SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ____________________ to ____________________.
Commission File Number: 0-25476
NAL FINANCIAL GROUP INC.
(Exact name of small business issuer as specified in its
charter)
Delaware 23-2455294
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
500 Cypress Creek Road West
Suite 590
Fort Lauderdale, Florida 33309
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: 954-938-8200
Check 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 past 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 ninety days.
(1) Yes X No
(2) Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's sole
class of common stock, as of November 10, 1995 is 6,550,347
shares.
Transitional Small Business Disclosure Format
Yes No X
<PAGE>
NAL FINANCIAL GROUP INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Balance Sheets -
September 30, 1995 and
December 31, 1994 3-4
Consolidated Condensed Statement
of Operations - for the Nine and
Three Months Ended September 30, 1995
and 1994 5
Consolidated Condensed Statements
of Cash Flows for the Nine Months
Ended September 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7-9
Item 2 Management's Discussion and Analysis
or Plan of Operation 10-25
PART II OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 26
Item 3 Defaults Upon Senior Securities 26
Item 4 Submission of Matters to a Vote
of Securities Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
[FN]
The accompanying financial information is unaudited and is not
covered by an Independent Certified Public Accountant's Report.
<PAGE>
<TABLE>
NAL FINANCIAL GROUP INC.
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Net loan and lease receivables $102,335,591 $30,289,290
Reserve for credit losses (3,057,193) (501,806)
------------- ------------
Net receivables 99,278,398 29,787,484
Cash and cash equivalents 473,348 664,848
Restricted cash 862,406 1,061,041
Net investment in operating leases 3,318,035 1,230,647
Returned automobile inventory, net 2,483,616 150,779
Debt issue costs, net 887,682 214,112
Property and equipment, net 1,096,538 510,885
Accrued interest receivable 1,370,390 167,692
Other assets, net 2,435,895 534,058
------------- ------------
Total assets $112,206,308 $34,321,546
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings:
Lines of credit and
warehouse facilities $31,732,937 $11,997,037
Debt participation interests 47,143,939 10,273,644
Convertible subordinated
debentures 8,065,965 ---
Other 34,575 231,359
----------- -----------
Total borrowings 86,977,416 22,502,040
Accounts payable and accrued
expenses 251,513 400,057
Security deposits 698,814 344,834
Accrued income taxes 432,950 110,460
Other liabilities 1,963,225 45,854
Due to shareholder 853,514 62,494
---------- ----------
Total liabilities 91,177,432 23,465,739
---------- ----------
Stockholders' equity
Preferred stock, $1,000 par value,
10,000,000 shares authorized,
no shares issued --- ---
Common stock, $.15 par value,
50,000,000 shares authorized,
6,550,347 and 5,592,968 shares
issued and outstanding at
September 30, 1995 and
December 31,1994,
respectively 982,552 838,945
Paid in capital 17,443,384 8,483,714
Retained earnings 2,602,940 1,533,148
----------- ----------
Total stockholders' equity 21,028,876 10,855,807
----------- ----------
Total liabilities and
stockholders' equity $112,206,308 $34,321,546
============ ===========
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
NAL FINANCIAL GROUP,INC.
Consolidated Condensed Statements of Operations
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Interest income $10,400,092 $2,020,177 $4,696,974 $583,928
Purchase discount
accretion 599,289 1,800,676 178,892 629,982
Gain on sale of
loan pools 127,673 2,137,024 127,673 697,262
Other income 1,241,140 239,833 876,510 118,302
---------- ---------- --------- --------
12,368,194 6,197,710 5,880,049 2,029,474
========== ========== ========= =========
EXPENSES
Interest expense 4,636,356 1,409,926 2,132,943 536,733
Operating expenses 4,514,227 3,683,617 2,056,174 1,445,123
Provision for
credit loss 1,412,138 355,548 709,362 221,026
Compensation expense
related to a Voting
Trust Arrangement
(Note 4) 80,000 ---- ---- ---
---------- --------- --------- ---------
10,642,721 5,449,091 4,898,479 2,202,882
---------- --------- --------- ---------
Income (loss)
before provision
for taxes 1,725,473 748,619 981,570 (173,408)
Provision (credit)
for taxes 655,680 293,864 372,998 (65,727)
--------- -------- -------- ---------
Net Income (Loss) $1,069,793 $454,755 $608,572 ($107,681)
========== ========= ======== =========
PER SHARE DATA
Earnings per share:
Primary $.18 $.09 $.10 $(.02)
Fully diluted .18 .08 .10 (.02)
Weighted average number
of shares outstanding:
Primary 5,875,228 5,192,968 6,144,997 5,192,968
Fully diluted 6,013,263 5,592,968 6,340,921 5,592,968
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
NAL FINANCIAL GROUP INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1995 and 1994
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $1,069,793 $454,755
Adjustments to reconcile net income to
cash provided by operating activities:
Accretion of purchase discount (599,289) (1,800,676)
Provision for credit losses 1,412,138 355,548
Depreciation and amortization 690,901 223,607
Gain on sale of loan pools (127,673) (2,137,024)
Non-cash charge related to Voting
Trust Arrangement 80,000 ---
Changes in assets and liabilities:
Payments received on receivables 31,788,300 15,412,737
Other, net 112,469 824,256
----------- ----------
Net cash provided by operating
activities 34,426,639 13,333,203
----------- -----------
Cash flows from investing activities:
Proceeds from sale of loan pools 1,622,723 15,173,690
Purchase of receivables (108,875,869)(21,732,535)
Purchase of property and equipment (688,907) (162,054)
------------ -----------
Net cash used in investing activities (107,942,053) (6,720,899)
------------ -----------
Cash flows from financing activities:
Net proceeds from financings 111,093,651 19,969,537
Repayments of financings (40,661,708)(25,768,637)
Issuance of common stock 2,100,950 ---
Note payable from shareholder 791,021 ---
Payment of dividends --- (618,000)
---------- ----------
Net cash provided by (used in)
financing activities 73,323,914 (6,417,100)
---------- ----------
Net (decrease) increase in cash
and cash equivalents (191,500) 195,204
Cash and cash equivalents,
beginning of year 664,848 96,009
---------- ----------
Cash and cash equivalents,end of year $473,348 $291,213
========== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during period for interest $3,964,533 $1,204,499
========== ==========
Cash paid during period for taxes $345,648 $302,660
========= ========
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
NAL Financial Group Inc.
