<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended
December 31, 1996
Commission File No. 0-23854
RELIANCE
ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
Exact Name of Registrant as Specified in Charter
Delaware 36-3235321
- ------------------------------ ------------------
State or Other Jurisdiction of I. R. S. Employer
Incorporation or Organization Identification
Number
400 North Loop 1604 East, Suite 200
San Antonio, Texas 78232
Address of Principal Executive Offices and Zip Code
(210) 496-5910
Registrant's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------
Title of Class
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ________
Aggregate market value of the voting stock held by non-affiliates of the
registrant (based upon the closing sale price of the Registrant's common stock
on March 24, 1997, and for the purposes of this calculation only, the assumption
that all of the Registrant's executive officers and directors are affiliates):
$71,990,000.
On March 24, 1997, there were 10,870,643 shares of the Registrant's common stock
issued and outstanding.
Portions of the Reliance Acceptance Group, Inc. Proxy Statement for the 1997
Annual Meeting ("Company's 1997 Proxy Statement") are incorporated by reference
into Part III of this Form 10-K.
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
-----------------------------------------------------
INDEX
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Part I. Page
- ----------------------------------------------------------------------------
No.
- ---
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Part II.
- --------
Item 5. Market for Registrants Common Stock and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
Item 8. Financial Statements and Supplementary Data................. 8
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 8
Part III.
- ----------
Item 10. Directors and Executive Officers of the Registrant.......... 9
Item 11. Executive Compensation...................................... 9
Item 12. Security Ownership of Management and Certain Beneficial
Owners...................................................... 9
Item 13. Certain Relationships and Related Transactions.............. 9
Part IV.
- --------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 10
2
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
-----------------------------------------------------
Item 1. Business
Reliance Acceptance Group, Inc. (the "Company" or the "Parent Company") formerly
known as Cole Taylor Financial Group, Inc., is a financial services company
engaged in the consumer loan acceptance business through its wholly owned
subsidiaries operating as Reliance Acceptance Corporation (formerly known as
Cole Taylor Finance Co.) (the "Finance Company").
Recent Developments
On February 12, 1997, the Company closed the transactions (the "Split-Off
Transactions") contemplated by the Amended and Restated Share Exchange Agreement
dated as of June 12, 1996, by and among the Company and the Taylor Family Group
(as defined below), including the following transactions: (1) the Taylor Family
Group exchanged 4,500,000 shares of the Company's common stock, $.01 par value
per share (the "Common Stock") with the Company for all of the outstanding
common stock of Taylor Capital Group, Inc. ("Taylor Capital"), which owned all
of the outstanding common stock of Taylor Capital Bank (the "Bank"), all of the
outstanding common stock of CT Mortgage Company, Inc. and an investment in Alpha
Capital Fund II, L.P., and (2) the Finance Company received $52 million in cash
and all of the used automobile receivables business of the Bank consisting of,
among other things, used automobile finance contracts having a fair market value
of $31 million. The "Taylor Family Group" means an investor group consisting of
Jeffrey W. Taylor, Bruce W. Taylor, Sidney J. Taylor, Iris A. Taylor, Cindy
Taylor Bliel, the Taylor Family Partnership and a series of related trusts.
Prior to their resignations in connection with the closing of the Split Off
Transactions on February 12, 1997, Jeffrey W. Taylor had been the Chairman of
the Board and Chief Executive Officer of the Company and Chairman of the Bank,
Bruce W. Taylor had been a director and President of the Company and President
and Chief Executive Officer of the Bank, Sidney J. Taylor had been a director of
the Company and chairman of the Executive Committee of the Company's Board of
Directors and certain investors in The Taylor Family Partnership were present or
former directors of the Bank.
The Finance Company
The Finance Company's headquarters are located in San Antonio, Texas. To date,
the Finance Company's operations have focused on purchasing closed-end retail
sales finance contracts, primarily in connection with sales of used automobiles
by franchised dealers. The Finance Company commenced operations in January, 1993
and, at December 31, 1996, operated 53 Reliance Acceptance Corp. offices, with
six offices in Georgia, four offices in Ohio, eighteen offices in Texas, four
offices in Florida, three offices in Colorado, two offices in Indiana, three
offices in Tennessee, two offices in Nevada, one office in New Mexico, one
office in Kentucky, one office in South Carolina, one office in Arizona, four
offices in Illinois, one office in North Carolina, one office in Missouri and
one office in Washington. In 1997, the Finance Company plans on opening several
additional offices in these and other states.
The Company's offices in Texas accounted for approximately 42%, 42%, and 54% of
gross finance receivables as of December 31, 1996, 1995, 1994 respectively:
offices in Georgia accounted for 14%, 12% and 16% of gross receivables as of
December 31, 1996, 1995 and 1994, respectively; and offices in Ohio accounted
for 7%, 9% and 14% of gross receivables as of December 31, 1996, 1995, and 1994
respectively. Each of the remaining states where offices are located accounted
for less than 10% of total gross finance receivables throughout the three years.
The Finance Company operates through a series of wholly owned subsidiaries and a
network of decentralized branch offices under the name of Reliance Acceptance
Corp. Each office is staffed with a branch manager who reports to an experienced
regional director. A typical Reliance Acceptance Corp. branch is located in an
office building that is reasonably close to the new and used car automobile
dealers that send sales finance contracts to the Finance Company's branch
offices for purchase approval. Having no direct loans, but only sales finance
contracts in their portfolio permits branch offices to operate efficiently with
a small staff and control their overhead expenses.
Dealer Loan Origination
Each branch office of the Finance Company purchases sales finance contracts from
dealers located in its local market area. In cities having multiple offices, one
office serves as a central contract purchasing office for all branches in that
city. Relationships are established with automobile dealers after performing
credit reviews on the dealers. Dealers who are approved for purchase of sales
finance contracts enter into a contractual relationship with the Finance
Company. This contract specifies, among other things, the percentage of dealer
discount for possible credit loss that will be deducted from the purchase
proceeds of sales finance contracts for each contract purchased by the Finance
Company. The Finance Company competes for business on the basis of service,
namely in rapid response times for approval or disapproval of credit
applications, a local presence and consistent application of the Finance
Company's underwriting standards, and immediate funding of sales finance
contract
3
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RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
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PART I
purchases upon delivery of all required documents. The Finance Company serves
more than 1,500 franchised automobile dealers.
Underwriting
The Finance Company purchases each sales finance contract in accordance with its
underwriting standards and procedures, which are intended to assess the
applicant's ability to repay the amounts due on the loan and the adequacy of the
financed vehicle as collateral. The majority of automobiles financed by the
Finance Company range in age from used current year models to those that are
five years old with less than 100,000 miles. Most of the Finance Company's
customers have some derogatory credit history, but have performed satisfactorily
in previous automobile financing transactions.
Nonrefundable Dealer Discounts
As protection to the Finance Company for possible credit losses, the Finance
Company purchases each sales finance contract at a discount from its stated
amount for the purpose of absorbing credit losses. Discounts are not refundable
to dealers; nor are dealers required to fund losses in excess of the discount.
The applicable discount is negotiated with each dealer. These dealer discounts,
net of charges to dealer discount for credit losses, have previously been
accredited to income over the terms of the contracts using the level-yield
method. The Finance Company discontinued accretion of the dealer discount on
October 1, 1996 to provide greater protection for possible credit losses. In
addition to the loss protection provided by the unamortized, nonrefundable
dealer discounts the Finance Company has established an allowance to absorb
potential credit losses not covered by the remaining discount.
Internal Reviews
Finance Company policy provides that each branch office be formally examined at
least every three months by a regional director. This examination includes a
review of the credit quality of the sales finance contracts that were purchased
by the branch, business development activities and internal operating procedures
to ensure compliance with established policies.
Sources of Funds
The Finance Company's purchases of sales finance contracts are primarily
financed with funds drawn pursuant to two principal sources. The Company's
primary source of funds is the $250 million secured senior debt revolving credit
agreement with a group of several lenders, led by Bank America Business Credit,
Inc. The arrangement is secured by the finance receivables of the Finance
Company, other than those that are part of the securitization described below.
The revolving credit agreement expires on July 12, 1997, although the Company is
currently in negotiations to extend the revolving credit agreement. Outstanding
borrowings bear interest at floating rates, at the Finance Company's option,
either equal to a reference rate plus .5% or adjusted LIBOR plus 2.25%. The
revolving credit agreement includes financial covenants relating to the ratio of
debt to adjusted tangible net worth (as defined), the ratio of the allowance for
loan losses and nonrefundable dealer discounts to finance receivables, the ratio
of unsubordinated debt to borrowing base (as defined), the ratio of adjusted net
income (as defined) to interest expense and to fixed charges (as defined), and
the charge-off policy. It also contains restrictions, among others, as to
dividend payments, merger or disposal of assets, and creation of liens on assets
owned or acquired. This facility is subject to a "keep well" agreement with the
Parent Company.
The Company completed a securitization of finance receivables on November 20,
1996 for approximately $126 million. The securitization was structured as an "on
balance sheet", financing transaction rather than using "gain on sale"
accounting treatment. As such, the transaction is analogous to a fixed-rate,
secured financing at an interest rate of approximately 7%. The proceeds of the
securitization were used primarily to pay down debt, particularly amounts drawn
under the revolving credit agreement. If market conditions warrant, the Company
may consider further securitizations, or issuances of fixed or floating rate
debt securities, either publicly or privately placed, as alternatives to
additional bank financing.
Prior to February, 1997, the Company also used a $200 million commercial paper
facility, guaranteed by the Company and supported by the revolving credit
agreement discussed above. The primary advantage offered by commercial paper to
the
4
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RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
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PART I
Company is its attractive interest rate, generally 200 or more basis points
lower than bank financing. Its primary disadvantage is its short-term nature,
with a term not exceeding 270 days. The Finance Company's commercial paper was
previously rated D-2 by Duff & Phelps Credit Rating Service and F-2 by Fitch
Investor Services. Both ratings were in effect as of December 31, 1996. These
ratings meant the Finance Company's commercial paper was "investment grade" and
therefore marketable to purchasers of commercial paper. But on March 11, 1997,
Duff & Phelps downgraded the Finance Company's commercial paper rating from D-2
to D-4 and its subordinated debt to BB from BB+ (see below), and on March 13,
1997, Fitch lowered its rating on the commercial paper to F-S. At the current
ratings, the Finance Company's commercial paper is below investment grade and
therefore not marketable. The Finance Company's access to the commercial paper
market since late January, 1997 already had been severely curtailed owning to
perceived conditions in the sub-prime auto finance sector generally,
particularly its declining credit quality in the fourth quarter of 1996. At
December 31, 1996, $147 million in commercial paper was outstanding. By March
20, 1997, only $0.5 million in commercial paper was outstanding. All of the
commercial paper was repaid on or before it became due mostly by borrowings
under the revolving credit agreement. Unless and until the credit ratings are
upgraded, the Finance Company will not access the commercial paper market and
will continue to rely primarily on its bank lines and possibly other financings,
including securitizations, for funding.
The Finance Company previously relied, to some extent, on loans from its parent
company, based on separate Company borrowings from bank lines or dividends from
other subsidiaries. This source of funds is no longer present as a result of the
split-off transaction. The Company currently has a $25 million investment as
subordinated debt in the Finance Company, in addition to its equity investment.
Competition
The consumer finance business is highly competitive. The Finance Company's
principal competitors are similar finance companies which purchase sales finance
contracts secured with used automobiles. Other competitors of the Finance
Company include well-established financial institutions, such as banks, savings
and loan organizations, small loan companies, credit unions, a variety of local,
regional and national consumer financing institutions and captive finance
companies of automobile manufacturers. Many of these competitors have greater
financial, technical and marketing resources than the Company and offer other
forms of financing to automobile dealers, including, but not limited to, vehicle
floor plan financing and leasing.
Employees
As of December 31, 1996, the Finance Company had a total of approximately 520
full-time equivalent employees. None of the employees of the Finance Company are
subject to a collective bargaining agreement. The Finance Company considers its
relationships with its employees to be good.
Used Automobiles Receivable Business
The used automobile receivable business (the "Bank Qualified Business"),
received by the Finance Company pursuant to the Share Exchange Agreement,
purchases sales finance contracts from dealers in the local area. The Bank
Qualified Business worked with over 75 franchise dealers as of December 31,
1996. The Bank Qualified Business competes for business on the basis of service,
namely rapid response times for the approval or disapproval of credit
applications, a local presence, and competitive interest rates. As such, these
customers generally pay lower interest rates and experience lower default rates
than other customers of the Finance Company. The majority of automobiles
financed range from late model cars to those that are six years old with less
than 80,000 miles. The Bank Qualified Business purchases the sales finance
contracts at par value or at a premium, based on competitive market rates.
Governmental Regulations
The Company's consumer finance business generally is subject to federal and
state regulation and supervision. Licensing or registration is required in
various states. In addition, the Company is subject to applicable usuary and
other similar laws in the jurisdictions where the Company operates. These laws
generally limit the amount of interest and other fees and charges that a
creditor may contract for, charge or receive in connection with lending money.
Applicable local law typically establishes penalties for violations of these
laws in that jurisdiction. The penalties could include the forfeiture to the
obligor
5
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RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
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PART I
of usurious interest contracted for, charged or received and, in some cases, all
principal as well as all interest and other charges that the loan carries with
it.
In addition to these laws, several other federal and state consumer credit and
protection laws, including the Federal Truth-In Lending Act, the Federal Equal
Credit Opportunity Act, the Federal Fair Credit Reporting Act and the Federal
Trade Commission Act, regulate the extension of credit in consumer credit
transactions, sales practices, credit discrimination, credit reporting and
disclosure and debt collection. These laws mandate certain disclosures with
respect to finance charges on retail installment sales finance contracts and
impose certain other restrictions on lenders. The so called "lemon laws" enacted
by the federal government and various states provide certain rights to
purchasers with respect to consumer products that fail to satisfy express
warranties. The application of such laws or violations of such other federal and
state laws may give rise to a claim or defense of a consumer against a dealer
and its assignee, including the Company.
Certain of these laws also regulate the Company's loan servicing activities,
including its methods of collection and repossession. Under the law applicable
in most states, a creditor can repossess a motor vehicle or other collateral
securing a loan by voluntary surrender, "self-help" repossession that is without
breach of the peace and, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, by judicial process. Consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
affecting such a sale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgement from a debtor for any deficiency on repossession and resale
of the motor vehicle or other collateral securing such debtor's loan. Such
resale must, however, be commercially reasonable and notification of the time
and place of the resale must be provided to the debtor. Certain other statutory
provisions, including federal and state bankruptcy and insolvency laws may,
however, limit or delay the ability of a lender to repossess and resell
collateral or enforce a deficiency judgement.
Item 2. Properties
The Company's headquarters are located in approximately 20,000 square feet of
leased space in San Antonio, Texas. The lease expires in June 2000.
Each of the branch offices of the Finance Company is located in rented space in
an office building that is reasonably close to the new and used car automobile
dealers from which the Finance Company purchases sales finance contracts. The
offices range in size from approximately 600 square feet to 3,000 square feet.
Monthly lease payments range from $600 to $3,000, and lease terms range from one
to five years in duration.
