<PAGE> 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 June 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 No X
------ ------
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, 4,964,294 shares outstanding as of July 31, 1996.
<PAGE> 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...................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 11
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
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS
<S> <C> <C>
Cash....................................................................... $ 1,449,181 $ 1,703,320
Restricted cash............................................................ 2,546,083 --
Finance receivables:
Net principal balance.................................................... 75,463,744 59,495,368
Unamortized contract acquisition discount................................ -- --
Unearned insurance commissions........................................... (86,548) (189,737)
----------- -----------
Automobile finance receivables........................................... 75,377,196 59,305,631
Allowance for credit losses.............................................. (6,499,954) (5,010,919)
----------- -----------
68,877,242 54,294,712
Property and equipment - at cost........................................... 1,013,334 881,713
Repossessed assets......................................................... 703,912 542,841
Deferred tax asset......................................................... 768,000 --
Other assets............................................................... 2,654,306 988,194
----------- -----------
TOTAL ASSETS........................................................... $78,012,058 $58,410,780
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Senior debt................................................................ $14,447,000 $43,267,000
Notes payble - securitized pool............................................ 45,087,652 --
Subordinated debt.......................................................... 8,411,264 8,354,541
Accounts payable - dealers................................................. 2,547,491 1,937,710
Other accounts payable and accrued expenses................................ 1,980,460 1,577,189
Other liabilities.......................................................... 801,318 460,271
----------- -----------
Total liabilities...................................................... 73,275,185 55,596,711
Common stock warrants...................................................... 807,019 649,300
Stockholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 2,062,080 shares issued
and outstanding........................................................ 20,621 20,621
Class B common stock, $.01 par value, non-
voting; 2,262,080 shares authorized;
1,015,569 issued and outstanding at
June 30, 1996.......................................................... 10,156 9,176
Additional paid-in capital............................................... 1,311,621 1,201,718
Retained earnings ....................................................... 2,982,607 1,328,405
Guaranteed loans of stockholders......................................... (395,151) (395,151)
----------- -----------
Total stockholders' equity............................................. 3,929,854 2,164,769
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY................................................... $78,012,058 $58,410,780
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- ---------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Finance charges and interest........................ $3,759,751 $2,073,616 $7,015,704 $4,235,443
Interest expense.................................... 1,532,641 948,120 2,890,221 1,819,528
---------- ---------- ---------- ----------
Net interest income............................. 2,227,110 1,125,496 4,125,483 2,415,915
Provision for credit losses......................... 225,000 -- 625,000 --
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses............................. 2,002,110 1,125,496 3,500,483 2,415,915
Other income:
Servicing income.................................. 1,441,759 943,693 2,567,488 1,421,666
Insurance commissions............................. 756,860 333,641 1,407,767 608,983
Fees and other income............................. 318,335 114,037 676,285 210,361
Gain on sale of finance receivables............... 115,343 -- 524,343 --
---------- ---------- ---------- ----------
Total other income.............................. 2,632,297 1,391,371 5,175,883 2,241,010
---------- ---------- ---------- ----------
Income before operating expenses................ 4,634,407 2,516,867 8,676,366 4,656,925
Operating expenses:
Salaries and employee benefits.................... 1,972,972 1,192,139 3,938,012 2,280,522
Rent expense...................................... 116,363 87,263 229,536 158,617
Depreciation and amortization..................... 84,976 53,509 168,556 112,564
Professional services............................. 179,549 105,402 254,467 163,424
Other expenses.................................... 806,948 449,546 1,522,874 807,872
---------- ---------- ---------- ----------
Total operating expenses........................ 3,160,808 1,887,859 6,113,445 3,522,999
---------- ---------- ---------- ----------
Income before income taxes...................... 1,473,599 629,008 2,562,921 1,133,926
Income taxes........................................ 591,000 15,000 1,018,000 30,000
Deferred income tax effect of
S corporation termination......................... -- -- (267,000) --
---------- ---------- ---------- ----------
Net income...................................... $ 882,599 $ 614,008 $1,811,921 $1,103,926
========== ========== ========== ==========
Pro forma net income per share...................... $ 0.20 $ 0.11 $ 0.41 $ 0.21
========== ========== ========== ==========
Pro forma weighted average number of common and
common equivalent shares outstanding.............. 5,391,679 4,996,588 5,391,679 5,001,159