Notes To Consolidated Financial Statements
September 30, 1995
1. BASIS OF PRESENTATION
The interim financial information of NAL Financial Group Inc.
(the "Company"), which is included herein, is unaudited and has
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB. In the opinion of management, these
interim financial statements include all the adjustments
necessary to fairly present the results of the interim periods
and all such adjustments are of a normal recurring nature. The
interim financial statements presented herein include the
accounts of the Company and its wholly-owned subsidiaries and
should be read in conjunction with the audited financial
statements, and the footnotes thereto, for the year ended
December 31, 1994. Certain 1994 amounts have been reclassified
to conform with the current year presentation.
Operating results for the nine and three month periods ended
September 30, 1995 are not necessarily indicative of the results
which may be expected for the year ended December 31, 1995.
2. ORGANIZATION AND NATURE OF OPERATIONS
The Company commenced operations in June 1991 as a specialized
finance company for the purpose of engaging in consumer finance
transactions involving the origination, purchase, remarketing and
servicing of consumer loan and lease receivables. Since June
1994, the Company's principal business has been the acquisition
and servicing of automotive loans and leases originated by
dealers in connection with sales or leases to individuals with
sub-prime credit.
On November 30, 1994, the Company merged with Corporate Financial
Ventures, Inc. ("CFVI"), a public company (the "Merger"). Under
the terms of the Merger, the Company's stockholders received
3,160,000 shares of CFVI in exchange for all outstanding shares
of stock of the Company. Stockholders of the Company received
approximately 56% of the outstanding common stock of CFVI. The
Merger has been accounted for as a reverse acquisition of the
Company. Upon completion of the Merger, CFVI assumed the historic
operations of the Company and changed its name to NAL Financial
Group Inc. The operations of CFVI prior to the Merger were not
significant.
<PAGE>
3. LOAN AND LEASE RECEIVABLES
Loan and lease receivables as of September 30, 1995 and December
31, 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Automotive finance contracts
Gross contracts receivable $104,556,879 $26,795,132
Less: Unearned interest (6,277,920) (2,004,435)
Deferred acquisition fees (105,485) ---
Unamortized acquisition discount --- (815,768)
----------- -----------
98,173,474 23,974,929
Consumer contracts receivable
Gross contracts receivable 3,087,354 2,333,016
Less: Unearned interest (435,030) ---
Unamortized acquisition discount (351,349) (841,322)
---------- ----------
2,300,975 1,491,694
Mortgage loans receivable
Gross loans receivable 2,545,423 6,041,464
Less: Unamortized acquisition discount (684,281) (1,218,797)
-------- ----------
1,861,142 4,822,667
--------- ---------
Net loan and lease receivables $102,335,591 $30,289,290
============ ===========
</TABLE>
The reserve available for credit losses consists of an allowance
for losses established through a provision from earnings, non-
refundable contract acquisition discounts on automotive finance
contracts purchased from dealers, and refundable reserves such as
dealer holdback. Prior to the end of the third quarter of 1995,
the Company amortized the non-refundable acquisition discount to
income over the life of the related receivables as an enhancement
of yield. However, beginning with the fourth quarter of 1995,
management has decided to cease amortization and allocate the
entire non-refundable acquisition discount to the reserve
available for credit losses.
The following table sets forth the components of the total
reserve available for credit losses as of September 30, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Non-refundable acquisition discount, net $1,890,234 ---
Allowance for credit losses 572,955 $305,000
Dealer holdback 594,004 196,806
--------- --------
Total reserve available for credit losses $3,057,193 $501,806
========== ========
</TABLE>
<PAGE>
4. VOTING TRUST ARRANGEMENT
Of the 3,160,000 shares of the Company's common stock received by
certain stockholders in conjunction with the merger of the
Company in November 1994, 400,000 shares were placed into a
voting trust arrangement by which shares may be released on an
annual basis pursuant to a formula tied to net income earned by
the Company. Any shares not released from the arrangement at
the end of three years will be canceled.