The used automobile receivables business received under the Share Exchange
Agreement is located in approximately 3,900 square feet of leased space in
Northbrook, Illinois. The lease expires in January 1998.
Item 3. Legal Proceedings
The Company and the Finance Company are from time to time parties to various
legal actions arising in the normal course of business. Management knows of no
proceeding, threatened or pending against the Company or the Finance Company,
that is likely to have a material adverse impact on the respective financial
condition or results of operations of the Company or the Finance Company.
Item 4. Submission of Matters to a Vote of Security Holders The following
matters were submitted to a vote of security holders on November 15, 1996:
1. To consider and vote upon a proposal to approve (1) the Share
Exchange Agreement, dated as of June 12, 1996 and amended and
restated as of June 12, 1996 (as amended and restated, the Share
Exchange Agreement"), by and among the Company and The Taylor
Family Group, and (2) the transactions
6
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RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
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PART I
contemplated by the Share Exchange Agreement. These transactions
include (i) the Company's exchange of (A) all of the stock of a
newly formed subsidiary of the Company holding all of the capital
stock of Cole Taylor Bank and certain other assets for (B) shares
of the Company's common stock held by the Taylor Family and
certain other parties, and (ii) the transfer by Cole Taylor Bank
of certain assets to the Company,
2. To consider and vote upon a proposal to approve an amendment to
the Company's Certificate of Incorporation to change the name of
the Company from "Cole Taylor Financial Group, Inc." to "Reliance
Acceptance Group, Inc.," to take effect upon consummation of the
Split-Off Transactions, and
3. To elect five Class II directors to serve for a term of three
years or until their successors have been elected and qualified.
The results of the matters submitted to a vote of security holders was approved
by stockholders as follows:
1. The stockholder vote in Item No. I, above, was 11,559,873 votes
in favor, 33,405 opposed and 49,220 votes abstaining.
2. The stockholder vote in Item No. 2, above, was 12,712,846 votes
in favor, 56,252 votes opposed and 49, 496 abstaining.
3. All Class II directors received a plurality of those votes cast
in person or by proxy, and were therefore elected. The directors
elected were Ross J. Mangano, William S. Race, Howard B.
Silverman, Bruce W. Taylor and Richard Tinberg. Messrs. Taylor
and Tinberg resigned on February 12, 1997, pursuant to earlier
arrangements, in connection with The Split-Off Transaction.
7
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is traded on the NASDAQ National Market (symbol RACC
(formerly symbol CTFG)). The high and low sales prices for the common stock as
reported on the NASDAQ National Market are set forth in the following table for
the periods indicated:
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C>
1996:
First Quarter $29.75 $22.00
Second Quarter 31.25 23.00
Third Quarter 30.75 26.25
Fourth Quarter 32.00 26.50
1995:
First Quarter $21.00 $16.50
Second Quarter 20.75 16.50
Third Quarter 24.25 17.00
Fourth Quarter 30.75 23.25
</TABLE>
As of March 24, 1997, the approximate number of stockholders of record of the
common stock was 570, based upon securities position listings furnished to the
Company by the transfer agent and registrar.
The Company has paid regular cash dividends on the Common Stock since the first
quarter of 1992 The following table sets forth, for each quarter in 1996 and
1995, the dividends paid on the Common Stock:
<TABLE>
<CAPTION>
Dividends Per Share
<S> <C>
1996:
First Quarter $0.09
Second Quarter 0.09
Third Quarter 0.09
Fourth Quarter 0.09
1995:
First Quarter $0.07
Second Quarter 0.07
Third Quarter 0.07
Fourth Quarter 0.07
</TABLE>
The holders of the Common Stock are entitled to receive such dividends as are
declared by the Board of Directors of the Company, which considers payment of
dividends quarterly. It is the intention of the Company to continue to pay cash
dividends on the Common Stock. There is no assurance that dividends will be
paid by the Company or that dividends will not be reduced or eliminated in the
future. In determining the timing and amount of dividends the Board of
Directors considers the earnings, capital requirements and debt of the Company,
as well as general economic conditions and other relevant factors. The
Company's ability to pay dividends is limited pursuant to its revolving line of
credit agreement.
Item 6. Selected Financial Data
The information for this item is included in the section entitled "Selected
Consolidated Financial Data" in this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information for this item is included in the section entitled "Management's
Discussion and Analysis of the Results of Operations and Financial Condition" in
this report.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and report of
independent auditors are included below:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Unaudited Pro Forma Condensed Balance Sheet - December 31, 1996
Unaudited Pro Forma Condensed Statement of Income - Year ended
December 31, 1996
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
8
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors and Executive Officers of the Company required
under this item is contained in the Company's 1997 Proxy Statement under the
captions "Election of Directors--Nominees for Election of Directors" and "Other
Directors and Executive Officers," which are incorporated herein by reference.
Item 11. Executive Compensation
Information required under this item is contained in the Company's 1997 Proxy
Statement under the caption "Executive Compensation," which is incorporated
herein by reference.
Item 12. Security Ownership of Management and Certain Beneficial Owners
Information required under this item is contained in the Company's 1997 Proxy
Statement under the caption "Security Ownership of Management and Certain
Beneficial Owners," which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required under this item is contained in the Company's 1997 Proxy
Statement under the caption "Certain Transactions," which is incorporated herein
by reference.
9
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Documents filed as part of this Form 10-K
(a)(1) The following Financial Statements are included on pages 28 through 50
of this Report:
Independent Auditors' Report - KPMG Peat Marwick LLP
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31,1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) No financial statement schedules are included because such schedules are
not required or the formation required has been presented in the aforementioned
financial statements.
(a)(3) Exhibits: The information called for by this paragraph is incorporated by
reference to the Exhibit Index on page 53 of this Form 10-K.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on October 10, 1996. The Form 8-K was filed
solely to provide (i) the Company's historical financial statements
restated for discontinued operations (the "Restated Financials"),
reflecting the reclassification of the Company's historical financial
statements for 1995, 1994 and 1993 to present the net assets and the
results of operations of the banking segment as a separate component, and
(ii) Management's Discussion and Analysis of Financial Condition and
Results of Operations based upon the Restated Financials.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The selected data presented below under the caption "Income Statement Data": and
"Balance Sheet Data" for and as of the end of each of the fiscal years in the
five-year period ended December 31, 1995, are derived from the audited financial
statements of the Company. The financial statements of the Company for 1995 and
1994 were audited by KPMG Peat Marwick LLP, independent accountants. The
financial statements of the Company for 1993 and 1992 were audited by Coopers &
Lybrand L.L.P., independent accountants. This data should be read in conjunction
with the financial statements, the notes thereto and other financial information
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Net interest income $ 50,385 $ 24,825 $ 10,885 $ 217 $ --
Provision for losses 18,000 (363) 375 --
Noninterest income 1,367 1,250 509 110 --
Noninterest expense 30,123 14,574 6,352 1,625 --
Provision for income tax 1,524 4,439 2,133 (551) --
----------- ----------- ----------- ----------- -----------
Net income from containing operations $ 2,105 $ 7,062 $ 3,272 $ (1,122) --
Net income from discontinued operations $ 16,404 $ 16,610 $ 14,487 $ 12,355 $ 8,245
=========== =========== =========== =========== ===========
Net Income $ 18,509 $ 23,672 $ 17,759 $ 11,233 $ 8,245
=========== =========== =========== =========== ===========
Per Share Data:
Primary earnings (less) per share from $ 0.14 $ 0.47 $ 0.23 $ (0.09) $ --
continuing operations
Primary earnings per share from discontinued 1.07 1.09 1.03 1.00 0.67
operations
----------- ----------- ----------- ----------- -----------
Primary earnings per share $ 1.21 $ 1.56 $ 1.26 $ 0.91 0.67
=========== =========== =========== =========== ===========
Average shares outstanding 15,255,629 15,222,426 14,077,776 12,360,560 $12,217,680
Cash dividends declared $ 0.36 $ 0.28 $ 0.18 $ 0.13 $ 0.13
Balance Sheet Data(at end of period):
Total assets $ 553,022 $ 372,562 $ 222,435 $ 123,854 $ 80,191
Net assets of discontinued operations 152,014 138,653 125,838 106,239 80,191
Finance receivables, net 383,348 231,726 93,653 18,722 --
Dealer discounts 10,718 12,655 5,351 1,157
Allowance for losses 4,913 -- -- 375
Commercial paper 147,326 127,268 -- -- --
Other debt 221,394 82,657 83,343 12,000 --
Stockholders' equity 175,651 154,617 134,317 90,102 $ 80,191
Earnings Performance Data:
Return on average stockholders' equity from
continuing operations 1.26% 5.01% 2.94% -1.33% N/A
Balance Sheet and Other Key Ratios:
Repossessions to total assets 1.07% 1.41% 0.41% 0.09% N/A
Net charge-offs to average finance receivables 10.83% 3.02% 0.92% 0.48% N/A
Dealer discounts and allowance for losses to
finance receivables 4.08% 5.46% 5.71% 6.18% N/A
Delinquent receivables to gross finance 1.74% 0.65% 0.52% 0.04% N/A
receivables
Delinquent receivables and repossessions to 2.88% 2.27% 1.23% 0.47% N/A
gross receivables and repossessions
</TABLE>
11
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following presents management's discussion and analysis of the results of
operations and financial condition of the Company as of the dates and for the
periods indicated. This discussion should be read in conjunction with "Selected
Consolidated Financial Data," the Company's Consolidated Financial Statements
and the Notes thereto, and other financial data appearing elsewhere in this Form
10-K.
Organization
As of December 31, 1996, the consolidated organization consisted of Reliance
Acceptance Group, Inc. (formerly known as Cole Taylor Financial Group, Inc).
(the "Company" or the "Parent Company") and its subsidiaries, Reliance
Acceptance Corporation (formerly known as Cole Taylor Finance Co.) (the "Finance
Company"), Cole Taylor Bank (the "Bank") and CT Mortgage Company, Inc. (the
"Mortgage Company"). The Finance Company operates through wholly owned
subsidiaries under the name Reliance Acceptance Corporation.
On June 12, 1996 the Board of Directors of the Company approved a definitive
share exchange agreement providing for the split-off of the Bank and Mortgage
Company to an investment group headed by the Company's then Chairman Jeffrey
Taylor, then President Bruce Taylor and then Company director and co-founder
Sidney Taylor.
On February 12, 1997 (the "Closing Date"), pursuant to an Amended and Restated
Exchange Agreement (the "Share Exchange Agreement") dated as of June 12, 1996,
Reliance Acceptance Group, Inc. ("RAG") (until the Closing Date, known as "Cole
Taylor Financial Group, Inc." ("CTFG")) and the Taylor Family Group (as defined
below), completed the exchange of (a) 1 share of Common Stock, $.01 par value
per share, of Taylor Capital Group, Inc., a subsidiary of RAG, holding, among
other things, all of the capital stock of Cole Taylor Bank (the "Bank"), CT
Mortgage Company, Inc. and an investment in Alpha Capital Fund II, L. P. ("Alpha
Capital"), which went to the Taylor Family Group, for (b) all of the 4.5 million
shares of Common Stock, $.01 par value per share, of RAG owned by the Taylor
Family Group, which went to RAG (the "Share Exchange"). Prior to the Share
Exchange, the Bank transferred to Cole Taylor Auto Finance, Inc. ("Auto Sub"), a
newly formed subsidiary of the Bank, which was subsequently transferred to RAG
prior to the Share Exchange, the Bank's used automobile receivables business
consisting of, among other things, used automobile finance contracts with a fair
value of $31 million, and $52.03 million in cash. At the same time as the Share
Exchange, Reliance Acceptance Corporation (formerly Cole Taylor Finance Co.), a
subsidiary of RAG, was merged with and into Auto Sub (the "Merger"), and the
surviving corporation was renamed Reliance Acceptance Corporation. The terms of
the transaction were the result of arm's length negotiations between the Board
of Directors of RAG, assisted by independent financial and legal advisors, and
the Taylor Family Group, and the transaction was approved by the Board without
the participation of members of the Taylor Family and by the stockholders of RAG
at its Annual Meeting held on November 15, 1996. The Taylor Family Group
consists of Jeffrey W. Taylor, Bruce W. Taylor, Sidney J. Taylor, Iris A.
Taylor, who is a trustee of several trusts that are part of the Taylor Family
Group, Cindy Taylor Bliel, related trusts and a related partnership. Certain
present and former directors of the Bank (Edward McGowan, Richard Kaplan, Ronald
Emanuel and Corky Eisen) who are not members of the Taylor Family are investors
in the partnership that is part of the Taylor Group. Until the Share Exchange,
Jeffrey W. Taylor had been a director and the Chairman of the Board and Chief
Executive Officer of CTFG and Chairman of the Bank, Bruce W. Taylor had been a
director and President of CTFG and President and Chief Executive Officer of the
Bank, and Sidney J. Taylor had been a director of CTFG and chairman of the
Executive Committee of CTFG's board of directors. Melvin E. Pearl, who until the
Share Exchange was a director of CTFG, is a trustee of several trusts that are
part of the Taylor Family Group.
The split-off entity, consisting of the Bank and Mortgage Company, qualifies as
discontinued operations as defined in Accounting Principles Board Opinion 30
(APB 30). Accordingly, the Company's consolidated balance sheet and
12
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
the consolidated statements of income and cash flows for the periods presented
have been presented to reflect the split-off entity's net assets and financial
results as discontinued operations. The Split-Off Transactions were accounted
for as a non-reciprocal distribution to stockholders, and an accounting gain of
$48 million recognized at February 12, 1997, reflecting the extent to which the
fair value of the split-off entity, measured by the fair value of the shares,
automobile receivables and cash exchanged, exceeds the Company's basis in the
split-off entity. The assets and liabilities of the discontinued operations have
been separately classified as net assets of discontinued operations. A summary
of these assets and liabilities is included in note 13 of the financial
statements.
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
Certain statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward-looking statements
that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management, and that are subject to certain risks or uncertainties. Such
forward-looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. When used herein, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such forward-
looking statements. The Company cautions readers of this Annual Report on Form
10-K that a number of important factors could cause the Company's actual
results, performance or achievements in 1997 and beyond to differ materially
from the results, performance or achievements expressed in, or implied by, such
forward-looking statements. These factors include, without limitation, risks
associated with dependence on a single business segment and other risks and
uncertainties relating to the separation of the traditional commercial and
consumer banking business from the Company in the split-off: dependence on sales
of automobiles and related demand by consumers for financing; general economic
and business conditions affecting the Company's customers; the continued ability
of the Company to (a) find expansion opportunities and to successfully implement
the Company's expansion strategy, (b) to obtain new sources of funds through
securitizations of automobile loans, public or private offerings of debt
securities or otherwise, or maintain existing sources of funds, (c) to establish
and maintain relationships with automobile dealers and (d) to purchase an
increased number of loans meeting the Company's underwriting standards; changes
in interest rates; the adequacy of the Finance Company's dealer reserves and
allowance for credit losses; competition from other finance companies and
financial institutions; the impact of any other strategic transactions
undertaken by the Company; federal and state legislation, regulation and
supervision; the risk that a portion of the sales finance contracts purchased by
the Finance Company will become defaulted contracts or be subject to certain
claims or defenses which automobile buyers may assert against automobile dealers
or the Finance Company as the holder of the contracts: and contractual,
restrictions on the payment of dividends. These and other factors are more fully
described in the Company's other filings with the Securities and Exchange
Commission, including, without limitation, the Company's Proxy Statement for its
1997 Annual Meeting of Stockholders and the Company's Prospectus dated May 25,
1994.
