% 13.54% 12.00% 14.08%
Number of branch offices............................ 33 23 33 23
Number of dealers................................... 1,133 578 1,133 578
(1) The Total Portfolio represents the principal amount of contracts owned
and/or serviced by the Company. Averages were computed using the
beginning and ending balances for each month during the periods presented.
(2) The Owned Portfolio represents theprincipal amount of contracts owned by
the Company. Averages were computed using the beginning and ending
balances for each month during the periods presented.
(3) Average indebtedness represents the average dollar balance of borrowings
outstanding under the Credit Facility, subordinated notes and notes
payable - securitized pool throughout the period presented. Cost of
borrowed funds represents interest expense as a percentage of average
indebtedness. Averages were computed using the daily outstanding
balances.
(4) Represents automobile finance charge income as a percentage of the
average Owned Portfolio.
(5) Represents net interest income as a percentage of the average Owned
Portfolio.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Net Interest Income
Finance charges and interest increased $5.2 million, or 79.2%, from $6.6
million for the nine months ended September 30, 1995 to $11.8 million for the
nine months ended September 30, 1996. The growth in finance charges and
interest resulted from an increase in the Owned Portfolio due to an increase in
the number of installment contracts purchased. While installment contracts
purchased increased $40.2 million, or 81.4%, from $49.5 million for the nine
months ended September 30, 1995 to $89.7 million for the nine months ended
September 30, 1996, the average Owned Portfolio increased $32.8 million, or
88.8%, from $36.9 million to $69.7 million over the corresponding periods.
This is due do the fact that the Company sold $34.7 million and $27.5 million
in contracts during the nine months ended September 30, 1996 and 1995,
respectively.
The Company opened eight branch offices during the nine months ended
September 30, 1996, increasing to 33 the total number of its branch offices.
At September 30, 1995, the Company operated 23 branch offices.
The average Owned Portfolio yield decreased from 23.9% for the nine months
ended September 30, 1995 to 22.6% for the nine months ended September 30, 1996.
The decrease is attributable to the following factors (i) no income from the
accretion of unamortized contract acquisition discount for the nine months
ended September 30, 1996 and (ii) the increase in forced placed collateral
protection insurance ("CPI"), for which the Company does not charge interest,
as a percentage of the Owned Portfolio.
Interest expense increased $1.7 million from $2.8 million for the nine
months ended September 30, 1995 to $4.5 million for the nine months ended
September 30, 1996. The increase in interest expense resulted from an increase
in borrowings under the Credit Facility and the issuance of additional
subordinated debt in September 1995. Average indebtedness increased $27.9
million, or 88.3%, from $31.6 million for the nine months ended September 30,
1995 to $59.5 million for the nine months ended September 30, 1996. The
average cost of borrowed funds decreased from 11.64% for the nine months ended
September 30, 1995 to 10.03% for the nine months ended September 30, 1996. The
decrease in average cost of borrowed funds was due primarily to the retirement
of subordinated debt as a result of the initial public offering and to a lesser
extent, a decrease in the rate paid on the Credit Facility. Proceeds from the
July 22, 1996 initial public offering were used to repay $4.0 million in
subordinated debt bearing interest at 13.5% and $4.5 million in subordinated
debt bearing interest at 13%. In addition to the interest rate on the
subordinated debt, the Company amortized both the fees associated with the
subordinated debt and the discount related to the detachable warrants attached
to the subordinated debt. For the nine months ended September 30, 1995, the
weighted average rate on the Credit Facility was 9.86% and for the nine months
ended September 30, 1996 the weighted average rate on the Credit Facility was
9.28%. Net interest income increased $3.5 million, or 91.2% from $3.8 million
for the nine months ended September 30, 1995 to $7.3 million for the nine
months ended September 30, 1996.
The net interest margin on the Owned Portfolio increased from 13.9% for
the nine months ended September 30, 1995 to 14.1% for the nine months ended
September 30, 1996, due to the lower average cost of borrowed funds, offset
slightly by the decrease in average Owned Portfolio yield as discussed above.
Provision for Credit Losses
For the nine months ended September 30, 1996, the Company made a provision
for credit losses of $950,000. There was no provision for credit losses for
the nine months ended September 30, 1995. The provision for credit losses
contributed to maintaining the allowance for credit losses as a percentage of
the Owned Portfolio at 8.3% as of September 30, 1996 as compared to 8.6% as of
September 30, 1995. See "Credit Loss Experience."
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Other Income
Other income increased $4.2 million, or 111%, from $3.8 million for the
nine months ended September 30, 1995 to $8.0 million for the nine months ended
September 30, 1996. The increase in other income was primarily due to
increases in servicing income derived from installment contracts sold, the sale
of ancillary products and the recognition of a gain on the sale of installment
contracts.