Management has evaluated the accounting treatment relating to
the potential release of the shares under the arrangement using
recent accounting guidance and the relevant facts and circum-
stances, and has determined that the potential release of approx-
imatly 340,000 shares of the total amount of shares held under
the arrangement is not compensatory. The potential release of
the remaining 60,000 shares is considered compensatory based on
the relevant facts and circustances, and accordingly, an expense
will be reflected for financial reporting purposes as these shares
become eligible for release. This expense will be a non-cash
charge and will not affect working capital or total stockholders'
equity.
Accordingly, compensation expense of $80,000 has been recorded
for the nine months ended September 30, 1995 for the portion of
the 60,000 shares that have become elibible for release under
the agreement.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The following information should be read in conjunction with the
Consolidated Interim Financial Statements and Notes thereto of
the Company included in this report.
BACKGROUND
NAL commenced operations during June 1991 as a specialized
finance company for the purpose of engaging in consumer finance
transactions involving the origination, purchase, remarketing and
servicing of consumer and mortgage loans and auto lease
receivables.
Because of the opportunities presented by the insolvency and
reorganization of many financial institutions at the time, from
inception through the second quarter of 1994, the Company's
principal activities involved the bulk purchase and servicing of
seasoned portfolios of consumer and mortgage loans and auto lease
receivables that had been administered by the Resolution Trust
Corporation ("RTC") or Federal Deposit Insurance Corporation
("FDIC").
In response to the decreasing availability of seasoned
portfolios, since the second quarter of 1994 the Company's
principal focus has shifted to other segments of the consumer
finance industry, particularly auto finance. Although
opportunistic purchases of seasoned portfolios may still be
considered by management, the principal focus of the Company's
business since June 1994, has been the acquisition and servicing
of automotive leases and loans originated by dealers in
connection with sales or leases to persons with sub-prime credit.
The Company became publicly held by virtue of the Merger with
Corporate Financial Ventures, Inc. ("CFVI") on November 30, 1994.
CFVI had been an inactive public company at the time of the
Merger. Since, as a result of the Merger, the stockholders of
historic NAL acquired a controlling interest in CFVI, the Merger
has been accounted for as a "reverse acquisition". Accordingly,
for financial statement presentation purposes, NAL is viewed as
the continuing entity and the related business combination is
viewed as a recapitalization of NAL, rather than an acquisition
by CFVI.
In conjunction with the Merger, CFVI changed its name to "NAL
Financial Group Inc."
<PAGE>
RESULTS OF OPERATIONS - HISTORICAL OVERVIEW
The Company's results of operations from inception in 1991
through the second quarter of 1994 principally reflected the
Company's investment earnings and gains realized from the sale of
seasoned portfolios of consumer and mortgage loans acquired at
significant discounts from their principal balances. The rate of
return on these portfolios included both interest earned on loans
and leases, as well as the purchase discount accretion which
reflected the increase in the value of the portfolio as it
approached maturity.
Gains on sales of loan pools and loans sold to correspondents
have historically constituted a significant element of the
Company's results of operations. During 1992, 1993 and 1994, the
Company realized gains on sales of loan pools of $1,127,000,
$2,131,000 and $2,292,000, respectively. These sales consisted
primarily of loan pools, principally longer-term, fixed rate
loans, which had been purchased at discounts and sold within a
short time period after purchase, or after a period during which
the deficiencies of previous servicers were corrected.
Due to an increase in competition for, and a decrease in
availability of, seasoned portfolios, the Company found it
necessary to increase the prices it paid for newly acquired
portfolios over the two and a half year period. The increase in
prices paid for the portfolios decreased the Company's effective
earnings yield, from 38.29% during the year ended December 31,
1992, to 27.06% during the year ended December 31, 1993, and
further to 22.53% for the year ended December 31, 1994. Although
the Company reduced its cost of borrowings during this period
through refinancing and expansion of its borrowing base with less
expensive financing, thereby reducing its cost of borrowings rate
from 14.55% during 1992, to 11.62% during 1993, and further to
9.73% during 1994, the cost of funds reduction was less than the
decrease in the earnings yield. Accordingly, the Company's net
interest spread rate, or the difference between the effective
yield earned on its interest-earning assets and the effective
rate paid on its interest-bearing liabilities, decreased from
23.74% in 1992 to 15.44% in 1993, and further to 12.80% during
1994.
In view of the shifting of the principal focus of the Company's
business to other segments of the consumer finance industry,
particularly, the acquisition and servicing of automotive leases
and loans, management anticipates that substantially all of its
earnings for the year ending December 31, 1995 and thereafter
will be derived from interest, rental income and fees earned on
sub-prime leases and loans. Management believes that the yields
to be derived from interest, discount and fees to be charged on
sub-prime credit automobile leases and loans will provide a
profitable spread over the costs of its borrowings. In view of
the early stage of the Company's auto finance business segment,
however, management is uncertain these yields will compare with
yields experienced in the past.