Overview
The Company has operated in the financial services industry, engaged primarily
in the banking and consumer loan acceptance business. As a result of the split-
off, the Finance Company, along with the used automobile receivables business of
the Bank, will constitute the sole business operations of the Company. This
Management's Discussion and Analysis of Results of Operations and Financial
Condition focuses on the continuing operations of the Company and the Finance
Company, with separate and summarized discussion of the discontinued operations,
consisting of the Bank and Mortgage Company.
The Finance Company commenced operations in January 1993 and at December 31,
1996 operated 53 Reliance Acceptance Corporation offices in sixteen states. The
Finance Company's headquarters are located in San Antonio, Texas. To date, the
Finance Company's operations have focused on purchasing closed-end retail sales
finance contracts, primarily in connection with sales of used automobiles.
The Finance Company purchases each sales finance contract in accordance with its
underwriting standards and procedures. The majority of automobiles financed by
the Finance Company range in age from used current year models to those that are
five years old with less than 100,000 miles. Most of the Finance Company's
customers have some derogatory credit history, but have performed satisfactorily
in recent automobile financing transactions. Typically, loans have terms ranging
from 24 to 60 months at annual interest rates between 18% and 25%. Accounts are
repayable in monthly installments and are assessed late payment fees if
scheduled payments are not made within ten days of their due date.
13
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The Company's net income of $18.5 million in 1996 represented a 21.8% decrease
from net income of $23.7 million in 1995. The 5.2 million decrease in net income
is attributed to an $18 million provision for credit losses taken in the fourth
quarter of 1996. Net income in 1995 surpassed 1994's net income of $17.8 million
by 33.3%. Total assets of the Company were $553.0, $372.6 million and $222.4
million at December 31, 1996, 1995 and 1994, respectively. Finance receivables,
were $383.3 million at December 31, 1996, compared to $231.7 million at December
31, 1995, and $93.7 million at December 31, 1994 . Stockholders' equity
increased to $175.7 million at December 31, 1996 compared to $154.6 million at
December 31, 1995 and $134.3 million at December 31, 1994.
Net income from continuing operations totaled $2.1 million in 1996 compared to
$7.1 million in 1995 and $3.3 million in 1994. The decline in net income from
continuing operations in 1996 is attributable to an $18 million provision for
credit losses taken in the fourth quarter. Net interest income increased to
$50.4 million in 1996 compared to $24.8 million in 1995 and $10.9 million in
1994. As of year end, gross finance receivables increased to $507.2 million from
$315.9 million in 1995 and $126.7 million in 1994. Operating expense increased
to $30.1 million in 1996 compared to $14.6 million in 1995 and $6.4 million in
1994 , reflecting the increased operational expenses of a growing organization.
Financial Condition
Finance Receivables
Gross finance receivables increased $191.3 million , or 60%, to 507.2 million at
December 31, 1996 from $315.9 million at December 31, 1995. Comparatively, gross
finance receivables at December 31, 1995 of $315.9 million represented an
increase of 189.2 million or 150% from $126.7 million December 31, 1994. These
increases were largely a result of the Company's expansion of its decentralized
branch network and favorable market and legislative conditions. As of December
31, 1996, the Company operated 53 branches in 16 states as follows: 18 branches
in Texas, 6 in Georgia, 4 in Florida, 4 in Ohio, 4 in Illinois, 3 in Colorado, 3
in Tennessee, 2 in Indiana, 2 in Nevada, 1 in Arizona, 1 in Kentucky, 1 in New
Mexico, 1 in North Carolina, 1 in South Carolina, 1 in Missouri and 1 in
Washington.
The following table summarizes the components of finance receivables for the
years ending as follows (in thousands):
<TABLE>
<CAPTION>
As of As of As of
12/31/96 12/31/95 12/31/94
-------- -------- --------
<S> <C> <C> <C>
Gross finance receivables.......................... $507,166 $315,908 $126,665
Less:
Unearned finance charges.................. 123,092 83,612 32,760
Unearned insurance commission............. 726 229 46
Unearned processing fees.................. -- 341 206
-------- -------- --------
Finance receivables, net........................... 383,348 231,726 93,653
Nonrefundable dealer discounts..................... 10,718 12,655 5,351
Allowance for credit losses........................ 4,913 0 0
-------- -------- --------
Finance receivables, net of allowance and dealer
discount......................................... $367,717 $219,071 $ 88,302
======== ======== ========
</TABLE>
Delinquencies and Repossessions
The Company generally suspends the accrual of interest when an account becomes
90 or more days contractually delinquent.
If an account becomes 60 or more days contractually delinquent it is classified
as delinquent. The following table sets forth certain information with respect
to the Company's 60 day and greater contractually delinquent receivables and
repossessed
14
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
assets (in thousands):
<TABLE>
<CAPTION>
As of As of As of
12/31/96 12/31/95 12/31/94
-------- -------- --------
<S> <C> <C> <C>
Delinquent receivables (60 days or more past due)............ $ 8,839 $2,063 $ 661
Repossessed assets........................................... 5,927 5,235 914
------- ------ ------
Total delinquent receivables and repossessed
assets............................................ $14,766 $7,298 $1,575
======= ====== ======
Delinquent receivables to gross finance receivables.......... 1.74% 0.65% 0.52%
Delinquent receivables and repossessed assets to gross
finance receivables plus repossessed assets................ 2.88% 2.27% 1.23%
</TABLE>
The Finance Company's ratios reported above reflect significantly increasing
trends with respect to the level of nonperforming loans and repossessions.
Allowance for Credit Losses and Nonrefundable Dealer Discounts
The Finance Company has nonrefundable dealer discounts available against which
losses can be charged. In conjunction with the financing of installment
contracts, agreements are entered into with dealers whereby nonrefundable
discounts are established to provide protection from potential losses associated
with such contracts. As of October 1, 1996, the Company has discontinued all
accretion of nonrefundable dealer discount into income.
The Finance Company also has an allowance for credit losses against which losses
can be charged. The allowance at December 31, 1996 amounted to $4.9 million. The
allowance for credit losses was established by a credit loss provision. The
Company took a loss provision of $18 million during the fourth quarter.
The loss provision of $18 million arose as a result of two primary factors.
First, the Company realized a greater loss per repossessed vehicle than in
earlier periods. In part, the Finance Company attributed this greater loss per
vehicle to overreliance on auto auctions to dispose of repossessed vehicles. The
Finance Company has since returned to selling the majority of these vehicles on
retail dealer lots, a process that typically takes longer than the auction
process, but which historically has generated results acceptable for the Finance
Company. There can be no assurance that future losses from repossessions will
more closely align with historical levels as a result of returning to this
practice.
Second, based on the Company's most recent analysis, as of December 31, 1996,
management determined that the repossession rate had significantly increased
from earlier periods, necessitating an upward adjustment to loss projections and
reserves. The Company has introduced controls intended to reduce delinquencies
and repossessions, however, there can be no assurance that such controls will be
effective at reducing delinquencies and repossessions.
The following table summarizes, for the periods indicated, period end and
average finance receivables, and activity in the nonrefundable dealer discount,
allowance for credit losses and related ratios:
15
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
-------- -------- --------
<S> <C> <C> <C>
Net finance receivables, before nonrefundable dealer
discount, end of period............................ 383,348 $231,726 $93,653
Average finance receivables, before nonrefundable
dealer discount.................................... 312,852 153,603 51,885
Balance at January 1--nonrefundable dealer discount.. 12,655 5,351 1,157
Nonrefundable dealer discount established............ 21,976 13,992 6,729
Discount accretion................................... (3,106) (2,046) (2,059)
Provision for credit losses.......................... 18,000 -- --
Net charges to dealer discount/allowance............. (33,894) (4,642) (476)
-------- -------- -------
Balance at December 31--nonrefundable dealer
discount........................................... $ 15,631 $ 12,655 $ 5,351
======== ======== =======
Net charges to the nonrefundable dealer discount/
allowance to average finance receivables before
nonrefundable dealer discount...................... 10.83% 3.02% 0.92%
Nonrefundable dealer discount to finance receivables
before dealer discount at end of period............ 4.08% 5.46% 5.71%
</TABLE>
Effective January 1, 1996, the Finance Company adopted the practice of
accumulating loss data on individual pools of loans based on month of
origination (pools). The nonrefundable dealer discount within each pool is
available to cover losses incurred on the pool or to be accreted into income
over the estimated life of the related loans, based upon management's estimate
of loan losses. To the extent management's estimate of losses by pool exceeds
the related available dealer discount, income accretion, if any, would cease and
a loan loss reserve would be established through charges to operating expense.
Prior to January 1, 1996, the discount was accreted into income over the
contractual life of the loan, subject to aggregate loan charge-offs. The Finance
Company stopped the accretion of all non refundable dealer discount into income
on October 1, 1996.
Additionally, effective January 1, 1996, repossession and repair expenses, which
were formerly added to the customer loan balances and reported as part of the
charge to the dealer discount, are immediately reported in other operating
expenses as incurred. This revision has reduced charges to the dealer
discount/allowance and increased operating expenses.
The Finance Company's policy regarding repossessions was also revised, beginning
January 1, 1996, to require that repossessed assets and deficiency balance
accounts (account balances remaining after the sale of a repossessed asset to be
satisfied by the refundable portions of insurance and warranty policies) be
charged down to the estimated net realizable value upon repossession.
Previously, repossessed assets and balances remaining after repossession or sale
were charged down to the estimated net realizable value in the month following
the 90 and 60 day agings, respectively.
The ratio of net charges to the nonrefundable dealer discount and allowance for
credit losses to average finance receivables before nonrefundable dealer
discount increased dramatically during the fourth quarter of 1996 primarily due
to the following factors: first, the Company realized a greater loss per
repossessed vehicle than in previous periods and secondly, the rate of
repossession increased. In part, the Finance Company attributed this greater
loss per vehicle to overreliance on auto auctions to dispose of repossessed
vehicles. Subsequent to year end, the Company returned to selling the majority
of these
16
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
vehicles on retail dealer lots, a process that typically takes longer than the
auction process, but which historically has generated results acceptable for the
Finance Company. There can be no assurance that future losses from repossessions
will more closely align with historical levels of net charge-offs as a result of
returning to this practice. Secondly, based on the Company's most recent
analysis as December 31, 1996, management determined that the repossession rate
had increased from earlier periods, necessitating an upward adjustment to loss
projections and reserve.
The above mentioned factors resulted in an increased charge-off ratio and a
decrease in the overall ratio of nonrefundable dealer discount and allowance for
credit losses to finance receivables (the "coverage ratio").
With the Company's adoption, effective January 1, 1996, of the practice of
accumulating loss data on individual pools of loans based on the month of
origination, management monitors the amount of nonrefundable dealer discount
available, within each pool, to cover losses incurred on that pool. Management's
estimate of losses, within each pool, over the estimated life of the related
loans resulted in the establishment of the allowance for credit losses in the
fourth quarter of 1996.
Based upon management's individual pool loss estimates, the nonrefundable dealer
discount and allowance for credit losses are sufficient to cover existing
estimated losses. The average coverage ratio, as of December 31, 1996,
represents a reduced coverage ratio required on those pools which are "seasoned"
and for which historically the majority of losses have already occurred and a
higher coverage ratio for those pools which have been more recently acquired.
Debt
The Finance Company's primary debt is the $250 million secured senior debt
revolving credit agreement with a group of several lenders, led by Bank America
Business Credit, Inc. The arrangement is secured by the finance receivables of
the Finance Company, other than those that are part of the securitization
described below. The revolving credit agreement expires on July 12, 1997,
although the Company is currently in negotiations to extend the revolving credit
agreement. Outstanding borrowings bear interest at floating rates, at the
Company's option, either equal to a reference rate plus .5% or adjusted LIBOR
plus 2.25%. The revolving credit agreement includes financial covenants relating
to the ratio of debt to adjusted tangible net worth (as defined), the ration of
the allowance for loan losses and nonrefundable dealer discounts to finance
receivables, the ratio of unsubordinated debt to borrowing base (as defined),
the ratio of adjusted net income (as defined) to interest expense and to fixed
charges (as defined), the charge-off policy and the required level of reserves
in relation to a rolling 12-month percentage of charge-offs (as defined). It
also contains restrictions, among others, as to dividend payments, merger or
disposal of assets, and creation of liens on assets owned or acquired. This
facility is subject to a "keep well" agreement with the Parent Company.
The Company completed a securitization of finance receivables on November 20,
1996 for approximately $126 million. The securitization was structured as an "on
balance sheet," financing transaction rather than using "gain on sale"
accounting treatment. As such, the transaction is analogous to a fixed-rate,
secured financing at an interest rate of approximately 7%. The proceeds of the
securitization were used primarily to pay down debt, particularly amounts drawn
under the revolving credit agreement. If market conditions warrant, the Company
may consider further securitizations, or issuances of fixed or floating rate
debt securities, either publicly or privately placed, as alternatives to
additional bank financing.
Prior to February, 1997, the Company also used a $200 million commercial paper
facility, guaranteed by the Company and supported by the revolving credit
agreement discussed above. The primary advantage offered by commercial paper to
the Company is its attractive interest rate, generally 200 or more basis points
lower than bank financing. Its primary disadvantage is its short-term nature,
with a term not exceeding 270 days. The Finance
17
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Company's commercial paper was previously rated D-2 by Duff & Phelps Credit
Rating Service and F-2 by Fitch Investor Services. Both ratings were in effect
as of December 31, 1996. This rating meant the Finance Company's commercial
paper was "investment grade" and therefore marketable to purchasers of
commercial paper generally. But on March 11, 1997, Duff & Phelps downgraded the
Finance Company's commercial paper rating from D-2 to D-4 and its subordinated
debt to BB from BB+ and on March 13, 1997, Fitch downgraded the Finance
Company's commercial paper rating to F-S. At the current ratings, the Finance
Company's commercial paper is below investment grade and therefore not
marketable. The Finance Company's access to the commercial paper market since
late January, 1997 already had been severely curtailed owing to perceived
conditions in the sub-prime auto finance sector generally, particularly its
declining credit quality in the fourth quarter of 1996. At December 31, 1996,
$147 million in commercial paper was outstanding. By March 20, 1997, only $0.5
million in commercial paper was outstanding. All of the commercial paper was
repaid on or before it became due, mostly by borrowings under the revolving
credit agreement. Unless and until the credit ratings are upgraded, the Finance
Company will not access the commercial paper market and will continue to rely
primarily on its bank lines for funding.
The Finance Company previously relied, to some extent, on Holding Company loans
to its subsidiary, based on separate Holding Company borrowings from bank lines
or dividends from other subsidiaries. This source of funds is no longer present
as a result of the split-off transaction. The Company currently has a $25
million investment as subordinated debt in the Finance Company, in addition to
its equity investment.