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $1,811,921 $1,103,926
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization........................... 225,279 158,700
Provision for credit losses............................. 625,000 --
Deferred income taxes................................... (501,000) --
Deferred income tax effect of
S corporation termination............................. (267,000) --
Gain on sale of finance receivables..................... (524,343) --
Accretion of contract acquisition
discount.............................................. -- (113,296)
Changes in assets and liabilities:
Restricted cash......................................... (2,546,083) --
Repossessed assets...................................... (161,071) (54,620)
Other assets............................................ (1,141,769) (500,255)
Accounts payable and
accrued expenses...................................... 761,520 1,367,437
Income taxes payable.................................... 251,532 --
Other liabilities....................................... 341,047 (44,183)
----------- -----------
Total adjustments..................................... (2,936,888) 813,783
----------- -----------
Net cash provided by (used in)
operating activities.................................. (1,124,967) 1,917,709
Cash flows from investing activities:
Automobile installment contracts
purchased............................................... (62,251,117) (32,711,265)
Proceeds from sale of automobile
installment contracts................................... 31,665,399 24,777,933
Principal collections on automobile
installment contracts................................... 15,378,188 10,534,694
Principal collections on timeshare
receivables............................................. -- 150,351
Capital expenditures...................................... (300,177) (285,121)
----------- -----------
Net cash provided by (used in)
investing activities.................................. (15,507,707) 2,466,592
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Borrowings under senior debt.............................. $47,335,000 $23,484,000
Payments on senior debt................................... (76,155,000) (18,921,000)
Proceeds from issuance of securitized notes............... 45,087,652 --
Proceeds from issuance of
common stock............................................ 110,883 --
Payments on repurchase of
common stock............................................ -- (6,666)
Dividends paid............................................ -- (576,141)
---------- ----------
Net cash provided by
financing activities.................................. 16,378,535 3,980,193
---------- ----------
INCREASE (DECREASE)
IN CASH............................................... (254,139) 8,364,494
Cash at beginning of period................................. 1,703,320 714,445
---------- ----------
Cash at end of period....................................... $1,449,181 $9,078,939
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $2,846,679 $1,650,305
Income taxes............................................ 1,287,000 34,100
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 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 dealer 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 al 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, at a price of $7 per
share, in connection with the Company's initial Public Offering.
The pro-forma net income per share computations do not 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.
7
<PAGE> 8
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FINANCE RECEIVABLES
Finance receivables are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
----------- ------------
<S> <C> <C>
Contractual payments due.................................... 103,216,285 $79,422,000
Unearned finance charges.................................... (27,752,541) (19,926,632)
------------- -----------
Net principal balance....................................... 75,463,744 59,495,368
Unamortized contract acquisition............................ -- --
Unearned insurance commission............................... (86,548) (189,737)
------------- -----------
Automobile finance receivables.............................. 75,377,196 59,305,631
Allowance for credit losses................................. (6,499,954) (5,010,919)
------------- -----------
$ 68,877,242 $54,294,712
============= ===========
</TABLE>
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 six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
Balance at beginning of year................................ $ -- $228,617
Additions from new business................................. -- --
Accreted into finance charge income......................... -- (113,296)
Transferred to allowance for credit losses.................. -- --
--------- --------
Balance at end of year...................................... $ -- $115,321
--------- ========
</TABLE>
A summary of the activity in allowance for credit losses is as follows for
six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
Balance at beginning of year................................ $5,010,919 $2,562,723
Additions from new business................................. 6,329,755 3,575,756
Related to finance receivables sold......................... (2,946,826) (2,196,776)
Finance receivables charged off, net of recoveries.......... (2,518,894) (1,299,648)
Provision for credit losses................................. 625,000 --
---------- ----------
Balance at end of year...................................... $6,499,954 $2,642,055
========== ==========
</TABLE>
8
<PAGE> 9
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:
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
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 June 30, 1996........................................ $14,447,000
===========
Subordinated Debt:
$4,000,000, subordinated note, unsecured, due September 30, 1996.