<PAGE>
Revenues generated from purchase discount accretion and gains on
sales of loans which had historically constituted the principal
component of the Company's earnings will likely decrease after
1994. Management is, however, currently evaluating the
feasibility of pooling its portfolio of originated automobile
loans and leases for resale through securitization programs. To
the extent that such programs are undertaken in the future, the
composition of the Company's earnings may shift to some extent to
include gains on sale of loan and lease pools.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1994
The Company reported net income of $1,069,800 for the nine months
ended September 30, 1995 on revenues of $12,368,000. This
compares to net income of $455,000 on revenues of $6,198,000 for
the nine months ended September 30, 1994.
The Company's results of operations for the nine months ended
September 30, 1995 principally reflected net interest and fees
earned on its expanded portfolio of sub-prime automobile
contracts receivable. The results of operations for the nine
months ended September 30, 1994 principally reflected interest
and discount earned on bulk purchased portfolios and gains from
the sale of these portfolios.
The Company's level of sub-prime automobile contracts acquired
continues to increase when comparing the current interim period
to the comparable interim period of the preceding year. Contracts
acquired in the 1995 period totalled $108,427,000 compared to
$10,372,000 for the 1994 period. The significant increase reflects
the company's success in the establishment and continual expansion
of its network of automobile dealerships participating in the
Company's financing programs.
<TABLE>
NET INTEREST SPREAD
The following table presents net interest spread information for
the nine months ended September 30, 1995 and 1994:
<CAPTION>
Nine Months Ended Sept. 30,
1995 1994
<S> <C> <C>
Net investment in loans and
leases - average balance $64,589,000 $16,704,000
Interest income and purchase
discount accretion 10,999,000 3,821,000
Annualized effective earnings rate 22.71% 30.50%
Participations and notes payable -
average balance $55,667,000 $14,776,000
Interest expense 4,636,000 1,410,000
Annualized effective cost rate 11.10% 12.72%
Net interest spread rate 11.61% 17.78%
</TABLE>
<PAGE>
During the nine months ended September 30, 1995, the Company's
net interest spread rate, or the difference between the effective
rate earned on interest - earning assets and the effective rate
paid on interest - bearing borrowings, decreased 6.17%, from
17.78% to 11.61%, when compared to the same period of the
preceding year. This decrease was due primarily to a 7.79%
decrease in the effective rate earned on interest earning assets,
from 30.50% to 22.71%. The decrease in the earnings rate was
offset by a decrease in the Company's effective cost rate from
12.72% to 11.10%, or 1.62%.
During the nine months ended September 30, 1994, a greater
portion of the Company's earnings was derived from purchase
discount accretion than during the equivalent 1995 period. During
the 1994 period, purchase discount accretion was $1,801,000
compared to $599,000 for the 1995 period. This resulted in a
higher effective earnings rate for the 1994 period. The decrease
in purchase discount accretion reflects the Company's shift in
focus from acquiring bulk loan and lease portfolios at
significant discounts to acquiring and servicing sub-prime
automotive loan and lease contracts receivable. Although the
automotive contracts do not provide as much earnings from
purchase discount accretion as the bulk purchase portfolios, the
coupon interest rate earned on the contracts is higher.
Interest income increased from $2,020,000 for the nine months
ended September 30, 1994 to $10,400,000 for the nine months ended
September 30, 1995. This increase was due to higher contractual
rates earned on sub-prime contacts and an increase in the average
balance of loan and lease receivables from $16,704,000 in the
1994 period to $68,977,000 in the 1995 period. Substantially all
of the increase in the balance of loan and lease receivables is
attributable to acquired automotive contracts.
The decrease in the Company's effective cost rate was
attributable to an increase in borrowings to finance the
expansion of the automotive contracts portfolio. For the most
part, the Company has financed its acquisitions of automotive
contracts with borrowings which have had interest rates which
were established at the time of financing based on the prime rate
or LIBOR rate in effect at the time. These borrowings had rates
which were lower than the rates on borrowings utilized during the
1994 period to finance bulk-purchase portfolios. At September 30,
1995, the Company had borrowed approximately $67,195,000 under
arrangements in which the interest rates were fixed at the time
of financing, and approximately $11,682,000 under lines of credit
and warehouse arrangements which bear interest at variable rates
tied to the prime rate or LIBOR.
Management believes that the effective cost rate will decrease in
future periods as an increasingly greater number of contracts are
financed using the warehouse line established in September, 1995,
with a lower cost of funds than financing arrangements utilized
previously.
<PAGE>
GAINS ON SALES OF LOANS
Gains on sales of loans totalled $2,137,000 during the nine
months ended September 30, 1994 compared to $128,000 for the nine
months ended September 30, 1995. Prior to 1995, gains on sales of
loans constituted a significant element of the Company's results
of operations. The sales consisted primarily of loan pools which
had been purchased at discounts and sold within a short period
after purchase. Unless it elects to initiate a broad-based
securitization program presently under consideration, it is the
Company's current intention to hold principally all of its
present portfolio until maturity. Given that intention, the
Company may not experience gains on the sales of loan pools as it
has in the past.