Discontinued Operations
The loan portfolio of the Company's discontinued operations has grown in each of
the last three years. Gross loans increased $12.3 million, or 1.0% at December
31, 1996 as compared to December 31, 1995. In 1995, gross loans increased $81.0
million, or 7.1%, as compared to December 31, 1994. Commercial and industrial
loans were the largest component of the portfolio, representing 52.7% and 52.5%
at December 31, 1996 and 1995, respectively. Nonperforming assets totaled $12.0
million and $15.3 million at December 31, 1996 and 1995, respectively.
Nonperforming assets to total loans plus repossessed property were 0.98% and
1.26% at December 31, 1996 and 1995, respectively.
Average deposits increased 10.7% in 1996 as compared to an increase of 5.0% in
1995. In recent years, the earning asset growth has exceeded core deposit
growth, which has resulted in increased use of brokered certificates of deposit
and other borrowed funds. The Bank is categorized as "well capitalized" with
respect to all bank regulatory capital guidelines. Interest rate swaps have been
entered into by the bank as a designated hedge against then existing balance
sheet interest rate risk. The notional amount of all interest rate swaps at
December 31, 1996 was $75 million.
Results of Operations
Net Interest Income
Net interest income, the difference between total interest income earned on
earning assets and total interest expense paid on interest-bearing liabilities,
is the Company's principal source of revenue. The amount of net interest income
is affected by changes in the volume of earning assets, the level of rates
earned on those assets, the volume of interest-bearing liabilities, and the
level of rates paid on those interest-bearing liabilities.
The net interest income of the Company has grown in each of the last two years.
Net interest income for 1996 was $50.4 million, an increase of 103% from 1995.
Net interest income for 1995 was $24.8 million, an increase of 128%
18
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
from $10.9 million in 1994. Growth in net interest income during 1996 was
primarily due to a 65% increase in net finance receivables. The Finance
Company's net interest margin was 17.2% during 1996 compared to 17.9% during
1995 and 22.9% during 1994. The decrease compared to 1995 is attributed to an
increase in the level of charges to nonrefundable dealer discount (which reduces
the amount of discount accretion) and the cessation of discount accretion on
October 1, 1996.
Provision for Loan Losses
The Finance Company's primary protection against losses is the nonrefundable
dealer discount. The Finance Company also has an allowance for credit losses
against which losses also can be charged. The allowance for credit losses is
maintained by a credit loss provision. Total nonrefundable dealer discounts and
allowance for credit losses amounted to $10.7 million and $4.9 million
respectively at December 31, 1996 for a total of $15.6 million as a reserve to
absorb credit losses. The Finance Company recorded a loss provision of $18
million during the fourth quarter.
The loss provision of $18 million during the fourth quarter arose as a result of
two primary factors. First, the Finance Company realized a greater loss per
repossessed vehicle than in earlier periods. In part, the Finance Company
attributed this greater loss to overreliance on auto auctions to dispose of
repossessed vehicles. The Finance Company has since returned to selling the
majority of these vehicles on retail dealer lots, a process that typically takes
longer than the auction process, but which historically has generated results
acceptable for the Company. Management expects that future losses from
repossessions will more closely align with historical levels as a result of
returning to this practice.
Secondly, in a high-growth environment, especially for a relatively young
company such as Reliance, continual reassessment and adjustment of estimates is
required. Based on the Company's most recent analysis, management determined
that the repossession rate and loss per repossessed vehicle had increased,
necessitating an upward adjustment to loss projections and reserves.
Other Income
Other income, which principally includes insurance commissions and warranty
service fees, increased $117,000, or 9%, to $1.4 million in 1996 from
$1.3 million in 1995 and increased $741,000, or 145%, in 1995 from $509,000 in
1994. Both years' increases are principally due to the increase in the number of
branch offices and in finance receivables.
Beginning in early 1996, a management decision was made to include certain fee
income related to warranty financing received on new contracts in the
nonrefundable dealer discount. The revision had the effect of increasing the
discount and accretion income and lowering other income in 1996 when compared to
prior years. A portion of the dealer discount was then accredited into interest
income until accretion of dealer discount was stopped on October 1, 1996.
Operating Expense
The following table shows the Company's operating expenses for the years
indicated in dollars and as a percent of average net receivables (% ANR)
(dollars in thousands):
19
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
$ %ANR $ %ANR $ %ANR
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Operating Expense:
Salaries and benefits...... $ 15,435 5.16 $ 8,679 5.99 $ 4,176 8.56
Occupancy.................. 1,001 0.33 627 0.43 249 0.51
Furniture and Equipment.... 635 0.21 230 0.16 76 0.16
Computer processing........ 420 0.14 427 0.29 215 0.44
Repossession & repair...... 5,313 1.78 284 0.20 109 0.22
Other...................... 7,319 2.45 4,327 2.98 1,527 3.12
-------- ----- -------- ----- -------- -----
Total operating expense.. 30,123 10.07 14,574 10.05 6,352 13.01
======== ===== ======== ===== ======= =====
Average net receivables.... $299,094 $144,964 $48,807
</TABLE>
Operating expense increased $15.5 million, or 106%, to $30.1 million in 1996 as
compared to $14.6 million in 1995. For 1995, operating expense increased $8.2
million, or 129%, to $14.6 million from $6.4 million in 1994. These increases
were primarily attributable to the opening of new branches, the growth in
average net receivables, and the immediate recognition, in 1996, of repossession
and repair expenses. Expenses, excluding repossession and repair expenses and
furniture and equipment expense, as a percentage of average net receivables
showed a consistent decrease as the Company benefited from economies of scale as
individual office sizes grew. The average size office at the end of 1996 was
$9.6 million in gross finance receivables versus $8.8 million at the end of
1995 and $5.3 million at the end of 1994.
Salaries and employee benefits represent the largest category of operating
expense, accounting for 51.2% of the 1996 total versus 59.6% in 1995 and 65.7%
in 1994. Salaries and employee benefits increased $6.7 million, or 77%, to $15.4
million in 1996 from $8.7 million in 1995. During 1995, salaries and employee
benefits increased $4.5 million, or 108%. Salaries and employee benefits expense
includes contributions to the Company's management incentive, employee stock
ownership and profit sharing plans of $1.9 million, $1.5 million and $0.3
million in 1996, 1995 and 1994, respectively. The Company's group health
insurance costs were $0.9 million in 1996 compared with $0.5 million in 1995 and
$0.4 million in 1994. In 1996, 1995 and 1994, the average number of full-time
equivalent employees at the Company was 402, 339, and 140, respectively. The
annual percentage increases of 19% and 142% in 1996 and 1995, respectively, were
due to the growth of the Company in number of offices and finance receivables.
Occupancy expenses increased $374,000, or 60%, to $1.0 million in 1996 from
$627,000 in 1995 and increased $378,000, or 152%, in 1995 from $249,000 in 1994.
These increases were attributable to the Company's opening 17 new branch offices
in 1996 and 11 in 1995. The Company normally leases space for a period of 3
years in Class B professional office buildings.
Furniture and equipment expenses increased $405,000, or 176%, to $635,000 in
1996 from $230,000 in 1995, and increased $154,000, or 203%, in 1995 from
$76,000 in 1994. The majority of these increases related to growth and the
establishment of new offices.
Computer processing expense decreased $7,000, or 2%, to $420,000 in 1996 from
$427,000 in 1995 and increased $212,000, or 99%, in 1995 from $215,000 in 1994.
The decrease in 1996 was attributable to the Company's acquisition, in May 1996,
of an integrated finance contract acquisition, servicing and general ledger
system, thus reducing the Company's cost and reliance on an outside vendor. The
increase from 1994 to 1995 and a portion of 1996 costs were the result of
increased data processing charges from the Company's outside vendor and were
directly attributable to the growth in the number of branch offices and
transactions processed.
20
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
During 1996, the Finance Company repossessed approximately 8,400 vehicles.
Expenses related to repossession and repair of these vehicles for resale
amounted to $5.3 million, or an average of $630 per vehicle. At year end, the
Finance Company had in its inventory 844 repossessed automobiles with an
estimated recovery value of approximately $6 million. It also had $1.2 million
in receivables included in other assets on the balance sheet from insurance
claims and refunds on repossessed automobiles that had been sold.
Other operating expense (which principally includes certain professional fees,
consulting, outside services and other operating expenses, such as telephone,
postage, office supplies and employee travel) increased $3.0 million, or 69%, to
$7.3 million in 1996 from $4.3 million in 1995. During 1995, other operating
expense increased $2.8 million, or 183%, from $1.5 million in 1994. The rise in
other operating expense was generally attributable to increased costs associated
with growth in offices, finance receivables and headcount. These expenses as a
percent of average net receivables continue to trend downward as the economics
of scale at the Company are realized. The average branch size continued to
increase to the 1996 level of $9.6 million in gross finance receivables versus
$8.8 million at the end of 1995.
Income Taxes
The income tax provision from continuing operations for 1996, 1995 and 1993 was
$1.5 million, $4.4 million, and $2.1 million, respectively. As a percentage of
pretax income, income tax expense for 1996 was 41.9%, as compared to 38.6% in
1995 and 39.5% in 1994. The increase in income tax expense as a percentage of
pretax income during 1996 was generally due to the allocation of state income
tax benefits to discontinued operations. Management expects the percentage of
income tax provision to pretax income to approximate pre-1996 rates, in the
future, as earnings continue to grow.
Discontinued Operations
Net income from discontinued operations decreased 1.2% to $16.4 million in 1996
from $16.6 million in 1995. Net interest income increased $3.7 million, or 5.3%,
to $73.1 million during 1996 from $69.4 million in 1995, while tax equivalent
net interest margin remained flat at 4.38% in both 1996 and 1995. The increase
in net interest income is the result of a 5.1 increase in average earning
assets. The tax equivalent net interest margin remained flat due to a 7 basis
point decrease in the yield on average earnings assets offset by a 7 basis
point decrease in the cost of the funds.
Net income from discontinued operations increased 14.7% to $16.6 million in 1995
from $14.5 million in 1994. Net interest income increased $2 million, or 2.8%,
during 1995, while average earning assets increased 7.4% to $1.6 billion. The
decline in the net interest income was attributable to the decline in the tax
equivalent net interest margin to 4.38% in 1995 from 4.88% in 1994. The
decrease in the net interest margin was generally reflective of the increased
cost of interest-bearing deposits and borrowings and a shift from lower cost
interest-bearing demand deposits and savings accounts to time deposits and
borrowed funds.
The provision for loan losses decreased $714,000, or 17.6% to $3.3 million in
1996 from $4.1 million in 1995. The 1995 provision for loan losses decreased
$3.3 million to $4.1 million from $7.4 million in 1994. The ratio of net
charge-offs to average total loans decreased slightly to 0.24% in 1996 from
0.26% in 1995. The 1995 ratio of net charge-offs to average total loans
decreased from 0.26% from 0.41% in 1994.
Noninterest income increased $2.4 million, or 17.2% to $16.7 million in 1996
from $14.2 million in 1995. Service charges totaled $8.7 million in 1996, a
$1.2 million, or 16.5% increase over 1995 service charges of $7.5 million. This
increase is a result of increased deposit account and retail and merchant credit
card service charges. Trust fees increased slightly to $3.6 million in 1996 from
$3.5 million in 1995. Fees received from the sale of insurance and
21
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
brokerage related activities decreased $112,000, or 36.5%, to $195,000 in 1996
primarily as a result of the outsourcing during 1995 of retail branch sales of
insurance and financial services products. Mortgage banking income, which is
comprised of gains and losses on loans originated for sale and loan servicing
income, increased $1.1 million to $2.8 million in 1996 from $1.7 million in
1995. An increase in the volume of loans originated and sold accounts for the
increased income in 1996.
Noninterest income increased to $14.2 million in 1995 from $12.9 million in
1994. Service charges increased $253,000, or 3.5%, to $7.5 million in 1995 and
1994, primarily as a result of increases in retail and merchant credit card
service charges. Trust fees grew to $3.5 million in 1995, an increase of
$444,000, or 14.3%, over 1994 trust fees of $3.1 million. The increase was
attributable to increased employee benefit, land trust and exchange trust
revenues. In February 1995, the Bank completed an acquisition of approximately
1,000 land trust accounts from a financial institution located in the Chicago
metropolitan area. Fees received from the sale of insurance and brokerage
related activities decreased $253,000, or 45.2%, in 1995 from 1994. This
decrease was primarily attributable to the outsourcing during 1995 of retail
branch sales of insurance and financial services products. Mortgage banking
income increased to $1.7 million in 1995 from $694,000 in 1994. The increase in
1995 mortgage banking income was primarily attributable to the adoption of SFAS
No. 122, "Accounting for Mortgage Servicing Rights," which resulted in $895,000
of additional income. In addition, 1995 income benefited from a $487,000 gain
on a bulk sale of mortgage servicing rights, offset by a decline in loan
servicing income.
Noninterest expense increased 7.8% to $61.5 million in 1996 from $57.1 million
in 1995. Salaries and employee benefits increased $1.8 million, or 5.7% to
$32.6 million in 1996 form $30.8 million in 1995 primarily as a result of the
start-up of the mortgage subsidiary, which began operations in November 1995.
Occupancy and furniture and equipment expenses totaled $8.5 million in 1996, a
$793,000 or 10.3% increase over 1995. This increase is largely due to increases
in amortization of new computer equipment and increased rent and real estate
taxes. Computer processing fees increased $370,000, or 21.6%, in 1996 over 1995
as a result of increased charges from the Bank's data processor and volume
increases on credit card processing charges. Legal expenses increased $823,000,
or 45.3%, as a result of the split-off transaction. Advertising and public
relations increased slightly over the prior years totaling $1.9 million in 1996
as compared to $1.8 million in 1995. FDIC deposit insurance decreased $1.4
million in 1996 as compared to 1995 as a result of the reductions in the premium
rate assessed the Bank. Other real estate and repossessed asset expense
decreased $474,000, or 40.5%, to $695,000 in 1996 as compared to $1.2 million in
1995. This decrease is attributable to gains recognized on the disposition of
other real estate and repossessed assets.
Noninterest expense increased less than 1% to $57.1 million in 1995 from $56.6
million in 1994. FDIC deposit insurance decreased $1.2 million as a result of
the reductions in the premium rates assessed. Computer processing fees
increased $268,000, or 18.6%, in 1995 over 1994 as a result of the increased
cost of retail credit card processing and charges for phone lines associated
with the Bank's wide area computer network. Advertising and public relations
decreased $602,000, or 25.2%, in 1995 due to reduced amounts of television and
radio advertisements relating to the Bank's "Sweat Equity" marketing campaign.
Legal expenses increased $634,000, or 53.6%, as a result of increased litigation
costs associated with various legal actions concluded in 1995. Furniture and
equipment expense increased $270,000, or 11.2%, as a result of increased
depreciation charges, primarily related to technology enhancements.
Liquidity
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Company's ability to repay borrowings as they mature and to make new loans and
investments as opportunities arise.
22
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The Company's purchase of sales finance contracts are primarily financed with
funds drawn pursuant to the senior secured revolving credit agreement, proceeds
of asset securitization, cash flow from maturing sales finance contracts and
other borrowings (including subordinated borrowings). Prior to January 1997,
the Company also used commercial paper extensively to fund its operations. The
Company began issuing commercial paper in 1995. Commercial paper issuances must
meet the borrowing base requirements, as contained in the revolving credit
facility described previously, since that facility also serves as the commercial
paper backup facility.
