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 March 31, 1997.
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, 5,429,009 shares outstanding as of April 30, 1997.
2
FIRST ENTERPRISE FINANCIAL GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets............................................... 3
Statements of Income......................................... 4
Statements of Cash Flows..................................... 5
Notes to Financial Statements................................ 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 10
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS............................................ 18
Item 2. CHANGES IN SECURITIES........................................ 18
Item 3. DEFAULTS UPON SENIOR SECURITIES.............................. 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS............................................. 18
Item 5. OTHER INFORMATION............................................ 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 18
SIGNATURES................................................... 19
INDEX OF EXHIBITS............................................ 20
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
-------------- --------------
ASSETS
Cash........................................................................ $ 2,596,898 $ 1,323,149
Restricted cash............................................................. 4,275,440 4,586,780
Automobile finance receivables.............................................. 97,898,996 118,537,808
Allowance for credit losses................................................. (10,368,935) (11,349,783)
-------------- --------------
Finance receivables, net.................................................. 87,530,061 107,188,025
Property and equipment - at cost............................................ 1,391,621 1,255,777
Repossessed assets.......................................................... 999,006 929,560
Deferred tax asset.......................................................... 2,330,000 2,260,000
Retained interest........................................................... 4,826,346
Other assets................................................................ 4,333,758 2,212,660
-------------- --------------
TOTAL ASSETS............................................................ $108,283,130 $119,755,951
============== ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Senior debt................................................................. $ 49,179,000 $ 61,153,000
Notes payable - securitized pool............................................ 31,996,161 36,732,987
Servicing liability......................................................... 2,393,939 --
Accounts payable - dealers.................................................. 2,380,399 2,704,455
Other accounts payable and accrued expenses................................. 3,213,889 2,524,003
Other liabilities........................................................... 692,540 325,208
-------------- --------------
Total liabilities....................................................... 89,855,928 103,439,653
Stockholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 5,425,143 and 5,285,955 shares issued
and outstanding at March 31, 1997 and December 31, 1996, respectively 54,251 52,860
Additional paid-in capital................................................ 13,428,572 13,271,986
Unrealized gain - retained interest....................................... 365,000 --
Retained earnings ........................................................ 4,579,379 2,991,452
-------------- --------------
Total stockholders' equity.............................................. 18,427,202 16,316,298
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.................................................... $108,283,130 $119,755,951
============== ==============
The accompanying notes are an integral part of these statements.
3
4
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31,
-----------------------------------
1997 1996
------------ ------------
Finance charges and interest.................................. $5,937,209 $3,255,953
Interest expense.............................................. 2,019,106 1,357,580
------------ ------------
Net interest income....................................... 3,918,103 1,898,373
Provision for credit losses................................... 1,880,341 400,000
------------ ------------
Net interest income after provision for credit losses..... 2,037,762 1,498,373
Other income:
Servicing income............................................ 965,641 1,125,729
Insurance commissions....................................... 462,351 650,907
Fees and other income....................................... 461,003 357,950
Gain on sale of finance receivables......................... 3,025,000 409,000
------------ ------------
Total other income........................................ 4,913,995 2,543,586
------------ ------------
Income before operating expenses.......................... 6,951,757 4,041,959
Operating expenses:
Salaries and employee benefits.............................. 2,639,987 1,965,040
Rent expense................................................ 188,241 113,173
Depreciation and amortization............................... 116,334 83,580
Professional services....................................... 211,301 74,918
Other expesnes.............................................. 1,214,967 715,926
------------ ------------
Total operating expenses.................................. 4,370,830 2,952,637
------------ ------------
Income before income taxes................................ 2,580,927 1,089,322
Income taxes.................................................. 993,000 427,000
Deferred income tax effect of S corporation termination....... -- (267,000)
------------ ------------
Net income................................................ $1,587,927 $ 929,322
============ ============
Net income per share.......................................... $ 0.28 --
============ ============
Pro forma net income per share................................ -- $ 0.20
============ ============
Weighted average number of common and common
equivalent shares outstanding............................... 5,630,242 --
============ ============
Pro forma weighted average number of common
and common equivalent shares outstanding.................... -- 5,674,675
============ ============
The accompanying notes are an integral part of these statements.