OTHER INCOME
Other income increased $1,001,000 from $240,000 during the nine
months ended September 30, 1994 to $1,241,000 during the nine
months ended September 30, 1995, due primarily to the commissions
earned by the Company's insurance brokerage services from placing
insurance policies and late fees charged on the automotive
portfolio of loans and leases.
PROVISION FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses totalled $1,412,000 for
the nine months ended September 30, 1995, or $1,056,000 more than
the $356,000 reported for the equivalent 1994 period. This
increase related primarily to provisions recorded for an estimate
of possible losses which may be incurred for new automotive
contracts acquired during the 1995 period.
Beginning with the fourth quarter of 1995, management has decided
to cease the amortization to earnings of the non-refundable
acquisition discount on purchased automotive finance contracts
and allocate this discount to the reserve available for credit
losses. Management believes that this decision, although not
totally eliminating the need for future provision, will
ultimately result in lower provisions for credit losses on
purchased contracts.
Management periodically reviews the adequacy of the allowance for
loan and lease losses and considers whether the level of
allowance is sufficient to cover any losses of the carrying value
of the collateral pledged for the loans and leases receivable, an
analysis of the equity invested in the collateral by the
borrowers, delinquency data and historical loss experience, and
any recourse arrangements the Company has with dealers or other
sellers of contracts and portfolios.
<PAGE>
OPERATING AND OTHER EXPENSES
Operating and other expenses increased $830,000 from $3,684,000
during the nine months ended September 30, 1994 period to
$4,514,000 during the nine months ended September 30, 1995, due
primarily to increased overhead and costs associated with the
Company's automotive contract financing business. This increase
was attributable to, among other things, an increase in
compensation and employee benefits paid due to an expansion of
the Company's work force. Additional personnel were hired to
assist with underwriting, collecting and servicing of the
Company's expanding portfolio of automotive contracts.
Management expects that operating expenses will increase as the
size of its automotive contract portfolio increases, but does not
expect the growth of expenses to be disproportionate with the
growth of revenues from the portfolio.
QUARTER ENDED SEPTEMBER 30, 1995 COMPARED TO QUARTER ENDED
SEPTEMBER 30, 1994
The Company reported net income of $609,000 for the three months
ended September 30, 1995 on revenues of $5,880,000. This compares
to a net loss of $108,000 on revenues of $2,029,000 for the three
months ended September 30, 1994.
The Company's results of operations for the three months ended
September 30, 1995, principally reflect net interest and fees
earned on its expanded portfolio of sub-prime automobile
contracts receivable. The results of operations for the three
months ended September 30, 1994 principally reflect interest and
discount earned on bulk purchased portfolios and gains from the
sale of these portfolios.
<TABLE>
NET INTEREST SPREAD
The following table presents net interest spread information for
the three months ended September 30, 1995 and 1994:
<CAPTION>
Quarter Ended Sept. 30,
1995 1994
<S> <C> <C>
Net investment in loans and leases
- average balance $86,941,000 $16,807,000
Interest income and purchase discount
accretion 4,876,000 1,214,000
Annualized effective earnings rate 22.43% 28.89%
Participations and notes payable
- average balance $77,775,000 $15,662,000
Interest expense 2,133,000 537,000
Annualized effective cost rate 10.97% 13.75%
Net interest spread rate 11.46% 15.14%
</TABLE>
<PAGE>
During the three months ended September 30, 1995, the Company's
net interest spread rate decreased 3.68%, from 15.14% to 11.46%,
when compared to the same period of the preceding year. This
decrease was primarily due to a 6.46% decrease in the effective
rate earned on interest-earning assets from 28.89% to 22.43%. The
decrease in the earnings rate was partially offset by a decrease
in the Company's effective cost rate from 13.75% to 10.97%, or
2.78%.
The decrease in the effective earnings rate was due to a greater
portion of the Company's earnings attributable to purchase discount
accretion during the 1994 period. The decrease in purchase discount
accretion, from $630,000 for the quarter ended September 30, 1994
to $179,000 for the same quarter 1995, reflected the maturing during
1994 of discounted portfolios previously purchased by the Company,
which were replaced in 1995 with automotive loan and lease receiv-
ables purchased from dealers with lower comparable discounts.
Interest income increased $4,113,000, from $584,000 in 1994 to
$4,697,000 for the comparable quarter ended 1995. The increase
was due to higher contractual rates earned on sub-prime contracts
and an increase in the average balance of these receivables from
$16,807,000 for the 1994 period to $90,601,000 for the 1995
period.
The decrease in the Company's effective cost rate was
attributable to an increase in borrowings to finance the
expansion of the automotive contracts portfolio at interest
rates which were lower than those charged on borrowings used to
finance bulk purchase portfolios during the 1994 period.
OTHER INCOME
Other income increased $759,000, due primarily to an increase in
commission income earned by the Company's insurance brokerage
services for placing policies with its customers and from late
fees charged on customer accounts.