Servicing income increased $1.6 million, or 68.7%, from $2.4 million for
the nine months ended September 30, 1995 to $4.0 million for the nine months
ended September 30, 1996. The increase in servicing income was due to the sale
of $34.7 million in installment contracts during the nine months ended
September 30, 1996 compared to the sale of $27.5 million in installment
contracts during the nine months ended September 30, 1995. Further, the
average balance of sold contracts increased $21.8 million from $17.4 million
for the nine months ended September 30, 1995 to $39.2 million for the nine
months ended September 30, 1996.
Income from insurance commissions increased $1.4 million from $1.0 million
for the nine months ended September 30, 1995 to $2.4 million for the nine
months ended September 30, 1996. The increase was attributable to the
increased sales of insurance products in connection with the increase in the
volume of installment contracts purchased and the introduction of certain new
insurance products in late 1995.
For the nine months ended September 30, 1996, the Company recognized a
gain on the sale of $34.7 million of installment contracts in the amount of
$524,000. The gain on the sales of installment contracts was determined by the
difference between sales proceeds and the cost of the installment contracts
adjusted for the present value of the excess servicing rights. The excess
servicing rights were capitalized and are being amortized over the expected
life of the related installment contracts in direct proportion to the reduction
in the related pool of installment contracts sold.
Operating Expenses
Operating expenses increased $4.1 million, or 71.0%, from $5.7 million for
the nine months ended September 30, 1995 to $9.8 million for the nine months
ended September 30, 1996. The increase in operating expenses was due to
increases in salaries and employee benefits, rent and other expenses relating
to the opening of new branch offices as well as the addition of administrative
personnel at the Evanston, Illinois and Enterprise, Alabama offices. Salaries
and employee benefits increased $2.6 millions, or 70.4%, from $3.6 million for
the nine months ended September 30, 1995 to $6.2 million for the nine months
ended September 30, 1996. Although operating expenses increased for the nine
months ended September 30, 1996 compared to the nine months ended September 30,
1995, the Total Portfolio grew at a faster rate than the increases in operating
expenses. As a result, operating expenses as a percentage of the average Total
Portfolio decreased from 14.1% for the nine months ended September 30, 1995 to
12.0% for the nine months ended September 30, 1996.
Income Taxes
Income taxes increased $1.9 million from $45,000 for the nine months ended
September 30, 1995 to $2.0 million for the nine months ended September 30,
1996. The increase is due to the Company terminating its status as an S
Corporation effective on January 1, 1996. As a result, the Company is now
subject to federal and certain state and local income taxes.
Upon termination of the S Corporation status, and in compliance with SFAS
No. 109, the Company recognized a deferred tax benefit of $267,000 for the nine
months ended September 30, 1996.
Extraordinary Item
In conjunction with the initial public offering, the Company recognized an
extraordinary charge against income of approximately $150,000, net of taxes of
$96,000, related to the early retirement of subordinated debt. There was no
such extraordinary item for the nine months ended September 30, 1995.
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Net Income
Net income increased $936,000, or 49.8%, from $1.9 million for the nine
months ended September 30, 1995 to $2.8 million for the nine months ended
September 30, 1996. The increase in net income was primarily attributable to
the growth in the Total Portfolio and related factors as discussed above, as
well as the income tax benefit resulting from the termination of the S
Corporation status.
CREDIT LOSS EXPERIENCE
The Company maintains an allowance for credit losses at a level management
believes adequate to absorb potential losses in the Owned Portfolio. The
adequacy of the allowance for credit losses is evaluated by management on an
ongoing basis through historical credit loss experience, delinquencies, the
value of the underlying collateral, the level of the finance contract portfolio
and general economic conditions and trends. An account is charged off against
the allowance for credit losses at the earliest of the time the account's
collateral is repossessed, the account is 120 days or more past due or the
account is otherwise deemed to be uncollectible.
The Total Portfolio is grouped into pools on a chronological basis
(quarterly beginning in 1995) for purposes of evaluating trends and loss
experience on a more detailed basis. If management determines that the
allowance for credit losses is not adequate to provide for potential losses of
an individual pool, amounts will be transferred, to the extent available, from
the unamortized contract acquisition discounts for that pool to the allowance
for credit losses. Any remaining shortfall in the allowance for credit losses
would be provided through a charge against income.