with interest at 13.5% (net of unamortized allocation of $36,364 to
common stock warrants)............................................................. $ 3,963,636
$4,500,000, subordinated note, unsecured, due August 31, 1998, with
interest at 13.0% (net of unamortized allocation of $52,372 to common
stock warrants).................................................................... $ 4,447,628
-----------
$ 8,411,264
===========
</TABLE>
Borrowings under the Credit Facility are collateralized by all finance
receivables 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 June 30, 1996.
9
<PAGE> 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. 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 June 30, 1996.
NOTE E - STOCK OPTIONS
The following table summarized the Company's stock option plans for the
six months ended June 30, 1996.
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
------ --------------
<S> <C> <C>
Option outstanding at December 31, 1995................ 610,891 $1.13 - 1.36
Option changes
Exercised.............................................. (97,944) 1.13
-------
Options outstanding at June 30, 1996................... 512,947 1.13 - 1.36
=======
</TABLE>
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.
10
<PAGE> 11
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 June 30, 1996 as compared with December 31, 1995
and the results of operations for the six months ended June 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 June 18, 1996, the Company completed a $45.1 million debt financing
consisting of 6.84% fixed rate securitization 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 financed receivables. Financial Security Assurances
Inc. ("FSA") issued a financial guaranty insurance policy for the benefit of
the noteholders.
On July 22, 1996, the Company completed its initial public offering of
1,886,640 shares of common stock at a price of $7 per share. 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.
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,
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1996 1995
------- -------
<S> <C> <C>
Finance charges from installment contracts............................. 57.5% 65.2%
Interest income from timeshare receivables............................. -- 0.2
Servicing income....................................................... 21.1 22.0
Other fees and commissions............................................. 17.1 12.6
Gain on sale of installment contracts.................................. 4.3 --
----- -----
Total.................................................................. 100.0% 100.0%
===== =====
</TABLE>
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
11
<PAGE> 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 six months ended June 30, 1996, the weighted average
non-refundable contract acquisition discount was approximately 10.1% and 10.2%,
respectively. For the three and six months ended June 30, 1995, the weighted
average non-refundable contract acquisition discount was approximately 10.3%
and 10.9%, respectively.
12
<PAGE> 13
RESULTS OF OPERATIONS:
The following table sets forth certain financial data relating to the
Company.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PORTFOLIO DATA:
Total Portfolio (1)............................ $118,715 $60,010
Average Total Portfolio (1).................... 100,068 49,278
Average Owned Portfolio (2).................... 61,124 36,607
Average indebtedness (3)....................... 53,889 31,574
Number of installment contracts purchased...... 8,324 4,728
Installment contracts purchased................ 62,251 32,711
OPERATING DATA:
Owned Portfolio yield (4)...................... 23.08% 23.33%
Cost of borrowed funds (3)..................... 10.78 11.62
Net interest spread ........................... 12.30 11.71
Net interest margin (5)........................ 13.57 13.31
Allowance for credit losses as a
percentage of Owned Portfolio............... 8.61 8.52
Net charge-offs in the Owned Portfolio as a
percentage of average Owned Portfolio....... 8.24 7.10
Net charge-offs in the Total Portfolio as a
percentage of average Total Portfolio....... 6.73 6.07
Operating expenses as a percentage of
average Total Portfolio..................... 12.28 14.42
Number of branch offices....................... 29 21
Number of dealers.............................. 1,025 519
</TABLE>
(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.