PROVISION FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses totaled $709,000 during
the three months ended September 30, 1995, compared to $221,000
for the comparable 1994 period. The increase of $488,000 related
to provisions recorded for an estimate of possible losses which
may be incurred for new automotive contracts acquired during the
1995 period.
As previously discussed, management has decided to cease the
amortization to earnings of the non-refundable acquisition
discount on purchased automotive finance contracts and allocate
this discount to the reserve available for credit losses.
Management believes that this decision, although not totally
eliminating the need for further provision for credit loses, will
ultimately result in lower provisions for credit losses on
purchased contracts.
<PAGE>
Management periodically reviews the adequacy of the allowance for
loan and lease losses and considers whether the level of
allowance is sufficient to cover any losses of the carrying value
of the collateral pledged for the loans and leases receivable, an
analysis of the equity invested in the collateral by the
borrowers, delinquency data and historical loss experience, and
any recourse arrangements the Company has with dealers or other
sellers of contracts and portfolios.
OPERATING AND OTHER EXPENSES
Operating and other expenses increased $611,000 from $1,445,000
during the three months ended September 30, 1994 to $2,056,000
during the three months ended September 30, 1995. This increase
was due to an increase in compensation and employee benefits paid
due to an expansion of the Company's work force.
DELINQUENCY EXPERIENCE
The following table summarizes the Company's delinquency
experience on accounts over 30 days past due on both a number of
contracts and dollar basis. The table excludes two under-
performing portfolios which were purchased during the year ended
December 31, 1994 at substantial discounts. The Company is
accounting for a portion of these portfolios using the cost
recovery method. Under this method, income is recognized only for
the excess of collections received over the purchase price basis
of the loans. At December 31, 1994 and September 30, 1995, the
principal balance and book value of these two portfolios totalled
$2,271,000 and $897,000, and $690,000 and $234,000, respectively,
principally all of which was delinquent 30 days or more. It is
management's estimate that the Company will collect at least its
net book value of the portfolios.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Dollars #Contracts Dollars #Contracts
($ in 000)
<S> <C> <C> <C> <C>
Principal outstanding $104,148 9,322 $33,165 3,560
Delinquencies:
30-59 days 6,822 654 2,549 311
60-89 days 2,410 251 215 19
90 days or more 2,790 230 423 27
Total delinquencies
over 30 days as % of
principal/contracts 11.54% 12.18% 9.61% 10.03%
Total delinquencies
over 60 days as % of
principal/contracts 4.99% 5.16% 1.92% 1.29%
</TABLE>
Total delinquencies over 60 days, expressed as a percentage of
total principal balance, were 4.99% and 1.92% at September 30,
1995 and December 31, 1994, respectively.
<PAGE>
At December 31, 1994, the dollar amount of the Company's
portfolios consisted of approximately 76% of new contracts
acquired through its sub-prime credit program and 24% of
previously acquired bulk purchase portfolios. At September 30,
1995, the Company's portfolios consisted of 93% of new contracts
acquired and 7% of previously acquired bulk purchase portfolios.
Management expects that future delinquency rates for sub-prime
automobile leases and loans will differ from that experienced for
bulk purchased portfolios.
The Company has prepared analyses of its automotive finance
contracts, based on its own credit experience and available
industry data, to identify the relationship between loan
delinquency and default rates at the various stages of a
contract's repayment term. The results of these analyses, suggest
that the probability of a contract becoming delinquent or going
into default is highest during the "seasoning period" which
begins 3-4 months, and ends 12-14 months, after the origination
date. The Company believes that the increase in the over 60 days
delinquency percentage from 1.92% at December 31, 1994 to 4.99%
at September 30, 1995, is primarily the result of an increase in
the percentage of automotive finance contracts in the "seasoning
period," rather than any change in the underlying average credit
characteristics of the Company's portfolio.
If the rate of the Company's volume continues to escalate, an
increasingly greater portion of the Company's portfolio is
expected to fall into the "seasoning period" described above,
causing a rise in the overall portfolio delinquency and default
rates, without regard to underwriting performance. Assuming no
changes in any other factors that may affect delinquency and
default rates, the Company believes this trend should stabilize
or reverse when the volume of mature contracts (with lower
delinquency and default rates) is sufficient to offset the total
portfolio delinquency and default rates.
<PAGE>
NET CREDIT LOSS EXPERIENCE
The following table summarizes the Company's net credit loss and
losses from lease termination experience for the nine month
periods ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
1995 1994
($ in 000)
----------- -----------
<S> <C> <C>
Principal Outstanding $105,498 $24,579
Average Principal O/S 69,332 27,207
Charge-offs and Lease Termination
Losses Net of Recoveries 673 504
Net Losses % Principal O/S 0.85% 2.73%
Net Losses % Avg Principal 1.29% 2.46%
<FN>
The percentages set forth for the nine-months ended September 30, 1995 and
1994 are annualized in order to present comparable data for a full twelve-
month period.