4
5
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
-----------------------------
1997 1996
------------- -------------
Cash flows from operating activities:
Net income.................................................. $ 1,587,927 $ 929,322
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization............................. 116,334 134,099
Provision for credit losses............................... 1,880,341 400,000
Deferred income taxes..................................... (70,000) (192,000)
Deferred income tax effect of S corporation termination... -- (267,000)
Changes in assets and liabilities:
Restricted cash........................................... 311,340 --
Repossessed assets........................................ (69,446) (159,753)
Retained interest......................................... (4,461,346) --
Other assets.............................................. (2,121,098) (1,237,591)
Servicing liability....................................... 2,393,939 --
Accounts payable - dealers................................ (324,056) 945,048
Other accounts payable and accrued expenses............... 689,886 138,832
Other liabilities......................................... 367,332 190,025
------------- -------------
Total adjustments....................................... (1,286,774) (48,340)
------------- -------------
Net cash provided by operating activities............... 301,153 880,982
Cash flows from investing activities:
Automobile installment contracts purchased.................. (35,498,462) (32,433,070)
Proceeds from sale of automobile installment contracts...... 43,573,394 22,856,863
Principal collections on automobile installment contracts... 9,702,691 8,467,032
Capital expenditures........................................ (252,178) (185,693)
------------- -------------
Net cash provided by (used in) investing activities..... 17,525,445 (1,294,868)
Cash flows from financing activities:
Borrowings under senior debt................................ $32,120,000 $22,660,000
Payments on senior debt..................................... (44,094,000) (22,893,000)
Payments on securitized notes............................... (4,736,826) --
Proceeds from issuance of common stock...................... 157,977 110,883
------------- -------------
Net cash used in financing activities................... (16,552,849) (122,117)
------------- -------------
INCREASE (DECREASE) IN CASH............................. 1,273,749 (536,003)
Cash at beginning of period................................... 1,323,149 1,703,320
------------- -------------
Cash at end of period......................................... $ 2,596,898 $ 1,167,317
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 2,019,675 $ 1,330,000
Income taxes.............................................. 650,000 153,000
Supplemental shedule of non-cash financing activities:
Gain on sale of automobile installment contracts............ $ 3,025,000 $ 409,000
The accompanying notes are an integral part of these statements.
5
6
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, including its wholly-owned special purpose
subsidiaries, First Enterprise Securitization Corp. and First Enterprise
Securitization Co. II, (collectively, 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 thereto included in
the Company's 1996 Annual Report.
IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." As a
result, for the securitization transaction completed on March 7, 1997, which
met the specific criteria of SFAS No. 125, the Company treated the
securitization as a sale and has removed the securitized finance receivables
and related liability from its balance sheet and recognize the applicable
retained interest asset, servicing liability, and a gain on the sale of the
finance receivables.
The Financial Accounting Standards Board, ("FASB"), has issued SFAS No.
128, "Earnings Per Share," which is effective for financial statements issued
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully dilutive earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this
new standard is not expected to have a material impact on the disclosure of
earnings per share in the financial statements.
NET INCOME PER SHARE
Net income per share amounts for 1997 are calculated based on net income
divided by the weighted average number of shares of common stock outstanding
during the period after consideration of the dilutive effect of common stock
equivalents. Pro forma net income per share for 1996 periods reflect the
issuance of the Company's common stock in it's Initial Public Offering and are
calculated based on pro forma net income divided by the pro forma weighted
average shares outstanding after consideration of the dilutive effect of common
stock equivalents.
6
7
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FINANCE RECEIVABLES
Finance receivables are summarized as follows:
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
Contractual payments due............... $128,142,511 $160,224,969
Unearned finance charges............... (30,265,747) (41,673,797)
------------- -------------
Net principal balance.................. 97,876,764 118,551,172
Unearned insurance commission.......... 22,232 (13,364)
------------- -------------
Automobile finance receivables......... 97,898,996 118,537,808
Allowance for credit losses............ (10,368,935) (11,349,783)
------------- -------------
Finance Receivables, net............... $ 87,530,061 $107,188,025
============= =============
Automobile finance receivables are accounted for on a discount basis and
generally have terms of 24 to 42 months, with a maximum term 54 months.