As indicated above, the Finance Company has financed its operations to date
primarily through intercompany loans, bank loans and commercial paper sources.
After the split-off, the Company's current sources of funds may not be adequate
to fully support the Company's growth plans. Consequently, the Company is
actively pursuing new sources of funds, such as securitizations of automobile
loans as well as public and private offerings of debt securities. In this
connection, in November 1996, the Company completed a $126 million asset
securitization. The terms of such securitization include provisions that relate
to acceptable ratios of delinquencies and defaulted receivables and other
matters. Should the Company's actual experience on a monthly basis exceed
certain thresholds, the Company could lose access to a significant portion of
cash from the repayment of obligations by borrowers or be subject to an
accelerated pay-down of the obligation to the securitization's note holders, or
both. In addition, either of these results might circumscribe the Company's
ability to complete securitizations of assets in the future. As of February 28,
1997, the date of the most recently completed report, the Company had not
exceeded these thresholds. Unless current trends in delinquencies and defaulted
receivables reverse themselves or unless the terms of the securitization are
revised, the Company could in the near future exceed these thresholds.
Prior to January 1997, a significant portion of the Company's funding had been
obtained from commercial paper with maturities of 270 days or less. Because the
Company's finance receivables have average maturities in excess of one year, the
Finance Company's net interest income (and margin) can be negatively impacted in
periods of rising interest rates. In addition, the Finance Company's continued
growth is dependent upon its continued ability to obtain sufficient financing to
fund its purchases of finance contracts.
Cash inflows from operating activities exceeded operating outflows by $24.3
million in 1996, $18.1 million in 1995 and $17.4 million in 1993. Interest
received net of interest paid is the principal source of operating cash inflows
in each of the above periods. Market conditions and management of investing and
financing activities determine the level and the stability of net interest cash
flows.
Net cash outflows from investing activities were $179.5 million in 1996 as
compared to $141.7 million in 1995 and $90.0 million in 1994. In each of the
aforementioned years, the majority of the net cash outflows from investing
activities were the result of new loan volume.
Net cash inflows from financing activities were $157.0 million in 1996 as
compared to $122.8 million in 1995 and $77.8 million in 1994. All cash inflows
from financing activities were primarily the result of borrowings for the
purpose of funding new loan volume.
The Company's ability to pay dividends to its stockholders is limited pursuant
to its revolving credit agreement. While it is the Company's intention to
continue to pay cash dividends on its common stock, there is no assurance that
dividends will be paid in the future.
Effects of Inflation
A financial service organization's assets and liabilities are primarily
monetary. Therefore, a financial service organization does not necessarily gain
or lose due to the effects of inflation. Moreover, changes in interest rates,
which are a major determinant of a financial service organization's
profitability, do not necessarily correspond to
23
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
changes in the prices of goods and services. An analysis of a financial service
organization's asset and liability structure provides the best indication of how
a financial services organization is positioned to respond to changing interest
rates and maintain profitability.
The financial statements have been prepared primarily on an historical basis
which is mandated by generally accepted accounting principles. Fluctuations in
the relative value of money due to inflation or recession generally are not
considered.
Additional Accounting Pronouncements
Statement of Financial Accounting Standards No. 123, Accounting and Disclosure
of Stock-Based Compensation ("SFAS No. 123"), is effective for fiscal years
beginning after December 15, 1995. SFAS No. 123 encourages, but does not
require, entities to recognize expense for stock-based awards based on their
fair value on the date of grant. Under SFAS No. 123, entities may continue
following the existing accounting rules (the intrinsic value method, which often
results in no compensation expense), provided that pro forma disclosures are
made of what net income and earnings per share would have been had the new fair
value method been used. To do this, the fair value of options and similar awards
will have to be calculated using complex valuation techniques. Additionally,
this new standard requires entities to make significantly more disclosures
regarding employee stock options than are now required. Management has decided
not to adopt the fair value accounting encouraged by the Standard. See financial
statement disclosure in note 8 to consolidated financial statements.
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
125") was issued in June 1996, and is effective for fiscal years beginning
after December 31, 1996. SFAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on a consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Under the financial-components
approach, after a transfer of financial assets, an entity recognizes all
financial and servicing assets it controls and liabilities it has incurred and
derecognizes financial assets it no longer controls and liabilities that have
been extinguished. If a transfer does not meet the criteria for a sale, then the
transfer is accounted for as a secured borrowing with pledge of collateral. The
Company adopted FAS 125 effective January 1, 1997 and does not expect the
Standard to have a material impact on its financial condition or results of
operations.
24
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
-----------------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements of the Company as of
December 31, 1996 and for the periods then ended, have been derived from the
Company's consolidated financial statements included in the Company's Current
Report on Form 10-K for the period ended December 31, 1996 and reflect the
Split-Off of the Company's banking segment, consisting of the Bank and the
Mortgage Company. The pro forma statements begin with the historical amounts
which have been reclassified to reflect the banking segment as discontinued
operations. The pro forma adjustments reflect the exchange of cash, automobile
receivables and shares to effect the Split-Off. The pro forma balance sheet
assumes that the Split-Off was consummated at the end of the reporting period
and includes nonrecurring expenses directly attributable to the transaction. The
pro forma income statement assumes the transaction was consummated at the
beginning of the reporting period and gives effect to items that are directly
attributable to the transaction and expected to have a continuing effect on the
Company. The unaudited pro forma consolidated financial statements are not
necessarily indicative of the Company's future financial position or results of
operations.
Notes to Unaudited Pro Forma Consolidated Financial Statements
(a) Reflects the tender of 4,500,000 shares of the Company's Common Stock from
the Taylor Family and certain other persons to the Company, the transfer of
$52 million and the transfer of $31 million fair market value of Automobile
Receivables from the Bank, in exchange for the Company's net investment in
the Bank, Mortgage Company and Alpha Capital Fund. The 4,500,000 shares
acquired are reflected as treasury shares at their fair value, which is the
average market price of the stock for the few days surrounding the date of
the Share Exchange Agreement and the announcement of the transaction. The
accounting gain on the transaction is reflected as a credit to retained
earnings. The cash received is assumed to be used to reduce other debt at
the Company and then bank debt at the Finance Company.
One time charges of $2.3 million, net of income tax effect, for financial
advisers, investment bankers and special payments to certain employees as a
result of the Split-Off Transaction are considered as a reduction in
proceeds for purposes of calculating the gain. Included in income from
discontinued operations for the period ended December 31, 1996 is
approximately $1.6 million of expenses directly attributable to the Split-
Off Transaction.
(b) Reflects the exercise of the Taylor Family stock options and the use of the
cash received from their exercise to reduce borrowings and the tax benefit
used to increase income taxes receivable.
(c) Reflects the related interest income, loan fees and late charges earned on
the Automobile Receivables transferred to the Company from the Bank, along
with the provision for credit losses, salaries and benefits of employees
and other direct costs of originating and servicing these Automobile
Receivables.
(d) Reflects the reduction in interest expense as a result of the debt
reductions from the cash received through the sale of the net assets of
discontinued operations and the exercise of the Taylor Family Options.
(e) Reflects the tax effect of the pro forma adjustments at a 38% effective tax
rate.
(f) The pro forma statements do not reflect the possible exercise of Bank
employee stock options, all of which become fully vested as a result of the
Split-Off Transaction and all options will expire within 90 days of the
transaction. Total Bank employee options outstanding at December 31, 1996
were 520,491 shares with a weighted average exercise price of $17.77.
25
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Year
ended Pro forma
December 31, 1996 adjustments Pro forma
----------------- ----------- -----------
<S> <C> <C> <C>
Interest Income
Interest and fee income $ 71,521 $ 3,439 (c) $ 74,960
Interest expense 21,136 (4,021)(d) 17,115
Net Interest income 50,385 7,460 57,845
Provision for credit losses 18,000 600 (c) 18,600
Net interest income after provision
for credit losses 32,385 6,860 39,245
Other Income 1,367 -- 1,367
Operating expense:
Salaries and employee benefits 15,435 417 (c) 15,852
Occupancy 1,001 60 (c) 1,061
Furniture, fixtures and equipment, net 635 48 (c) 683
Computer processing 420 84 (c) 504
Repossession & repair expense 5,313 36 (c) 5,349
Other operating expense 7,319 167 (c) 7,486
----------- ----------- -----------
Total operating expense 30,123 812 30,935
----------- -----------
Income from continuing operations before income taxes 3,629 6,048 9,677
Income taxes 1,524 2,293 (e) 3,817
----------- ----------- -----------
Net income from continuing operations $ 2,105 $ 3,755 $ 5,860
Discontinued operations:
Income from discontinued operations before income taxes 24,913 (24,913) --
Income taxes 8,509 (8,509) --
----------- ----------- -----------
Net income from discontinued operations 16,404 (16,404) --
----------- ----------- -----------
Net income 18,509 (12,649) 5,860
=========== =========== ===========
Average number of common and common 99,605 (b)
equivalent shares outstanding 15,255,629 (4,500,000)(a) 10,855,234
=========== =========== ===========
Net income per share from continuing operations $ 0.14 $ 0.54
===========
Net income per share from discontinued operations $ 1.07
-----------
Net income per share $ 1.21
===========
</TABLE>
See accompanying note to the Unaudited Pro Forma Consolidated Financial
Statements.
26
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(formerly known as Cole Taylor Financial Group, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, Pro forma
1996 adjustments Pro forma
------------ ----------- ---------
<S> <C> <C> <C>
Assets
- ------
Cash $ 4,546 $ 1,071 (a) $ 5,617
Short-term investments 2,110 -- 2,110
Finance receivables, net before allowance
for credit losses 372,630 31,000 (a) 403,630
Allowance for credit losses (4,913) -- (4,913)
-------- --------- ---------
Finance receivables, net of allowance 367,717 31,000 398,717
Repossessions 5,927 -- 5,927
Other assets 20,708 722 (a) 23,304
1,874 (b)
Net assets of discontinued operations 152,014 (152,014)(a) --
-------- --------- ---------
Total assets $553,022 $(117,547) $ 435,675
======== ========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Commercial paper $147,326 $ -- $ 147,326
Other debt 221,394 (52,700)(e) 165,928
(2,766)(b)
Accounts payable and other liabilities 8,651 2,391 (a) 11,042
-------- --------- ---------
Total liabilities $377,371 $ (53,075) $ 324,296
-------- --------- ---------
Stockholders' equity:
Common stock 150 3 (b) 153
Surplus 82,793 4,637 (b) 87,430
Retained Earnings 92,708 48,088 (a) 140,796
Treasury Stock -- (117,000)(a) (117,000)
-------- --------- ---------
Total stockholders' equity 175,651 (64,272) 111,379
-------- --------- ---------
Total liabilities and stockholders' equity $553,022 $(117,347) $ 435,675
======== ========= =========
</TABLE>
See accompanying notes to the Unaudited Pro Forma Consolidated Financial
Statements
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Reliance Acceptance Group, Inc. (formerly known as Cole Taylor Financial
Group, Inc.):
We have audited the consolidated balance sheets of Reliance Acceptance Group,
Inc. (formerly known as Cole Taylor Financial Group, Inc.) and subsidiaries
("the Company") as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three years ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Reliance
Acceptance Group, Inc. (formerly known as Cole Taylor Financial Group, Inc.) and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three year periods
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
March 3, 1997
28
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(Formerly known as Cole Taylor Financial Group, Inc.)
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash ($3,937 restricted as of December 31, 1996) $ 4,546 $ 3,375
Short-term investments, at cost which approximates market 2,110 1,454
Finance receivables, net 383,348 231,726
Nonrefundable dealer discounts (10,718) (12,655)
Allowance for credit losses (4,913) --
-------- --------
367,717 219,071
Repossessions 5,927 5,235
Income tax refund receivable 9,180 --
Other assets 11,528 4,774
Net assets of discontinued operations 152,014 138,653
-------- --------
Total assets $553,022 $372,562
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper $147,326 $127,268
Other debt 221,394 82,657
Accounts payable and other liabilities 8,651 8,020
-------- --------
Total liabilities 377,371 217,945
-------- --------
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares issued and
outstanding at December 31, 1996 and 1995 -- --
Common stock, $.01 par value; 40,000,000 shares authorized; 15,036,720 and
14,571,429 shares issued and outstanding at December 31, 1996, and December
31, 1995, respectively 150 146
Class A common stock, $.01 par value; 2,000,000 shares authorized; no shares
issued and outstanding at December 31, 1996 and 1995 -- --
Surplus 82,793 75,212
Retained earnings 92,708 79,516
Employee Stock Ownership Plan loan -- (257)
-------- --------
Total stockholders' equity 175,651 154,617
-------- --------
Total liabilities and stockholders' equity $553,022 $372,562
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(Formerly known as Cole Taylor Financial Group, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest and fee income $71,521 $36,419 $14,199
Interest expense 21,136 11,594 3,314
------- ------- -------
Net interest income 50,385 24,825 10,885
Provision for credit losses 18,000 -- (363)
------- ------- -------
Net interest income after provision
for credit losses 32,385 24,825 11,248
Other income 1,367 1,250 509
------- ------- -------
Operating expense:
Salaries and employee benefits 15,435 8,679 4,176
Occupancy 1,001 627 249
Furniture, fixtures and equipment 635 230 76
Computer processing 420 427 215
Repossession & repair expense 5,313 284 109
Other operating expense 7,319 4,327 1,527
------- ------- -------
Total operating expense 30,123 14,574 6,352
------- ------- -------
Income from continuing operations before income taxes 3,629 11,501 5,405
Income taxes 1,524 4,439 2,133
------- ------- -------
Net income from continuing operations 2,105 7,062 3,272
------- ------- -------
Discontinued operations:
Income from discontinued operations before income taxes 24,913 22,521 20,342
Income taxes 8,509 5,911 5,855
------- ------- -------
Net income from discontinued operations 16,404 16,610 14,487
------- ------- -------
Net income $18,509 $23,672 $17,759
======= ======= =======
Earnings per share from continuing operations $ 0.14 $ 0.47 $ 0.23
Earnings per share from discontinued operations 1.07 1.09 1.03
------- ------- -------
Earnings per share $ 1.21 $ 1.56 $ 1.26
======= ======= =======
Cash dividends declared per share $ 0.36 $ 0.28 $ 0.18
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(Formerly known as Cole Taylor Financial Group, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Employee
Stock
Voting Ownership
--------------- Retained Plan (ESOP)
Common Class A Surplus Earnings Loan Total
--------------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994.................. $103 $ 17 $45,705 $44,706 $ (429) $ 90,102
Reduction of loan to ESOP.................. 86 86
Net proceeds from issuance
of common stock -- 2,300,000 shares....... 23 27,280 27,303
Restricted common stock issued in
connection with long-term incentive
plan, 2,921 shares...................... 32 32
Exercise of common stock options in
connection with long-term incentive
plan, 85,962 shares -- net of 6,434
restricted shares canceled.............. 1 374 375
Payments to acquire and retire common
stock -- 22,000 shares.................. (303) (303)
Conversion of Class A common stock to
common stock -- 1,708,000 shares........ 17 (17) --
Conversion of mandatory convertible
note-- 90,910 shares.................... 1 1,249 1,250
Tax benefit associated with exercise of
common stock options.................... 260 260
Dividends:
Common -- $0.18125 per share........... (2,489) (2,489)
Class A -- $0.13125 per share.......... (58) (58)
Net income............................... 17,759 17,759
------- ------- ------- ------- -------- --------
Balance at December 31, 1994................ 145 -- 74,597 59,918 (343) 134,317
Reduction of loan to ESOP................ 86 86
Exercise of common stock options in
connection with long-term incentive
plan, 73,312 shares -- net of 588
restricted shares canceled............. 1 461 462
Payments to acquire and retire common
stock -- 10,236 shares................. (220) (220)
Tax benefit associated with exercise of
common stock options................... 374 374
Dividends:
Common -- $0.28 per share.............. (4,074) (4,074)
Net income............................... 23,672 23,672
------- ------- ------- ------- -------- --------
Balance at December 31, 1995................ 146 -- 75,212 79,516 (257) 154,617
Reduction of loan to ESOP................ 257 257
Exercise of common stock options in
connection with long-term incentive
plan, 465,291 shares -- net of 49,313
restricted shares canceled............. 4 4,327 4,331
Payments to acquire and retire common
stock -- 10,236 shares.................