13
<PAGE> 14
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Interest Income
Finance charges and interest increased $2.8 million, or 65.6%, from $4.2
million for the six months ended June 30, 1995 to $7.0 million for the six
months ended June 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 $29.6 million, or 90.3%, from $32.7 million for the six
months ended June 30, 1995 to $62.3 million for the six months ended June 30,
1996, the average Owned Portfolio increased $24.5 million, or 67.0%, from $36.6
million to $61.1 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 six months ended June 30, 1996 and 1995, respectively.
The Company opened four branch offices during the six months ended June
30, 1996, increasing to 29 the total number of its branch offices. At June 30,
1995, the Company operated 21 branch offices.
The average Owned Portfolio yield decreased from 23.3% for the six months
ended June 30, 1995 to 23.1% for the six months ended June 30, 1996.
Interest expense increased $1.1 million from $1.8 million for the six
months ended June 30, 1995 to $2.9 million for the six months ended June 30,
1996. The increase in interest expense resulted from an increase in borrowings
under the Credit Facility and the issuance of additional subordinated debt.
Average indebtedness increased $22.3 million, or 70.6%, from $31.6 million for
the six months ended June 30, 1995 to $53.9 million for the six months ended
June 30, 1996. The average cost of borrowed funds decreased from 11.61% for
the six months ended June 30, 1995 to 10.79% for the six months ended June 30,
1996. The decrease in average cost of borrowed funds was due primarily to the
decrease in the rate paid on the Credit Facility. For the six months ended
June 30, 1995, the weighted average rate on the Credit Facility was 9.92% and
for the six months ended June 30, 1996 the weighted average rate on the Credit
Facility was 9.29%. Additionally, in September 1995, the Company issued a new
subordinated note for $4.5 million bearing interest at 13%, the proceeds of
which were used to pay down borrowings under the Credit Facility. 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. Net interest income
increased $1.7 million, or 70.8% from $2.4 million for the six months ended
June 30, 1995 to $4.1 million for the six months ended June 30, 1996.
The net interest margin on the Owned Portfolio increased from 13.3% for
the six months ended June 30, 1995 to 13.6% for the six months ended June 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 six months ended June 30, 1996, the Company made a provision for
credit losses of $625,000. There was no provision for credit losses for the
six months ended June 30, 1995. The provision for credit losses contributed to
the increase in the allowance for credit losses as a percentage of the Owned
Portfolio from 8.5% as of June 30, 1995 to 8.6% as of June 30, 1996. See
"Credit Loss Experience."
Other Income
Other income increased $3.0 million, or 131%, from $2.2 million for the
six months ended June 30, 1995 to $5.2 million for the six months ended June
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 $1.2 million, or 80.6%, from $1.4 million for
the six months ended June 30, 1995 to $2.6 million for the six months ended
June 30, 1996. The increase in servicing income was due to the sale
14
<PAGE> 15
of $34.7 million in installment contracts during the six months ended June 30,
1996 compared to the sale of $27.5 million in installment contracts during the
six months ended June 30, 1995. Further, the average balance of sold contracts
increased $26.3 million from $12.7 million for the six months ended June 30,
1995 to $39.0 million for the six months ended June 30, 1996.
Income from insurance commissions increased $799,000 from $609,000 for the
six months ended June 30, 1995 to $1.4 million for the six months ended June
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 six months ended June 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 $2.6 million, or 73.5%, from $3.5 million for
the six months ended June 30, 1995 to $6.1 million for the six months ended
June 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 $1.6 millions, or 72.7%, from $2.3 million for the six
months ended June 30, 1995 to $3.9 million for the six months ended June 30,
1996. Although operating expenses increased for the six months ended June 30,
1996 compared to the six months ended June 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 14.4% for the six months ended June 30, 1995 to 12.3% for the six months
ended June 30, 1996.
Income Taxes
Income taxes increased $988,000 from $30,000 for the six months ended June
30, 1995 to $1.0 million for the six months ended June 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 six
months ended June 30, 1996.
Net Income
Net income increased $708,000, or 64.1%, from $1.1 million for the six
months ended June 30, 1995 to $1.8 million for the six months ended June 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.
15
<PAGE> 16
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 six months ended June 30, 1996, the Company increased its allowance for
credit losses by $625,000 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.