A summary of the activity in allowance for credit losses is as follows for
three months ended March 31, 1997 and 1996:
MARCH 31, MARCH 31,
1997 1996
----------- ----------
Balance at beginning of year.......................... $11,349,783 $5,010,919
Additions from new business........................... 3,697,687 3,318,944
Related to finance receivables sold or securitized.... (4,505,258) (2,137,420)
Finance receivables charged off, net of recoveries... (2,053,618) (1,153,703)
Provision for credit losses........................... 1,880,341 400,000
----------- ----------
Balance at end of period.............................. $10,368,935 $5,438,740
=========== ==========
FINANCE RECEIVABLE SALE TRANSACTIONS
The Company utilized Asset Purchase Agreements and Servicing Agreements to
sell automobile finance receivables totaling $74.8 million between 1993 and
1996. All sales under these agreements have been without recourse to the
Company and have been accounted for as sales of receivables. Under the terms
of the agreements, the Company retains rights for the sold receivables and
receives a contractual annualized servicing fee equal to 3% of the net
outstanding receivables from the purchaser. The outstanding balance of all
receivables sold under these agreements and serviced by the Company totaled
$25,151,833 and $30,918,651 at March 31, 1997, and December 31, 1996,
respectively. The Company is eligible to receive additional bonus servicing
fees under these agreements based upon portfolio performance. The bonus
servicing fees represent the difference between the yield received by the
Company and the sum of the Company's 3% contractual servicing fee, the yield
retained by the purchaser and the addition or reduction necessary to maintain
the purchaser's reserve at the required level.
7
8
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FINANCE RECEIVABLES - CONTINUED
Gains of $409,000 were recorded on sales of $25.4 million of finance
receivables for the three months ended March 31, 1996. The gains were
determined by the difference between the sales proceeds and the cost of the
finance receivables and adjusted for the present value of the difference
between the estimated future servicing revenues (net of a fixed rate to the
purchaser) and normal servicing costs ("excess servicing rights"). The excess
servicing rights have been capitalized and are being amortized over the
expected repayment life of the sold finance receivables. The unamortized
balance of excess servicing rights at March 31, 1997 was $266,203.
NOTE C - SENIOR DEBT
Senior debt consists of the following at:
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
Senior Debt:
$85,000,000, senior secured Credit Facility, due June 1, 1998,
with interest at the reference rate as defined in the agreement,
plus .25%, which was 8.75% at March 31,1997, and included
a placement option of 250 basis points over the LIBOR rate........ $49,179,000 $61,153,000
=========== ===========
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 March 31, 1997.
NOTE D - SECURITIZATION OF FINANCE RECEIVABLE ACTIVITIES
The Company has entered into a securitized facility with a placement
agent for the issuance of up to $200 million of securitized notes through
wholly-owned subsidiaries.
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., and have an
outstanding balance of $31,996,161 at March 31, 1997. 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.
On March 7, 1997, the Company completed the sale of finance receivables to
First Enterprise Securitization Co. II, a wholly-owned special purpose
subsidiary of First Enterprise Financial Group, Inc., and the issuance of $44.1
million of 6.45% fixed rate notes. 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. FSA issued a financial guarantee insurance policy for the
benefit of the noteholders. The transaction was accounted for as a sale in
accordance with the criteria of SFAS No. 125 "Accounting for Transfers and
Servicing of
8
9
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - SECURITIZATION OF FINANCE RECEIVABLE ACTIVITIES - CONTINUED
Financial Assets and Extinguishment of Liabilities." Accordingly, the Company
has removed the securitized finance receivables and related liability from
its balance sheet and recognized the applicable retained asset and servicing
liability. The Company recognized a gain on the sale of the finance
receivables in the amount of $3,025,000, which was determined through computing
the present value of the expected future net cash flows of the securitized
assets.
For the above securitization transactions, 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 March 31, 1997.
NOTE E - STOCK OPTION PLANS
The following table summarized the Company's stock option plans for the
three months ended March 31, 1997.
OPTION PRICE
SHARES PER SHARE
------------- ---------------
Option outstanding at December 31, 1996.... 487,950 $1.13 - $7.00
Option changes
Granted.................................... --
Exercised.............. ................... (139,188) 1.13 - 1.36
---------
Options outstanding at March 31, 1997...... 348,762 $1.13 - $7.00
=======
The Company continues 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 has provided pro
forma net income and income per share disclosures in its annual audited
financial statements contained in its 1996 Annual Report 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.