Based upon historical analysis and expected future trends, management
changed the allocation of the non-refundable contract acquisition discount to
the allowance for credit losses, such that all non-refundable contract
acquisition discount was allocated entirely to the allowance for credit losses
during 1995. Additionally, after reviewing the adequacy of the allowance for
credit losses, the remaining balance of the unamortized contract acquisition
discount was transferred to the allowance for credit losses on August 1, 1995.
For the nine months ended September 30, 1996, the Company increased its
allowance for credit losses by $950,000 through a charge against income based
upon continued historical analysis, particularly evaluation of the earliest
pools. Management will continue to monitor this allocation and may, if
appropriate, in the future allocate portions of the non-refundable acquisition
discount to unamortized contract acquisition discount.
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DELINQUENCY EXPERIENCE
A payment is considered past due if the customer fails to make any full
payment on or before the due date as specified by the terms of the installment
contract. The Company typically contacts delinquent customers within one to
two days after the due date.
The following table summarizes the Company's delinquency experience for
accounts with payments 60 days or more past due on a dollar basis for the Total
Portfolio and Owned Portfolio. The delinquency experience data excludes
automobiles which have been repossessed.
AS OF SEPTEMBER 30,
1996 1995
---------- ----------
TOTAL PORTFOLIO:
Installment contracts, gross $177,175 $89,853
Past due accounts, gross:
60 to 89 days 1,331 538
90 days or more 900 115
-------- -------
Total 60 days or more $ 2,231 $ 653
======== =======
Contracts with payments 60 days or more past due as a
percentage of total installment contracts, gross 1.26% 0.73%
======== ======
OWNED PORTFOLIO:
Installment contracts, gross $131,680 $ 58,156
Past due accounts, gross:
60 to 89 days 849 255
90 days or more 508 52
-------- --------
Total 60 days or more $ 1,357 $ 307
======== ========
Contracts with payments 60 days or more past due as a
percentage of total installment contracts, gross 1.03% 0.53%
======== =======
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LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations, branch office openings and the
growth of the Total Portfolio through six principal sources of funds: (i)
payments received under installment contracts, (ii) borrowings under the Credit
Facility, (iii) proceeds from the issuance of subordinated notes, (iv) proceeds
from the sale of installment contracts, (v) proceeds from an asset
securitization transaction and (vi) proceeds from the liquidation of timeshare
receivables.
Net cash flows used in operating activities were $969,000 and net cash
flows provided by operating activities were $2.4 million for the nine months
ended September 30, 1996 and 1995, respectively. The decrease resulted
primarily from increases in restricted cash and other assets, offset by
increases in net earnings.
Net cash flows used in investing activities were $36.2 million and $9.2
million for the nine months ended September 30, 1996 and 1995, respectively.
The increase resulted from cash used to purchase installment contracts.
Net cash flows provided by financing activities were $36.9 million and
$7.1 million for the nine months ended September 30, 1996 and 1995,
respectively. Cash provided by financing activities was used primarily to
support the growth in the total portfolio.
In order to meet its funding needs, the Company will require additional
financing to supplement its expected cash flows from operations, the
anticipated borrowings under its Credit Facility, the net proceeds from its
initial public offering and proceeds from the issuance of the securitized
notes. The Company has entered into a letter of intent with a placement agent
for the issuance of up to $200 million of securitized notes through its
wholly-owned special purpose subsidiary. On June 18, 1996, First Enterprise
Securitization Corporation sold approximately $45.1 million of 6.84% fixed rate
securitized notes in an asset securitization transaction.
On July 22, 1996, the Company completed its initial public offering of
1,886,640 shares of common stock (1,500,000 shares issued at a price of $7 per
share and 386,640 shared issued for $520,000 in connection with warrant
exercises). Net proceeds from the offering were used to retire the
subordinated debt and repay borrowings under the Credit Facility.
On August 20, 1996, the Underwriters exercised their 30 day over-allotment
option to purchase 282,996 additional shares of common stock at a price of $7
per share. Net proceeds from the exercise were used to repay borrowings under
the Credit Facility.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits
3.1 Articles of Incorporation
3.2 By Laws
11. Statement Regarding Computation of Per Share Earnings
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST ENTERPRISE FINANCIAL GROUP, INC.
Date: 11/8/1996 /s/ Michael P. Harrington
-------------------------- ------------------------------------
Michael P. Harrington
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer)
Date: 11/8/96 /s/ Jan W. Erfert
-------------------------- ------------------------------------
Jan W. Erfert
Vice President and Treasurer
(Principal Accounting and
Financial Officer)
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INDEX OF EXHIBITS
Exhibit No. Description
3.1 Articles of Incorporation
3.2 By Laws
11. Statement Regarding Computation of Per Share Earnings
21