</TABLE>
Net credit losses, representing charge-offs of loan and lease
credit losses, net of recoveries, expressed as an annualized
percentage of total average principal outstanding, were 1.29% and
2.46% for the nine months ended September 30, 1995 and 1994,
respectively. The table for 1994 reflects activity during a
period in which the Company primarily purchased loans and leases
on a bulk basis. In view of the shift of the Company's business
principally to the purchase and origination of automotive loan
and lease contracts during the second half of 1994, management
expects that the credit loss experience for the nine months ended
September 30, 1994 may not be indicative of future results.
Due to the limited historical experience reflecting results of
the Company's program of auto loan and lease acquisitions,
management is continuously assessing the level or extent of
future credit losses. Credit losses in the future will be
dependent on the Company's credit criteria, advance rates in
relation to the value of the secured automobiles, and the value
received from the disposition of any repossessed automobiles in
relation to the outstanding balance of the lease or loan.
LIQUIDITY AND CAPITAL RESOURCES
CURRENT OPERATIONS
The Company's business requires substantial cash to support its
growth in the rate of acquisition and origination of automotive
finance contracts. The following chart presents the growth in
both the number and dollar amount of contracts acquired each
quarter since June 1994.
Quarter Ended
June Sept Dec March June Sept
1994 1994 1994 1995 1995 1995
Contracts Acquired
- ------------------
Amount ($ in mil) $3.26 $7.12 $14.76 $29.66 $34.79 $43.97
Number 423 848 1,490 2,657 2,889 3,524
<PAGE>
As a general matter, the Company finances the acquisition of its
automotive finance contracts by drawing against its available
lines of credit and warehouse facilities. Under the terms of
these facilities, funding is provided between 80-90% of the
acquisition price of the contracts. Accordingly, the Company must
secure the remainder of the acquisition price from equity or
other funding sources.
As the rate of growth of contract acquisition continues to
increase, the Company must secure additional equity or other
sources to fund these requirements. The Company's growth,
therefore, is governed by its ability to gain access to
additional financing sources. The Company's growth during the
nine month period ended September 30, 1995 and thereafter, has
been facilitated by its ability to successfully complete private
placements of debt and equity securities and gain access to
increasing sources of financing.
During 1995, the Company had secured its principal sources of
working capital through a series of debt participation interests,
unsecured advances, revolving lines of credit and the proceeds
from the sale of convertible subordinated debentures and shares
of common stock in private placement transactions. As of September
30, 1995, the respective balances provided by these sources of
working capital were as follows:
<TABLE>
<CAPTION>
September, 1995
<S> <C>
Lines of Credit and
Warehouse Facility $31,732,937
Debt Participation Interests $47,143,939
Private Placement of Convertible
Subordinated Debentures $8,065,965
Private Placement of Common Stock $2,100,950
Unsecured Advances $34,575
</TABLE>
LINES OF CREDIT AND WAREHOUSE FACILITIES
In March 1993, the Company entered into a $20,000,000 three-year
revolving credit facility with Congress Financial Corporation
(the "Congress Credit Facility"). The Congress Credit Facility
bears monthly interest at 2% over the prime rate of CoreStates
Bank, N.A. (10.75% at September 30, 1995) and is secured by
certain lease contracts receivable and consumer and mortgage
loans receivable. As of September 30, 1995, the Company had drawn
down approximately $1,100,000 and had an available borrowing base
of approximately $18,900,000 under the Congress Credit Facility
for the financing of additional loan and lease portfolio
purchases which meet certain credit guidelines established by
Congress, in its sole discretion.
<PAGE>
During February 1994, the Company entered into a $5,000,000 one-
year revolving credit facility with General Electric Capital
Corporation (the "GECC Credit Facility"). In September 1994,
the GECC Credit Facility was increased to $10,000,000. The
GECC Credit Facility bears interest payable monthly at rates
fixed at the time of financing and is secured by certain lease
contracts receivable and consumer and mortgage loans receivable.
In March 1995, the GECC Credit Facility available line was in-
creased to $25,000,000 and at September 30, 1995, the Company
had drawn down approximately $20,660,000 under the facility.
The GECC Credit Facility is automatically renewed annually
unless GECC provides the Company with notice of termination
90 days prior to such renewal.
During the third quarter 1995, the Company entered into a $50
million warehouse repurchase facility (the "Repurchase Facility")
with an additional lending institution (the "Lender"). Under the
terms of the Repurchase Facility, the Lender purchases loan and
lease contracts receivable from the Company at approximately
ninety percent of the outstanding principal balance. The Company
repurchases the receivables from the Lender at approximately
ninety percent of the outstanding principal balance at the time
of repurchase plus a premium for accrued interest at a rate of
2.25% over 30 days LIBOR. The Repurchase Facility also provides
that if the market value of contracts sold to the Lender (market
value being determined by an independent third party) is less
than the Lender's margin amount (market value multiplied by the
advance rate), the Lender may require the Company to transfer
money or additional contracts to the Lender until the margin
amount is satisfied. Market value may be affected by, among other
things, sudden changes in interest rates, delinquency rates and
credit losses. Although management believes that this is unlikely
to occur to any significant degree, a margin call could require
an allocation of certain of the Company's liquidity and capital
resources. The term of the Repurchase Facility is for one year,
automatically renewable for an additional year. The Company
intends to use the Repurchase Facility to fund additional growth
in loan and lease receivables with the intent to eventually pool
and securitize these receivables.