9
10
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 March 31, 1997 as compared with December 31, 1996
and the results of operations for the three months ended March 31, 1997 and
1996. 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 March 7, 1997, the Company completed the sale of finance receivables to
First Enterprise Securitization Co. II, a wholly-owned special purpose
subsidiary of First Enterprise Financial Group, Inc. and the issuance of $44.1
million of 6.45% fixed rate notes. 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. FSA issued a financial guarantee insurance policy for the
benefit of the noteholders. The transaction was accounted for as a sale in
accordance with the criteria of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Accordingly,
the Company has removed the securitized finance receivables and related
liabilities from its balance sheet and recognized the applicable retained
interest asset and servicing liability. The Company recorded a gain on the
sale of finance receivables in the amount of $3,025,000, which was determined
through computing the present value of the expected future net cash flows of
the securitized assets.
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) the recognition of gains resulting
from the sale of installment contracts, (iii) contractual servicing fees and
bonus servicing fees resulting from the sales of certain receivables and (iv)
fees and commissions derived from the sale of ancillary products. The
following table summarizes the Company's sources of revenues,
THREE MONTHS
ENDED MARCH 31,
1997 1996
------ ------
Finance charges from installment contracts........... 56.3% 56.1%
Gain on sale of installment contracts................ 28.7 7.1
Servicing income..................................... 6.2 19.4
Other fees and commissions........................... 8.8 17.4
----- -----
Total................................................ 100.0% 100.0%
===== =====
Installment contracts are 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. Installment contracts purchased during the three months ended March 31,
1996 and 1997 had a weighted average discount of approximately 10.8%. The
portfolio of owned and sold installment contracts is grouped into pools on a
chronological basis (quarterly beginning in 1995) for purposes of evaluating
the non-refundable contract acquisition discounts. 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 non-refundable
contract acquisition discount, if any, is allocated to the unamortized contract
acquisition discount
10
11
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. See "---Credit Loss Experience."
The Company records an installment contract on its books as the total of
contractually scheduled payments under such contract, reduced by: (i) unearned
finance charges, which are recognized as income using the interest method;
(ii) unearned insurance commissions, which are recognized as income over the
average terms of the related policies using the sum-of-the-months'-digits
method; (iii) the unamortized contract acquisition discount, which represents
the portion of the non-refundable contract acquisition discount not allocated
to the allowance for credit losses and (iv) that portion of the contract
acquisition discount allocated to the allowance for credit losses. If an
installment contract becomes 90 or more days contractually delinquent and no
full contractual payment is received in the month the account reaches such
delinquency status, the accrual of income is suspended until one or more full
contractual monthly payments are received. Late charges, deferment fees and
extensions fees are recognized as income when collected.
11
12
RESULTS OF OPERATIONS:
The following table sets forth certain financial data relating to the Company.
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
-------------- -----------
(DOLLARS IN THOUSANDS)
PORTFOLIO DATA:
Total Portfolio (1).......................... $168,115 $101,519
Average Total Portfolio (1).................. 160,218 89,235
Average Owned Portfolio (2).................. 120,024 57,323
Average indebtedness (3)..................... 98,418 49,877
Number of installment contracts purchased.... 4,428 4,390
Installment contracts purchased.............. $35,498 $32,433
OPERATING DATA:
Owned Portfolio yield (4).................... 20.06% 22.85%
Cost of borrowed funds(3).................... 8.32% 10.95%
Net interest spread ......................... 11.74% 11.90%
Net interest margin (5)...................... 13.24% 13.32%
Allowance for credit losses as a
percentage of Owned Portfolio.............. 10.59% 8.98%
Net charge-offs in the Owned Portfolio as a
percentage of average Owned Portfolio...... 6.82% 8.05%
Net charge-offs in the Total Portfolio as a
percentage of average Total Portfolio...... 8.15% 7.16%
Operating expenses as a percentage of
average Total Portfolio.................... 11.06% 13.31%
Number of branch offices..................... 39 28
Number of dealers............................ 1,493 834
(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 the principal 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.
12
13
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net Interest Income
Finance charges and interest increased $2.7 million, or 82.3%, from $3.2
million for the three months ended March 31, 1996 to $5.9 million for the three
months ended March 31, 1997. 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. Installment contracts purchased
increased $3.1 million, or 9.5%, from $32.4 million for the three months ended
March 31, 1996 to $35.5 million for the three months ended March 31, 1997. The
average Owned Portfolio increased $62.7 million, or 109.4%, from $57.3 million
for the three months ended March 31, 1969 to $120.0 million for the three
months ended March 31, 1997. The Company expanded from 28 branch offices at
March 31, 1996 to 39 branch offices at March 31, 1997, including the opening of
4 branch offices during the three months ended March 31, 1997.