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 exclude
automobiles which have been repossessed.
<TABLE>
<CAPTION>
AS OF JUNE 30,
1996 1995
-----------------------------
<S> <C> <C>
TOTAL PORTFOLIO:
Installment contracts, gross $159,207 $ 79,541
Past due accounts, gross:
60 to 89 days 993 245
90 days or more 891 74
-------- ---------
Total 60 days or more $ 1,884 $ 319
======== =========
Contracts with payments 60 days or more past due as a
percentage of total installment contracts, gross 1.18% 0.40%
======== =========
OWNED PORTFOLIO:
Installment contracts, gross $103,216 $ 41,069
Past due accounts, gross:
60 to 89 days 489 194
90 days or more 470 67
-------- ---------
Total 60 days or more $ 959 $ 261
======== =========
Contracts with payments 60 days or more past due as a
percentage of total installment contracts, gross 0.93% 0.64%
======== =========
</TABLE>
16
<PAGE> 17
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 $2.9 million and net
cash flows provided by operating activities were $0.8 million for the six
months ended June 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 $15.5 million and net
cash flows provided by investing activities were $2.5 million for the six
months ended June 30, 1996 and 1995, respectively. The decrease resulted from
cash used to purchase installment contracts.
Net cash flows provided by financing activities were $16.4 million and
$4.0 million for the six months ended June 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 at a price of $7 per share. 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.
17
<PAGE> 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
On May 1, 1996, the shareholders of the Company adopted,
by unanimous written consent, (i) an amendment to the
Company's Articles of Incorporation to eliminate cumulative
voting rights for any and all classes of stock and (ii)
the 1995 Non-qualified Director Stock Option Plan.
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits
11. Statement Regarding Computation of Per Share Earnings
(b) Reports on Form 8-K - None
18
<PAGE> 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: 9/4/96 Michael P. Harrington
-------------------- ------------------------------------
Michael P. Harrington
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer)
Date: 9/4/96 Jan W. Erfert
-------------------- ------------------------------------
Jan W. Erfert
Vice President and Treasurer
(Principal Accounting and
Financial Officer)
<PAGE> 20
INDEX OF EXHIBITS
Exhibit No. Description
11. Statement Regarding Computation of Per Share Earnings
20
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before income taxes................................. $1,473,599 $629,008 $2,562,921 $1,133,926
Pro forma provision for income taxes @ 39%................. 245,000 442,000
Income taxes............................................... 591,000 751,000
Adjustments for reduction in interest
expense and effects of shares
required to pay offering costs,
and debt of $9,685,000................................. 188,000 169,000 375,000 334,000
---------- --------- ---------- ----------
Pro forma net income....................................... $1,070,599 $553,008 $2,186,921 $1,025,926
========== ========= ========== ==========
Average number of common shares outstanding................ 3,077,654 2,600,628 3,077,654 2,605,199
Common equivalent shares outstanding....................... 427,385 509,320 427,385 509,320
Shares included in the offering............................ 1,886,640 1,886,640 1,886,640 1,886,640
---------- --------- ---------- ----------
Pro forma weighted average number of common
and common equivalent shares outstanding............... 5,391,679 4,996,588 5,391,679 5,001,159
========== ========= ========== ==========
Pro forma net income per common and common
equivalent shares outstanding.......................... $0.20 $0.11 $0.41 $0.21
========== ========= ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,449,181
<SECURITIES> 0
<RECEIVABLES> 75,377,196
<ALLOWANCES> 6,499,954
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,013,334
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,012,058
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 30,777
0
0
<OTHER-SE> 3,899,077
<TOTAL-LIABILITY-AND-EQUITY> 78,012,088
<SALES> 0
<TOTAL-REVENUES> 12,191,587
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,113,445
<LOSS-PROVISION> 625,000
<INTEREST-EXPENSE> 2,890,221
<INCOME-PRETAX> 2,562,921
<INCOME-TAX> 751,000
<INCOME-CONTINUING> 1,811,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,811,921
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0
</TABLE>