Tax benefit associated with exercise of
common stock options................... 3,254 3,254
Dividends:
Common -- $0.36 per share.............. (5,317) (5,317)
Net income............................... 18,509 18,509
------- ------- ------- ------- -------- --------
Balance at December 31, 1996................ $150 $ -- $82,793 $92,708 $ -- $175,651
======= ======= ======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(Formerly known as Cole Taylor Financial Group, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 18,509 $ 23,672 $ 17,759
Adjustments to reconcile net income to net cash provided by
operating activities:
Dealer discount accretion (3,106) (2,279) (2,059)
Provision (reduction of allowance) for credit losses 18,000 -- (375)
Deferred income taxes 1,171 (20) 163
Depreciation and amortization 1,211 152 199
Other, net -- 6 (13)
Changes in assets and liabilities:
Income Tax refund receivable (9,180) -- --
Other assets (1,701) (6,503) (1,849)
Accounts payable and other liabilities (540) 3,075 3,570
---------- --------- --------
Net cash provided by operating activities 24,364 18,103 17,395
---------- --------- --------
Cash flow from investing activities:
Loan repayments 127,029 64,547 20,569
Loan originations (291,261) (192,671) (89,162)
Capital expenditures, net (1,935) (772) (304)
Net increase in assets of discontinued operations prior to
split-off (13,361) (12,815) (21,095)
---------- --------- --------
Net cash used in investing activities (179,528) (141,711) (89,992)
---------- --------- --------
Cash flows from financing activities:
Proceeds from commercial paper 1,202,006 540,420 --
Repayments of commercial paper (1,181,948) (413,152) --
Proceeds from other debt 551,131 188,400 121,500
Repayments of other debt (412,082) (189,000) (68,500)
Debt issuance expense (1,462) (324) (355)
Net proceeds from issuance of common stock 4,331 462 27,678
Payments to acquire common stock -- (220) (303)
Dividends paid (4,985) (3,779) (2,199)
---------- --------- --------
Net cash provided by financing activities 156,991 122,807 77,821
---------- --------- --------
Net (decrease) increase in cash and cash equivalents 1,827 (801) 5,224
Cash and cash equivalents, beginning of year 4,829 5,630 406
Cash and cash equivalents, end of year $ 6,656 $ 4,829 $ 5,630
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(Formerly known as Cole Taylor Financial Group, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOW (continued)
(in thousands)
Supplemental disclosure of cash flow information for the three years ended
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest $19,884 $11,613 $2,806
Income taxes 11,093 2,253 519
Supplemental disclosures of noncash investing and financing activities:
Conversion of mandatory convertible note to common stock -- -- 1,250
Dividends declared but not paid 1,352 1,020 725
Compensation paid through issuance of common stock -- -- 32
Tax benefit associated with exercise of common stock options 3,254 374 260
Reduction in ESOP loan 257 86 86
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
(Formerly known as Cole Taylor Financial Group, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
The consolidated organization consists of Reliance Acceptance Group, Inc.
(formerly known as Cole Taylor Financial Group, Inc.) (the "Company" or the
"Parent Company") and its subsidiaries, Reliance Acceptance Corporation
(formerly known as Cole Taylor Finance Co.) (the "Finance Company"), Cole
"Taylor Bank (the "Bank") and CT Mortgage Company, Inc. (the "Mortgage
Company"). The Finance Company operates through wholly owned subsidiaries
under the name Reliance Acceptance Corp. The Bank and Mortgage Company are now
accounted for as discontinued operations as fully described in note 2.
2. Discontinued Operations:
On June 12, 1996 the Board of Directors of the Company approved a
definitive share exchange agreement providing for the split-off of the Bank and
Mortgage Company to an investment group headed by the Company's Chairman Jeffrey
Taylor, President Bruce Taylor and Company director and co-founder Sidney
Taylor. Under the terms of the agreement, the Company will receive between 4.0
and 4.5 million shares of common stock of the Company plus (i) the Bank's used
automobile receivables business, principally consisting of cash and sales
finance receivables secured by automobiles, and (ii) cash amounts.
On February 12, 1997 (the "Closing Date"), pursuant to an Amended and
Restated Exchange Agreement (the "Share Exchange Agreement") dated as of June
12, 1996, Reliance Acceptance Group, Inc. ("RAG") (until the Closing Date, known
as "Cole Taylor Financial Group, Inc.," ("CTFG")) and the Taylor Family Group
(as defined below), completed the exchange of (1) 1 share of Common Stock, $.01
par value per share, of Taylor Capital Group, Inc., a subsidiary of RAG,
holding, among other things, all of the capital stock of Cole Taylor Bank (the
"Bank"), CT Mortgage Company, Inc. and an investment in Alpha Capital Fund II,
L. P. ("Alpha Capital"), which went to the Taylor Family Group, for (b) all of
the 4.5 million shares of Common Stock, $.01 par value per share, of RAG owned
by the Taylor Family Group, which went to RAG (the "Share Exchange"). Prior to
the Share Exchange, the Bank transferred to Cole Taylor Auto Finance, Inc.
("Auto Sub"), a newly formed subsidiary of the Bank, which was subsequently
transferred to RAG prior to the Share Exchange, the Bank's used automobile
receivables business consisting of, among other things, used automobile finance
contracts with a fair market value of $31 million, and $52.03 million in cash.
At the same time as the Share Exchange, Reliance Acceptance Corporation
(formerly Cole Taylor Finance Co.), a subsidiary of RAG, was merged with and
into Auto Sub (the "Merger"), and the surviving corporation was renamed Reliance
Acceptance Corporation. The terms of the transaction were the result of arm's
length negotiations between the Board of Directors of RAG, assisted by
independent financial and legal advisors, and the Taylor Family Group, and the
transaction was approved by the Board without the participation of members of
the Taylor Family and by the stockholders of RAG at its Annual Meeting held on
November 15, 1996. The Taylor Family Group consists of Jeffrey W. Taylor, Bruce
W. Taylor, Sidney J. Taylor, Iris A. Taylor, who is a trustee of several trusts
that are part of the Taylor Family Group, Cindy Taylor Bliel, related trusts and
a related partnership. Certain present and former directors of the Bank (Edward
McGowan, Richard Kaplan, Ronald Emanuel and Corky Eisen) who are not members of
the Taylor Family are investors in the partnership that is part of the Taylor
Group. Until the Share Exchange, Jeffrey W. Taylor had been a director and the
Chairman of the Board and Chief Executive Officer of CTFG and Chairman of the
Bank, Bruce W. Taylor had been a director and President of CTFG and President
and Chief Executive Officer of the Bank, and Sidney J. Taylor had been a
director of CTFG and chairman of the Executive Committee of CTFG's board of
directors. Melvin E. Pearl, who until the Share Exchange was a director of CTFG,
is a trustee of several trusts that are part of the Taylor Family Group.
The split-off entity, consisting of the Bank and Mortgage Company,
qualifies as discontinued operations as defined in Accounting Principles Board
Opinion 30 (APB 30). Accordingly, the Company's consolidated balance sheets as
of December 31, 1996 and 1995, and the related consolidated statements of income
December 31, 1996, changes in stockholders' equity and cash flows for each of
the years in the three year period ended December 31, 1996, have been presented
to reflect the split-off entity's net assets and financial operations as
discontinued operations. The split-off will be accounted for as a non-reciprocal
distribution to stockholders and an accounting gain of $48 million was recorded
by the Company. The assets and liabilities of the discontinued operations have
been
34
<PAGE>
separately classified on the accompanying consolidated balance sheets as net
assets of discontinued operations. A summary of these assets and liabilities is
included in note 13 of these financial statements.
Condensed unaudited pro forma financial information reflecting the consummation
of the transaction as if it occurred on December 31, 1996 for balance sheet
purposes and January 1, 1996 for income statement purposes is as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
(unaudited)
-----------------
<S> <C>
Finance Receivables, net of allowance $398,717
Other assets 36,958
--------
Total assets $435,675
========
Commercial paper and Other Debt $313,254
Other liabilities 11,042
Stockholders equity 111,379
--------
$435,675
========
Year ended
December 31, 1996
(unaudited)
-----------
Net income form continuing operations $ 5,860
========
Net income per share from continuing operations $ 0.54
========
</TABLE>
3. Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements report the operations of the Finance
Company and applicable assets, liabilities and expenses of the Parent Company as
continuing operations. The Bank and Mortgage operations and a portion of the
Parent Company expenses are reported as discontinued operations. The accounting
and reporting policies conform to generally accepted accounting principles and
to the general reporting practices within the finance and banking industries.
All significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles, requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The areas which are subject to estimation
techniques most significantly, include the adequacy of the nonrefundable dealer
discounts and the allowance for credit losses. These estimates may differ from
actual results.
Revenue Recognition:
Finance charges on precomputed notes are credited to unearned finance
charges at the time the notes are acquired and amortized into income using the
actuarial method, which approximates the level yield method. When an account
becomes 90 or more days contractually delinquent, the accrual of income is
suspended.
35
<PAGE>
Late charges and deferment charges are taken into income as collected. Extension
fees are taken into income on the same basis as finance charges.
In conjunction with its financing activities, the Finance Company, as agent
for unaffiliated insurers, receives commissions on credit life, accident and
health, collateral protection and vehicle warranty insurance. Commissions on
credit life and accident and health insurance are taken into income on the same
basis as finance charges. Commissions on collateral protection and vehicle
warranty insurance are taken into income on a straight-line basis over 12 months
and 13 months, respectively, which approximates the average contractual term of
the related policies. This method does not differ materially from the actuarial
method.
The net amount of participations in commissions received from dealers for
financing dealer-placed insurance and participations in commissions paid to
dealers for selling company-placed insurance are included in deferred income and
amortized into income over the estimated average terms of such underlying
insurance policies. Credit life and accident and health insurance commissions
are taken into income on a sum-of-the-digits method over a period of 24 months.
This method does not differ materially from the actuarial method.
Allowance for Credit Losses and Nonrefundable Dealer Discounts:
In conjunction with the financing of installment contracts, agreements are
entered into with dealers whereby nonrefundable dealer discounts are established
to protect the Finance Company from potential losses associated with such
contracts.
Effective January 1, 1996, the Company's accounting treatment for
nonrefundable dealer discounts was revised to follow guidelines analogous to the
treatment prescribed in AICPA Practice Bulletin 6, Amortization of Discounts on
Certain Acquired Loans. The Company stratifies its installment contracts
receivable by month of purchase (referred to as "pools") to evaluate the
adequacy of the nonrefundable dealer discounts allocated to such pools. If the
nonrefundable dealer discounts associated with an individual pool of installment
contracts receivable are estimated to be deficient to cover known and currently
estimable losses for that pool, an allowance for credit losses is used to absorb
such deficiency. Any required increase in the allowance for credit losses is
recognized as an additional provision for credit losses. If the nonrefundable
dealer discounts associated with an individual pool of installment contracts
receivable are estimated to exceed known and currently estimable losses for that
pool, such excess may be accreted to interest income over the remaining life of
the respective pool, using a method that approximates the level yield method.
Management's evaluation as to the adequacy of the nonrefundable dealer discount
to absorb losses is based on historical experience of the portfolio, estimates
of the collectibility of the accounts, the value of the underlying collateral,
and current economic conditions.
36
<PAGE>
Repossessed Assets:
Effective January 1, 1996, the Company's policy regarding repossessions was
revised to require that repossessed assets and deficiency balance accounts
(account balances remaining after the sale of a repossessed asset to be
satisfied by the refundable portions of insurance and warranty policies) be
charged down to the estimated net realizable value at the time of repossession.
Previously, repossessed assets and balances remaining after repossession and
sale were charged down to the estimated net realizable value in the month
following the 90 and 60 day agings, respectively.
The repossession policy was also revised, effective January 1, 1996, to
provide for the recognition in other operating expenses of repossession expenses
which were formerly capitalized to the related repossessed asset.
Cash and Cash Equivalents:
The Company considers its cash and short term investments to be cash and
cash equivalents for purposes of the statement of cash flows. Short-term
investments consist of overnight purchase of securities under agreements to
resell. The investments are carried at cost, which approximates market.
Furniture, Fixtures, and Equipment:
Furniture, fixtures, and equipment are carried at cost less accumulated
depreciation. Depreciation is charged to expense using the straight-line method
over three to ten years, the estimated useful lives of the assets.
Income Taxes:
The Company files a consolidated federal income tax return. The income tax
provision is computed in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109 and consists of current income taxes payable and the
change in deferred income taxes provided for temporary differences. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying value of assets and liabilities for financial reporting purposes and
the values used for income tax purposes. Deferred income taxes are recorded at
the statutory Federal and state rates at the time the temporary differences are
expected to reverse.
Earnings Per Share:
The weighted average number of common and common equivalent shares
outstanding for purposes of computing earnings per share was 15,255,629,
15,222,426 and 14,077,776 in 1996, 1995 and 1994 respectively. Weighted average
shares outstanding include common and common equivalent shares attributable to
outstanding stock options under the long-term incentive plan using the treasury
stock method in each of the periods.
4. Finance Receivables:
All finance receivables are sales finance contracts; the Finance Company
has no direct loans. Finance receivables are accounted for on a discount basis
and generally have terms of 18 to 48 months, with maximum terms of 60 months.
Finance receivables outstanding at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Gross finance receivables: $507,166 $315,908
Less:
Unearned finance charges 123,092 83,612
Unearned insurance commissions 726 229
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Unearned processing fee --- 341
------------------
Finance receivables, net 383,348 231,726
==================
</TABLE>
During the years ended December 31, 1996 and 1995, cash collections of
principal amounts of sales finance receivables (excluding finance charges
earned, nonrefundable dealer discounts, and processing fees) totaled
approximately $127,029,000 and $64,547,000, respectively, and the ratio of these
cash collections to average principal balances was 40.60% and 44.54%,
respectively.
The Company's offices in Texas accounted for approximately 42% and 42% of
gross finance receivables as of December 31, 1996 and 1995, respectively, and
offices in Georgia accounted for approximately 14% and 12% of gross receivables
as of December 31, 1996 and 1995, respectively. Each of the remaining states
where offices are located accounted for less than 10% of the total gross finance
receivables throughout the two years.