The average Owned Portfolio yield decreased from 22.9% for the three
months ended March 31, 1996 to 20.1% for the three months ended March 31, 1997.
The decrease is attributable to the following factors (i) the increase in
forced placed collateral protection insurance ("CPI"), for which the Company
does not charge interest, as a percentage of the Owned Portfolio for the three
months ended March 31, 1997 as compared to the three months ended March 31,
1996, (ii) a decrease in the weighted average contract rate of installment
contracts purchased during the three months ended March 31, 1997 as compared to
the three months ended March 31, 1996, resulting from increased penetration in
states which have laws which limit the maximum amount of finance charges, fees,
and premiums and other charges that can be charged, and (iii) and increase in
the level of accounts 90 or more days past due, resulting in the suspension of
interest accruals.
Interest expense increased $662,000, or 48.7%, from $1.4 million for the
three months ended March 31, 1996 to $2.0 million for the three months ended
March 31, 1997. The increase in interest expense resulted from an increase in
borrowings under the Credit Facility and the securitization of installment
contracts in June 1996. Average indebtedness increased $48.5 million, or
97.3%, from $49.9 million for the three months ended March 31, 1996 to $98.4
million for the three months ended March 31, 1997. The average cost of
borrowed funds decreased from 10.95% for the three months ended March 31, 1996
to 8.32% for the three months ended March 31, 1997. The decrease in average
cost of borrowed funds was due to the following factors (i) the extinguishment
of subordinated debt bearing interest at a weighted average rate of 13.3% in
July 1996 from the proceeds of the Initial Public Offering, (ii) a reduction of
the interest rate on the Credit Facility from an average of 10.2% for the three
months ended March 31, 1996 to 8.5% for the three months ended March 31, 1997,
and (iii) the securitization in June 1996, of installment contracts as a fixed
rate debt transaction bearing interest at a rate of 6.8%, the proceeds of which
were used to pay down borrowings under the Credit Facility. In addition to the
weighted average interest rates on the subordinated debt, the Company amortized
both the fees associated with the debt and the discount related to the
detachable warrants attached to the debt. Further, in addition to the stated
rate of 6.8% on the fixed rate securitized notes, the Company is amortizing
fees associated with the securitization, which totaled approximately $966,000.
Net interest income increased $2.0 million, or 106.4% from $1.9 million
for the three months ended March 31, 1996 to $3.9 million for the three months
ended March 31, 1997. The net interest margin on the Owned Portfolio decreased
from 13.3% for the three months ended March 31, 1996 to 13.2% for the three
months ended March 31, 1997, due to the reduction in Owned Portfolio yield,
offset by the lower average cost of borrowed funds, as discussed above.
Provision for Credit Losses
For the three months ended March 31, 1997, the Company made a provision
for credit losses of $1.9 million as compared to a provision for credit losses
of $400,000 for the three months ended March 31, 1996. The provision for
credit losses contributed to maintaining the allowance for credit losses as a
percentage of the Owned Portfolio at 10.6% as of March 31, 1997 as compared to
9.0% as of March 31, 1996. See "Credit Loss Experience."
13
14
Other Income
Other income increased $2.4 million, or 93.2%, from $2.5 million for the
three months ended March 31, 1996 to $4.9 million for the three months ended
March 31, 1997. The increase in other income was primarily due to the increase
in gains recognized from the sales of installments contracts, offset by
decreases in servicing income derived from installment contracts sold and
commissions recognized from the sale of ancillary products.
For the three months ended March 31, 1997, the Company recognized a gain
on the securitization of $47.4 million of installment contracts in the amount
of $3.0 million. The gain on the securitization of installment contracts was
determined through computing the net present value of the expected future cash
flows of the securitization, and the recognition of applicable retained
interests in the securitized installment contracts and servicing liabilities.
The securitization transaction is deemed to have met the criteria of Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Accordingly,
the Company has removed the securitized installment contracts and related
liabilities from its balance sheet. The retained interest in the securitized
installment contracts has been classified as "available for sale" and
accordingly has been marked to its estimated fair market value, with a
corresponding unrealized gain, net of taxes, recorded in stockholders' equity.
For the three months ended March 31, 1996, the Company recognized a gain
on the sale of $25.4 million of installment contracts in the amount of
$409,000. The gain on the sale 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 installment contracts in direct proportion to the reduction in the
related pool of installment contracts sold.
Servicing income decreased $160,000, or 14.2%, from $1.1 million for the
three months ended March 31, 1996 to $966,000 for the three months ended March
31, 1997. The decrease in servicing income was due to the decrease in the
average balance of sold contracts. The average balance of sold contracts
decreased $10.3 million from $31.9 million for the three months ended March 31,
1996 to $21.6 million for the three months ended March 31, 1997.
Income from insurance commissions decreased $189,000 from $651,000 for the
three months ended March 31, 1996 to $462,000 for the three months ended March
31, 1997. The decrease was attributable to continued increased penetration of
an insurance product offered to customers in which the term of the insurance
product is longer in duration than products previously offered. Commissions
received on this product are deferred and recorded as commission income over
the term of the product. The Company continues to experience increased sales of
insurance products in connection with the increase in the volume of installment
contracts purchased.
Fee and other income increased $103,000 from $358,000 for the three months
ended March 31, 1996, to $461,000 for the three months ended March 31, 1997.
The increase was attributable to increased fees collected in connection with
the growth of the Total Portfolio due to an increase in the number of
installment contracts purchased.
Operating Expenses
Operating expenses increased $1.4 million, or 48.0%, from $3.0 million for
the three months ended March 31, 1996 to $4.4 million for the three months
ended March 31, 1997. 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 $675,000, or 34.3%, from $2.0 million for the
three months ended March 31, 1996 to $2.6 million for the three months ended
March 31, 1997. Although operating expenses increased for the three months
ended March 31, 1997, compared to the three months ended March 31, 1996, 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 13.3% for the three months ended March 31, 1996 to 11.0% for the
three months ended March 31, 1997.
14
15
Income Taxes
Income taxes increased $566,000 from $427,000 for the three months ended
March 31, 1996 to $993,000 for the three months ended March 31, 1997. The
increase is due to increased net income attributable to the growth in the total
portfolio and related factors discussed above.
Upon termination of the Company's S Corporation status on January 1, 1996,
and in compliance with SFAS No. 109, the Company recognized a deferred tax
benefit of $267,000 for the three months ended March 31, 1996 representing the
cumulative temporary differences between the financial reporting and tax basis
in its assets and liabilities.
Net Income
Net income increased $659,000, or 70.9%, from $929,000 for the three
months ended March 31, 1996 to $1.6 million for the three months ended March
31, 1997. The increase in net income was primarily attributable to the growth
in the Total Portfolio and related factors as discussed above.
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 static pool analysis of credit losses, 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 150 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. If management determines
that the allowance for credit losses is in excess of amounts required to
provide for losses of an individual pool, the allowance for credit losses
charge to income, if any, will be reduced or the contract acquisition discounts
will be amortized into income over the remaining life of the contracts in the
pool. For the three months ended March 31, 1997, the Company increased its
allowance for credit losses by $1.9 million through a charge against income
based upon continued historical analysis, particularly evaluation of the
earliest pools.
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.
15
16
AS OF MARCH 31,
1997 1996
-------- --------
TOTAL PORTFOLIO:
Installment contracts, gross $221,525 $136,063
Past due accounts, gross:
60 to 89 days 1,614 597
90 days or more 2,476 564
-------- --------
Total 60 days or more $ 4,090 $ 1,161
======== ========
Contracts with payments 60 days or more past due as a
percentage of total installment contracts, gross 1.85% 0.85%
======== ========
OWNED PORTFOLIO:
Installment contracts, gross $128,143 $ 82,464
Past due accounts, gross:
60 to 89 days 1,060 396
90 days or more 1,883 388
-------- --------
Total 60 days or more $ 2,943 $ 784
======== ========
Contracts with payments 60 days or more past due as a
percentage of owned installment contracts, gross 2.30% 0.95%
======== ========
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 and (v) proceeds from asset
securitization transactions.
Net cash flows provided by operating activities were $301,000 and
$881,000 for the three months ended March 31, 1997 and 1996, respectively.