A summary of the activity in the allowance for credit losses and the
nonrefundable dealer discount for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
Allowance for Nonrefundable
credit losses dealer discount
-------------------------------
<S> <C> <C>
(in thousands)
Balance December 31, 1993 $ 375 $ 1,157
Provision/dealer discount established (375) 6,729
Finance receivables charged to dealer discount,
net of recoveries -- (476)
Finance receivables charged to allowance for credit
losses -- --
Discount accretion -- (2,059)
-------------------------------
Balance December 31, 1994 -- 5,351
Provision/dealer discount established -- 13,992
Finance receivables charged to dealer discount,
net of recoveries -- (4,642)
Discount accretion -- (2,046)
-------------------------------
Balance December 31, 1995 $ -- $ 12,655
Provision/dealer discount established 18,000 21,976
Finance receivables charged to dealer discount,
net of recoveries -- (20,807)
Finance receivables charged to allowance for credit
losses (13,087) --
Discount accretion -- (3,106)
------------- ==============
Balance December 31, 1996 $ 4,913 $ 10,718
============= ==============
</TABLE>
The gross outstanding balances of delinquent loans on which interest income
was suspended totaled approximately $4,519,000 and $1,024,000 at December 31,
1996 and 1995, respectively.
5. Commercial Paper:
During the second quarter of 1995, the Finance Company began issuing
commercial paper. The commercial paper program is limited to $200 million and is
supported by the Finance Company's revolving credit agreement and subject to the
borrowing limitations contained in the revolving credit agreement. As of
December 31, 1996 and 1995, there was $147.3 million and $127.3 million,
respectively, in commercial paper outstanding. Rates during 1996 and 1995 ranged
from 5.51% to 6.30% and from 5.95% to 6.48%, respectively. Original terms ranged
from one to 270 days for both years. Rates at December 31, 1996 ranged from
5.70% to 6.20% and the maturity dates ranged from January 1997 through July
1997.
38
<PAGE>
6. Other Debt:
Other debt consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
(in thousands)
PARENT COMPANY:
Subordinated notes bearing interest at 9% payable monthly,
maturing June 15, 2001 $ 25,000 $25,000
$30 million unsecured revolving loan, bearing interest at prime
rate or LIBOR plus 1.5%, maturing June 30, 1997; a commitment
fee of .25% per annum on the unused portion of the credit line
is payable annually 22,700 --
Employee Stock Ownership Plan ("ESOP") loan,
collateralized by a pledge of the Company's stock held
by the ESOP; bearing interest at 8%; payable in annual
principal installments of $86,000 plus interest until
June 15, 1998, repaid in 1996 -- 257
FINANCE COMPANY:
Revolving credit agreement bearing interest at reference rate
plus .50% or adjusted LIBOR plus 2.25%, maturing July 12, 1997, 55,550 57,400
Reliance Auto Receivable Corporation $126,060,667 Asset
Backed Notes, Series 1996-A, bearing interest at a rate of 6.10% 118,144 --
-------- -------
Total $221,394 $82,657
======== =======
</TABLE>
The agreement under which the Parent Company's revolving loan was issued
includes financial covenants relating to the amount of tangible net worth (as
defined), the ratio of indebtedness to tangible net worth, the ratio of
nonperforming assets to primary capital (as defined), and the amount of net
income. It also contains restrictions as to mergers or disposals of assets and
creation of liens on assets owned or acquired. As of December 31, 1996 and 1995,
the Company was in compliance with the provisions of the agreement. The
revolving loan was paid in full and cancelled on February 12, 1997.
During 1996, the Finance Company's revolving credit agreement was amended and
increased from $200 million to $250 million. The average usage of the lines of
credit during 1996 and 1995 was $62,502,307 and $51,683,333, respectively. The
rate at December 31, 1996 was 8.75% and rates at December 31, 1995 ranged from
7.94% to 9.00%. The Company is also obligated to pay an annual unused line fee
of 1/8th of 1% on the amount by which the total credit facility exceeds the
average unpaid loan during the month, an annualized fee equal to 5/16th of 1% of
the average commercial paper outstanding during the month, and an audit fee of
up to $200 per branch per month.
39
<PAGE>
The revolving credit agreement borrowings are secured by the Finance Company's
receivables. The agreement includes financial covenants relating to the ratio of
debt to adjusted tangible net worth (as defined), the ratios of the allowance
for loan losses and nonrefundable dealer discounts to finance receivables, the
ratio of unsubordinated debt to borrowing base (as defined), the ratio of
adjusted net income (as defined) to interest expense and to fixed charges (as
defined), and the charge-off policy. It also contains restrictions amongst
others, as to dividend payments, merger or disposal of assets and creation of
liens on assets owned or acquired. As of December 31, 1996, the Finance Company
was in default of covenants relating to the ratio of debt to adjusted tangible
net worth (as defined), the ratio of adjusted net income (as defined) to
interest expense, the ratio of unsubordinated debt to borrowing base (as
defined), and minimum adjusted tangible net worth (as defined). As of March ,
1997, the Finance Company received waivers from the lender regarding
noncompliance with these covenants as of December 31, 1996 and January 31, 1997.
The Finance Company was in compliance with the provisions as of February 28,
1997 and December 31, 1995.
During the fourth quarter of 1996, the Finance Company borrowed $126,060,667 at
a fixed rate of 6.10% in a securitized debt financing transaction which is
secured by $124,936,440 of the Company's finance receivables at December 31,
1996. Under the agreement, all principal portions of payments received on the
underlying collateral plus interest at 6.10% are paid monthly to the
noteholders. The remaining collections from the collateral, less a 3% servicing
fee paid monthly to the Finance Company, are retained by the Trustee as
additional collateral subject to a maximum credit support amount (as defined).
Cash collateral included in cash on the Company's balance sheet totaled
approximately $3.9 million at December 31, 1996. The agreement includes
financial covenants relating to the ratio of delinquencies (as defined), the
ratio of defaulted receivables (as defined), and minimum requirements for
tangible net worth (as defined). Violation of these provisions could result in
an increase in the credit support amount (as defined) or a more rapid pay down
of the notes or both. The Finance Company was in compliance with these
provisions as of December 31, 1996.
Following are the maturities of other borrowings at December 31, 1996. The
maturities of the asset backed notes are based upon the estimated collection of
the underlying receivables.
<TABLE>
<CAPTION>
Year Amount
---- (in thousands)
<S> <C>
1997................................... 128,725
1998................................... 41,434
1999................................... 26,235
2000................................... --
2001................................... 25,000
--------
Total................................ $221,394
========
</TABLE>
7. Stockholders' Equity:
On May 31, 1994, 20 million shares of undesignated preferred stock were
authorized. The preferred stock may be issued at the direction of the Board of
Directors, without stockholder approval, in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereon, to the extent that such are not fixed in
the Company's certificate of incorporation, as the Board of Directors
determines. The rights, preferences, limitations and restrictions of different
series of preferred stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions and other matters. The Board of Directors may authorize
the issuance of preferred stock which ranks senior to the common stock with
respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the Board of Directors is authorized to fix the
40
<PAGE>
limitations and restrictions, if any, upon the payment of dividends on common
stock to be effective while any shares of preferred stock are outstanding.
8. Long-Term Incentive Plan:
Under the terms of the Company's stock option plans, key employees are
granted options, at the discretion of the Board of Directors, to purchase shares
of the Company's common stock at the fair market value. Generally, these shares
vest at a rate of 20% per year over a five year period starting on the first
anniversary of the grant. A total of 1.96 million shares of common stock are
reserved for issuance under the long-term incentive plan.
41
<PAGE>
The changes in the stock options under the long-term incentive plan for the
two years ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Outstanding at December 31, 1994 (292,800 exercisable) 1,093,200 $
Granted 347,565 17.92
Exercised (73,900) 6.51
Canceled (41,075) 10.96
--------- --------------
Outstanding at December 31, 1995 (509,235
exercisable) 1,325,790
Granted 317,545 24.66
Exercised (514,604) 11.11
Canceled (36,257) 20.97
--------- --------------
Outstanding at December 31, 1996
(all exercisable) 1,092,474
=========
</TABLE>
The definitive share exchange agreement described in note 2, provides for
full vesting of all of the outstanding stock options at the closing date of the
Split-Off Transactions. On October 18, 1996, in anticipation of the Split-Off,
the Stock Option Committee approved an immediate 100% vesting of all outstanding
options. All options associated with discontinued operations expire within 90
days of the closing date.
As of December 31, 1996, the Company adopted the disclosure provisions of
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123). The per share weighted-average fair value of
stock options granted during 1996 and 1995 associated with continuing
operations, was $8.50 and $6.01, respectively, on the date of grant using the
Black Scholes option pricing model with the following weighted-average
assumptions: an expected dividend yield of 1.3% and 1.3%, respectively, expected
volatility of 33.8% and 31.9%, respectively, risk-free interest rate of 5.5% and
5.3%, respectively, and an expected life of 5 years and 5 years, respectively.
The per share weighted-average fair value of stock options granted during 1996
and 1995 associated with discontinued operations was $2.28 and $3.04,
respectively, on the date of grant using the Black Scholes option pricing model
with the following weighted-average assumptions: an expected dividend yield of
1.3% and 1.3%, respectively, expected volatility of 33.8% and 31.9%,
respectively, risk free interest rate of 5.5% and 5.3%, respectively and an
expected life of 0.4 years and 1.4 years, respectively.
42
<PAGE>
Under SFAS No. 123, the Company is required to disclose pro forma net
income and earnings per share both for 1995 and 1996 as if compensation expense
relative to the fair value of options granted had been included in earnings. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net income from continuing operations as reported $ 2,105 $ 7,062
Pro forma net income from continuing operations 1,759 6,917
Net income from discontinued operations as reported $16,404 $16,610
Pro forma net income from discontinued operations 15,765 16,354
Net income per share from continuing operations as reported $ 0.14 $ 0.47
Pro forma net income per share from continuing operations 0.12 0.46
Net income per share from discontinued operations as reported $ 1.07 $ 1.09
Pro forma net income per share from discontinued operations 1.03 1.07
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
Range Number Weighted-Average
of Outstanding Remaining Weighted-Average
Prices at 12/31/96 Contractual Life Exercise Price
--------------- ----------- ----------------- ----------------
<S> <C> <C> <C>
$4.68 to 6.60 341,100 4.4 5.45
$10.80 to 18.75 501,806 7.9 14.11
$19.50 to 29.75 249,568 9.4 24.33
-----------
1,092,474 7.2 13.74
===========
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period, as revised by the Stock Option Committee, and compensation cost for
options granted prior to January 1, 1995 is not considered.
9. Employee Benefit Plans:
The Company has an ESOP and a profit-sharing plan covering substantially
all employees. Company contributions are at the discretion of the Board of
Directors, with the exception of certain matching of employee contributions and
a minimum ESOP contribution sufficient to service the ESOP debt. During 1996 and
1995, the Parent Company and Finance Company contributions made to the Profit
Sharing Plan and ESOP totaled $140,700 and $248,000, respectively.
At December 31, 1996 and 1995, the ESOP owned 29,091 and 58,746 shares,
respectively, of the Company's common stock held in trust for the Parent
Company's and the Finance Company's employees. The plan's trustee is Cole Taylor
Bank.
10. Income Tax Provision:
The components of income tax expense (benefit) from continuing operations
for the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
(in thousands)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current income tax expense:
Federal $ 222 $3,763 $1,582
State 131 696 388
------ ------ ------
Total current income tax expense 353 4,459 1,970
Deferred income tax expense (benefit) 1,171 (20) 163
------ ------ ------
Total income taxes $1,524 $4,439 $2,133
====== ====== ======
</TABLE>
Temporary differences between the amounts reported in the financial statements
and the tax bases of assets and liabilities result in deferred taxes. The tax
effect of temporary differences at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
(in thousands)
<S> <C> <C>
Deferred Tax Assets:
Allowance for credit losses $ 1,863 --
Other -- 20
------- ------
Gross deferred tax assets 1,863 20
------- ------
Deferred Tax Liabilities:
Dealer acquisition discounts (3,002) --
Other (12) --
------- ------
Gross deferred tax assets (3,014) --
------- ------
Net deferred tax assets (liabilities) $(1,151) $ 20
======= ======
</TABLE>
At December 31, 1996, the Company and the Bank had net operating loss
carryforwards for Illinois state income tax purposes of approximately $34
million. These loss carryforwards will be allocated between the Company and the
Bank as of the Split-off date, in accordance with the Illinois Corporate Income
Tax Act. These loss carryforwards will expire at various dates through the year
2006.
Income tax expense was different from the amounts computed by applying the
federal statutory rate of 35% in 1996, 1995 and 1994 to income from continuing
operations before income taxes because of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Federal income tax expense at statutory rate $1,270 $4,025 $1,891
(Decrease) increase in taxes resulting from:
State income tax expense, net of federal income tax
benefit 142 459 261
Other, net 112 (45) (19)
------ ------ ------
Total $1,524 $4,439 $2,133
------ ------ ------
</TABLE>
11. Commitments:
44
<PAGE>
The Company leases various office facilities under operating leases
expiring through September 30, 2001. Estimated future minimum rentals under
noncancelable operating leases as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Amount
(in thousands)
--------------
<S> <C>
1997 $1,257
1998 934
1999 609
2000 184
2001 42
------
Total $3,026
======
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$1,042,000, $604,000, and $233,000, respectively.
12. Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of financial instruments.
Estimations and present value calculations were used by the Company for the
purposes of estimating fair values. Fair value estimates are made at specific
point in time for the Company's financial instruments; they are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. Fair value estimates do not
reflect the total value of the Company as a going concern.
The methods and assumptions used to determine fair values for each
significant class of financial instruments are presented below:
Cash and Equivalents:
The carrying amounts approximate fair value because of the short maturity
of these instruments.
Finance Receivables:
The interest rates on the receivables outstanding at December 31, 1996 and
1995 are consistent with the rates at which loans would currently be made to
borrowers of similar credit quality and the same maturities and security; as
such, the carrying value of the receivables outstanding at December 31, 1996 and
1995 approximate fair value at those dates.
45
<PAGE>
Commercial Paper:
The carrying amounts approximate fair value because of the short maturity
of these instruments.
Other Debt:
Other debt has been valued at present values of future cash flows using
rates which approximate current market rates for similar instruments. The
estimated fair value of other debt as of December 31, 1996 and 1995 was
$221,884,000 and $87,380,000, respectively.
Discontinued Operations:
A significant portion of the discontinued operations' assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
Cash, due from banks and short term investments are reported at amounts that
approximate fair value. Investment securities are determined from quoted market
prices. Fair value of loans has been estimated by the present value of future
cash flows, using current rates at which similar loans would be made. Deposit
liabilities have been valued at the present value of future cash flows using
rates which approximate current market rates for similar instruments. Short term
borrowings and long term debt have been valued at present values of future cash
flows using rates which approximate current market rates for similar
instruments. At December 31, 1996, the estimated fair value of net discontinued
financial instruments having a carrying book value of $21,656,000, was
$16,893,000. As of December 31, 1995, the estimated fair value of net
discontinued financial instruments having a carrying book value of $110,972,000,
was $110,987,000. The fair value of off-balance sheet interest rate swap
agreements as of December 31, 1996 and 1995 was a deficit value of $456,000 and
$96,000, respectively, and was estimated using quoted market prices.