The Company's cash flows used in investing activities since inception have
been used primarily for the purchase of installment contracts. Cash used for
the purchase of installment contracts was $35.5 million and $32.4 million for
the three months ended March 31, 1997, and 1996, respectively. Capital
expenditures were $252,000, and $186,000 for the three months ended March 31,
1997 and 1996, respectively. Cash used in investing activities was offset by
(i) the collection of principal on installment contracts of $9.7 million and
$8.5 million for the three months ended March 31, 1997 and 1996, respectively
and (ii) net proceeds of $43.6 million and $22.9 million from the sales of
installment contracts for the three months ended March 31, 1997, and 1996,
respectively.
Cash was used in financing activities, primarily through payments on the
Credit Facility, and payments on the securitized notes. Net reductions under
the Credit Facility were $12.0 million and $233,000 for the three months ended
March 31, 1997, and 1996, respectively. Payments on the securitized notes were
$4.7 million for the three months ended March 31, 1997. Cash was provided by
the issuance of common stock in the amounts of $158,000 and $111,000 for the
three months ended March 31, 1997, and 1996, respectively.
As of the date hereof, the Company has a $85 million Credit Facility with
a group of seven banks, for which LaSalle National Bank acts as agent, and
which expires June 1, 1998. The Credit Facility is collateralized by a lien on
all the Company assets not subjected to the securitized pool. Interest is
payable at the agent bank's reference rate plus .25% (8.75% at March 31, 1997)
and the Company has a option of 2.50% over the LIBOR rate.
16
17
The Credit Facility requires the Company to maintain minimum capital funds (as
defined) of $11.5 million. The Credit Facility also requires that total loss
reserves be maintained at not less than 8% of net installment contracts
receivable and no more than 3% of net installment contracts receivable may be
more than 60 days past due. The Credit Facility also requires that earnings
before interest and taxes to cash interest expense may not be less than 125%
and the ratio of unsubordinated debt to tangible net worth plus subordinated
debt cannot exceed 5 to 1. At March 31, 1997, the Company was in compliance
with all of these covenants.
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 and proceeds from the issuance
of securitized notes. The Company has entered into a securitized facility with
a placement agent for the issuance of up to $200 million of securitized notes
through one or more wholly-owned special purpose subsidiaries. Initially, 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. The debt incurred in this securitization is reflected on the
balance sheet of the Company and did not result in a gain on sale. On March 7,
1997, First Enterprise Securitization Co. II sold approximately $44.1 million
of 6.45% fixed rate securitized notes in as asset securitization transaction.
This securitization met the criteria of SFAS No. 125, and accordingly, the
Company removed the securitized assets and related liabilities from its balance
sheet and recognized applicable retained interests in the securitized
installment contracts and servicing liabilities and recorded a gain on the
sale.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed above in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those "Risk Factors"
as discussed in the Company's 1996 Annual Report.
17
18
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
10.1 Amendment No. 2 to Employment Agreement with Michael P.
Harrington
10.2 Amendment No. 2 to Employment Agreement with Thomas G.
Parker
10.3 Amendment No. 2 to Employment Agreement with Kenneth L.
Stucky
10.4 Sale and Servicing Agreement, by and between First
Enterprise Financial Group, Inc., First Enterprise
Acceptance Company, First Enterprise Securitization Co. II
and LaSalle National Bank
10.5 The 2nd Amendment to the 4th Amended and Restated Revolving
Credit Facility
11 Statement Regarding Computation of Net Income Per Share
(b) Reports on Form 8-K - None
18
19
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: May 13, 1997 /s/ Michael P. Harrington
__________________________ ____________________________________
Michael P. Harrington
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer)
May 13, 1997 /s/ Jan W. Erfert
Date: __________________________ ____________________________________
Jan W. Erfert
Vice President and Treasurer
(Principal Accounting and
Financial Officer)
19
20
INDEX OF EXHIBITS
Exhibit No. Description
10.1 Amendment No. 2 to Employment Agreement with Michael P. Harrington
10.2 Amendment No. 2 to Employment Agreement with Thomas G. Parker
10.3 Amendment No. 2 to Employment Agreement with Kenneth L. Stucky
10.4 Sale and Servicing Agreement, by and between First Enterprise
Financial Group, Inc., First Enterprise Acceptance Company, First
Enterprise Securitization Co. II and LaSalle National Bank
10.5 The Second Amendment to the Fourth Amended and Restated Revolving
Credit Facility
11 Statement Regarding Computation of Net Income Per Share
20