13. Net Assets of Discontinued Operations:
The assets and liabilities of the discontinued operations have been
separately classified on the balance sheet as net assets of discontinued
operations. A summary of these assets and liabilities follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
(in thousands)
ASSETS:
Cash and due from banks $ 67,032 $ 68,413
Federal funds sold 5,675 5,000
Interest-bearing deposits in other banks 14,564 19,134
Investment securities 403,789 438,348
Loans, net 1,205,055 1,187,753
Premises, leasehold improvements and equipment, net 15,314 16,906
Other assets 113,202 43,787
---------- ----------
Total assets--discontinued operations $1,824,631 $1,779,341
========== ==========
LIABILITIES:
Deposits $1,406,775 $1,363,511
Short-term borrowings 248,268 263,035
Accrued interest, taxes and other liabilities 17,574 14,142
---------- ----------
Total liabilities--discontinued operations 1,672,617 1,640,688
---------- ----------
Net assets of discontinued operations $ 152,014 $ 138,653
---------- ----------
</TABLE>
46
<PAGE>
A summary of the net income of the discontinued operations for the following
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net interest income $ 73,086 $ 69,421 $ 71,434
Provision for loan losses (3,342) (4,056) (7,374)
Noninterest income 16,669 14,227 12,887
Noninterest expense (61,500) (57,071) (56,605)
Income taxes (8,509) (5,911) (5,855)
-------- -------- --------
Net income $ 16,404 $ 16,610 $ 14,487
-------- -------- --------
</TABLE>
14. Parent Company Only:
Summarized unconsolidated financial information of Reliance Acceptance Group,
Inc. is as follows:
BALANCE SHEETS (Parent Company Only)
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Noninterest-bearing deposits with subsidiary Bank $ 235 $ 1
Securities purchased under agreement to resell with 2,110 1,454
subsidiary Bank
Investment in subsidiaries 28,199 23,583
Investment in discontinued operations 152,014 138,653
Advances to Finance Company 39,580 15,055
Other assets 4,444 2,798
-------- --------
Total assets $226,582 $181,544
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest, taxes and other liabilities $ 3,231 $ 1,670
Long-term borrowings 47,700 25,257
Stockholders' equity 175,651 154,617
-------- --------
Total liabilities and stockholders' equity $226,582 $181,544
======== ========
</TABLE>
47
<PAGE>
STATEMENTS OF INCOME (Parent Company Only)
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income:
Interest $ 3,118 $ 1,842 $ 853
Management fees from Finance Company 29 130 --
------- ------- -------
Total income 3,147 1,972 853
------- ------- -------
Expenses:
Interest 4,047 3,057 1,148
Salaries and employee benefits 1,118 903 529
Other 1,460 1,412 379
Intercompany services 329 359 297
------- ------- -------
Total expenses 6,954 5,731 2,353
------- ------- -------
Income (loss) before income taxes and equity in undistributed net income of
subsidiaries (3,807) (3,759) (1,500)
Income tax benefit 1,296 1,209 476
Equity in undistributed net income of Finance Company 4,616 9,612 4,296
Income from discontinued operations 16,404 16,610 14,487
------- ------- -------
Net income $18,509 $23,672 $17,759
======= ======= =======
</TABLE>
48
<PAGE>
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 18,509 $ 23,672 $ 17,759
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation -- 10 --
Provision for deferred income taxes 38 (532) 87
Equity in undistributed net income of subsidiaries (4,616) (9,612) (4,296)
Other, net -- 145 82
Changes in assets and liabilities:
Other assets 1,276 (1,106) (1,030)
Other liabilities 1,523 38 489
-------- --------- --------
Net cash provided by operating activities 16,730 12,615 13,091
-------- --------- --------
Cash flows from investing activities:
Net decrease (increase) in short-term investments (656) 3,746 (4,700)
Investment in subsidiaries -- -- (4,500)
Advances to subsidiaries (67,835) (160,715) (48,350)
Repayments of advances to subsidiaries 43,310 165,410 28,600
Other, net -- (39) --
Net increase in net assets of discontinued operations (13,361) (12,815) (21,095)
-------- --------- --------
Net cash provided by (used in) investing
activities (38,542) (4,413) (50,045)
-------- --------- --------
Cash flows from financing activities:
Dividends paid (4,985) (3,779) (2,199)
Repayments of long-term borrowings (40,000) (81,000) (37,500)
Proceeds from long-term borrowings 62,700 76,000 49,500
Net proceeds from issuance of common stock 4,331 462 27,678
Payments to acquire common stock -- (220) (303)
-------- --------- --------
Net cash (used in) provided by financing
activities 22,046 (8,537) 37,176
-------- --------- --------
Net (decrease) increase in cash 234 (335) 222
Cash beginning of year 1 336 114
-------- --------- --------
Cash end of year $ 235 $ 1 $ 336
======== ========= ========
</TABLE>
49
<PAGE>
14. Parent Company Only (continued):
Supplemental disclosure of cash flow information for the three years ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
For the Years
Ended
December 31,
------------------------
1996 1995 1994
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest 3,569 3,105 1,003
Income taxes received (3,257) (790) (696)
</TABLE>
The Bank is subject to dividend restrictions set forth by regulatory
authorities. Under such restrictions, the Bank may not, without prior approval
of regulatory authorities, declare dividends in excess of the sum of the current
year's earnings (as defined) plus the retained earnings (as defined) from the
prior two years. The dividends, as of December 31, 1996, that the Bank could
declare and pay to the Company, without the approval of regulatory authorities,
amounted to approximately $30.3 million, subject to the Bank remaining in
compliance with all applicable capital ratios.
At December 31, 1996, all the Company's and the Bank's capital ratios were
in compliance with the applicable regulatory requirements.
Allocation of Parent Company Expenses to Discontinued Operations
Certain Parent Company expenses have been allocated to the discontinued
operations. For the years ended December 31, 1996, 1995 and 1994, the after tax
expenses allocated to discontinued operations were $3.2 million, $1.5 million
and $.6 million, respectively. The allocation was based upon review of
individual expense line items and various assumptions on costs related to
management of the discontinued operations.
50
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
-----------------------------------------------------
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of March,
1997.
Reliance Acceptance Group, Inc.
By: /s/ Thomas L. Barlow
---------------------------------
Thomas L. Barlow
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ----------------------------------------------- --------------
<S> <C> <C>
/s/ Thomas L. Barlow President and Chief Executive Officer, Director March 31, 1997
- ----------------------- (Principal Executive Officer)
Thomas L. Barlow
/s/ Howard B. Silverman
- ----------------------- Chairman of the Board March 31, 1997
Howard B. Silverman
/s/ James D. Dolph Chief Financial Officer March 31, 1997
- ----------------------- (Principal Financial and Accounting Officer)
James D. Dolph
/s/ Michael D. Bernick
- ----------------------- Treasurer March 31, 1997
Michael D. Bernick
/s/ Lawrence R. Canedy
- ----------------------- Controller March 31, 1997
Lawrence R. Canedy
/s/ Lori Cole
- ----------------------- Director March 31, 1997
Lori Cole
</TABLE>
51
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC
------------------------------
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
SIGNATURES
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------ ---------------------- ----------------
<S> <C> <C>
/s/ Solway F. Firestone Director March 31, 1997
- ------------------------
Solway F. Firestone
/s/ Ross Mangano Director March 31, 1997
- ------------------------
Ross Mangano
/s/ William Race Director March 31, 1997
- ------------------------
William Race
</TABLE>
52
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC
(formerly known as COLE TAYLOR FINANCIAL GROUP, INC.)
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------- --------------------------------------------- -----------------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated by reference to
Incorporation of the Registrant Registration Statement on Form S-1
(No. 33-75842)
3.2 Amended and Restated Bylaws of the Registrant Incorporated by reference to
Registration Statement on Form S-1
(No. 33-75842)
10.1 Cole Taylor Financial Group, Inc. 1991 Stock Incorporated by reference to
Option Plan * Registration Statement on Form S-1
(No. 33-75842)
10.2 1985 Long-Term Incentive Plan * Incorporated by reference to
Registration Statement on Form S-1
(No. 33-75842)
10.3 Cole Taylor Financial Group, Inc. Employee Incorporated by reference to
Stock Ownership Plan * Registration Statement on Form S-1
(No. 33-75842)
10.4 Cole Taylor Financial Group, Inc. Profit- Incorporated by reference to
Sharing and Savings Plan * Registration Statement on Form S-1
(No. 33-75842)
10.5 Form of change in Control Severance Incorporated by reference to
Agreement * Registration Statement on Form S-1
(No. 33-75842)
11 Statement Regarding Computation of Earnings Filed with this document
Per Share
12 Statement Regarding Computation of Ratio of Filed with this document
Earnings to Fixed Charges
21 List of Subsidiaries Filed with this document
23 Consent of KPMG Peat Marwick LLP Filed with this document
27 Financial Data Schedule Filed with this document
</TABLE>
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to the Annual Report on Form 10-K.
The Company will furnish to any stockholder, upon written request, any exhibit
listed above upon payment by such stockholder of the Company's reasonable
expenses in furnishing any such exhibit.
53
<PAGE>
Exhibit 11
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ---------------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
1. Average common shares outstanding (1) 14,703,572 14,703,572 14,538,199 14,538,199 13,499,352 13,499,352
2. Net additional shares assuming stock
options exercised and proceeds used to
purchase treasury stock. 552,057 552,057 684,227 868,568 578,424 694,273
----------- ----------- ----------- ----------- ----------- -----------
3. Average number of common and common
equivalent shares outstanding 15,255,629 15,255,629 15,222,426 15,406,767 14,077,776 14,193,625
=========== =========== =========== =========== =========== ===========
EARNINGS
4(a) Net income from continuing
operations $ 2,105,000 $ 2,105,000 $ 7,062,000 $ 7,062,000 $ 3,272,000 $ 3,272,000
4(b) Net income from discontinued
operations 16,404,000 16,404,000 16,610,000 16,610,000 14,487,000 14,487,000
4(c) Net income $18,509,000 $18,509,000 $23,672,000 $23,672,000 $17,759,000 $17,759,000
=========== =========== =========== =========== =========== ===========
PER SHARE AMOUNTS
4(a) Net income from continuing
operations per share
(line 4(a)/line 3) $ 0.14 $ 0.14 $ 0.47 $ 0.46 $ 0.23 $ 0.23
4(b) Net income from discontinued
operations per share
(line 4(b)/line 3) $ 1.07 $ 1.07 $ 1.09 $ 1.08 $ 1.03 $ 1.02
----------- ----------- ----------- ----------- ----------- -----------
4(c) Net income per share
(line 4(c) / line 3) $ 1.21 $ 1.21 $ 1.56 $ 1.54 $ 1.26 $ 1.25
=========== =========== =========== =========== =========== ===========
</TABLE>
Note: In all periods, earnings per share were calculated using the treasury
stock method. Fully diluted earnings per share are not presented as they
are less than 3% dilutive.
(1) Average shares outstanding include common stock, and Class A common stock.
54
<PAGE>
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994 1993
------- ------- ------ -------
<S> <C> <C> <C> <C>
1. Income from continuing operations
before income taxes $ 3,629 $11,501 $5,405 $(1,673)
Add Back Fixed Charges:
2. Total interest expense 21,136 11,594 3,314 1,892
3. Interest included in operating lease
rental expense (1) 347 201 78 19
4. Adjusted earnings $25,112 $23,296 $8,797 $ 238
======= ======= ====== =======
5. Fixed charges (line 2 + line 3) 21,483 11,795 3,392 1,911
======= ======= ====== =======
RATIO OF EARNINGS TO FIXED
CHARGES
6. Ratio of earnings to fixed charges 1.17 1.98 2.59 0.12 (2)
======= ======= ====== =======
</TABLE>
(1) Calculation of interest included in operating lease rental expense is
representative of the interest factor attributable to the lease payment.
(2) The Finance Company commenced operations in 1993. All 1992 activity of the
Parent Company would be allocated to discontinued operations. The 1993
earnings were inadequate, by $1,673,000 to cover fixed charges, due to
start-up costs.
55
<PAGE>
Exhibit 21
List of Subsidiaries of Reliance Acceptance Group, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
Reliance Acceptance Corporation* (2)
Reliance Acceptance Corp. of Arizona (2) Reliance Acceptance Corp. of Nevada (2)
Reliance Acceptance Corp. of Colorado (2) Reliance Acceptance Corp. of New Mexico (2)
Reliance Acceptance Corp. of Florida (2) Reliance Acceptance Corp. of North Carolina (2)
Reliance Acceptance Corp. of Georgia (2) Reliance Acceptance Corp. of Ohio (3)
Reliance Acceptance Corp. of Illinois (2) Reliance Acceptance Corp. of Oregon (2)
Reliance Acceptance Corp. of Indiana (2) Reliance Acceptance Corp. of South Carolina (2)
Reliance Acceptance Corp. of Iowa (2) Reliance Acceptance Corp. of Tennessee (2)
Reliance Acceptance Corp. of Kentucky (2) Reliance Acceptance Corp. of Texas (4)
Reliance Acceptance Corp. of Minnesota(2) Reliance Acceptance Corp. of Utah (2)
Reliance Acceptance Corp. of Missouri (2) Reliance Acceptance Corp. of Washington (2)
Reliance Acceptance Corp. of Michigan(2) Reliance Auto Receivable Corporation (2)
</TABLE>
* Indicates direct wholly-owned subsidiary of Reliance Acceptance Group, Inc.
(2) State of Incorporation = Delaware
(3) State of Incorporation = Ohio
(4) State of Incorporation = Texas
56
<PAGE>
EXHIBIT 23
Consent of Independent Certified Public Accountants
---------------------------------------------------
The Board of Directors
Reliance Acceptance Group, Inc. (formerly known as Cole Taylor Financial
Group, Inc.):
RE: Registration Statements on Form S-8
-----------------------------------
. Registration No. 33-84432
. Registration No. 33-86798
We consent to incorporation by reference in the subject Registration Statements
on Form S-8 of Reliance Acceptance Group, Inc. (formerly known as Cole Taylor
Financial Group, Inc.) and subsidiaries (the Company) of our report dated March
3, 1997, relating to the consolidated balance sheets of the Company as of
December 31, 1996 and 1995, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the December
31, 1996 annual report on Form 10-K of the Company.
Chicago, Illinois
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,546
<SECURITIES> 2,110
<RECEIVABLES> 372,630
<ALLOWANCES> 4,913
<INVENTORY> 0
<CURRENT-ASSETS> 178,649
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 553,022
<CURRENT-LIABILITIES> 155,977
<BONDS> 221,394
0
0
<COMMON> 150
<OTHER-SE> 175,501
<TOTAL-LIABILITY-AND-EQUITY> 553,022
<SALES> 0
<TOTAL-REVENUES> 72,888
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,123
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 21,136
<INCOME-PRETAX> 3,629
<INCOME-TAX> 1,524
<INCOME-CONTINUING> 2,105
<DISCONTINUED> 16,404
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,509
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
</TABLE>