The Repurchase Facility includes certain financial and
operational covenants including, among other things, the required
maintenance of a minimum net worth of $30 million dollars,
prohibition upon debt to equity ratios in excess of 8 to 1 and
the maintenance of certain loan portfolio performance criteria.
For the purpose of the Repurchase Facility, net worth has been
defined as total stockholders' equity plus subordinated
indebtedness not due within 90 days. Management continues to
closely monitor the performance of its loan portfolios in order
to insure compliance with all operational covenants. At September
30, 1995 the Company had $10,000,000 outstanding under the
Repurchase Facility and was in compliance with all of the
financial and operational covenants.
<PAGE>
DEBT PARTICIPATION INTERESTS
Since inception, the Company has secured a significant amount of
its working capital through debt participation interests. As of
September 30, 1995, the Company had an existing series of
borrowings under participation arrangements outstanding with
Fairfax Savings, a Federal Savings Bank ("Fairfax") in the
approximate amount of $46,580,000. The participations bear
interest at prime plus 2.5% fixed at the time of financing, with
principal and interest due monthly. In general, under the terms
of the participation agreements, payments on the agreements are
tied to the payments received from the secured contracts and
loans receivable.
Under the Company's participation agreements, collections
received from loans securing the participations are deposited
into restricted, trust bank accounts pending distributions to
participation holders. Distributions generally are disbursed to
participants once each month for the previous month's
collections.
Distributions under some participation agreements with Fairfax
include deposits of a portion of the collections into segregated,
interest-bearing reserve accounts held for the benefit of the
Company at Fairfax. These reserve accounts are returned to the
Company once their balances equal 25% to 50% of the principal
balances of the participation agreements.
The balances of the trust account pending settlement with
participants and the balance of the reserve accounts on deposit
with Fairfax are reflected on the Company's balance sheet as
Restricted Cash.
<PAGE>
PRIVATE PLACEMENT OF CONVERTIBLE SUBORDINATED DEBENTURES,
WARRANTS AND COMMON STOCK
The Company has secured a significant component of its working
capital through the private placement of debt and equity
securities. During the period from April 1995 to September 1995,
the Company completed the offering and sale in private placement
transactions of $15,400,000 of 9% Convertible Subordinated
Debentures (the "Debentures") and 1,494,500 Common Stock Purchase
Warrants (the "Warrants"), as well as 176,500 shares of its
common stock which yielded net proceeds of $2,100,950.
The Company's liquidity and capital resources may in the future
be effected by the potential conversion of the Debentures and/or
exercise of the Warrants. The Debentures are convertible into
shares of Common Stock at the option of the holders thereof,
however, based upon the average trading price of the Company's
Common Stock, the Company has the right to cause the redemption
of the Debentures for the principal amount thereof (together with
accrued interest). As of September 30, 1995, $7,200,000 in
principal amount of Debentures had converted to shares of common
stock.
The Warrants entitle the holders thereof to purchase shares of
Common Stock at exercise prices that range from $9.00 through
$15.00. The Warrants also contain features that permit redemption
(at $.001 per Warrant) based upon the average trading price of
the Company's Common Stock. A complete exercise of the Warrants,
if at all, would provide gross proceeds of $15,585,000 to the
Company.
BUSINESS STRATEGY
Given the Company's dependence on its present sources of financing
for current cash flow, loss of such sources could have a material
adverse impact on the Company's conduct of business and prospects.
Management is presently evaluating additional sources of
financing through a continuation and expansion of its existing
practices; that is, through offering debt participation interests
to institutional investors, traditional lines of credit, and
through additional equity placements. In addition, the Company is
exploring alternative financing sources and structures, including
the possibility of securitizing part of its portfolio of
automotive finance contracts in order to maximize profitability
and make available sufficient funds to continue implementation of
the Company's growth strategy over the long term. There can be no
assurances that the Company will secure additional sources of
financing. By virtue of the Company's status as a public company,
management will likely seek to gain access to equity or debt
capital through a sale of securities either through the public
market or to institutional investors.
Management is currently engaged in negotiations with certain
institutional brokerage firms for the purpose of obtaining
additional working capital through an underwritten public sale
of the Company's securities that is anticipated to occur during
1996. These negotiations remain preliminary in nature, accord-
ingly, the precise terms of any such offering have not yet been
establised, nor can there be any assurances as to when or if such
an offering will occur.
Any funding provided by the sale of securities, if at all, would
be used directly to acquire additional automobile finance
contracts, or would enhance the Company's borrowing base so as to
facilitate increased lines of credit or participation agreements.
<PAGE>
Management believes that the Company's current cash flow from
operations, proceeds from private placement transactions, as well
as advances on its credit facilities and debt participation
interests, is adequate to meet the Company's liquidity
requirements for its existing operations. The terms of the
borrowings under the participation agreements and the credit
facilities provide for repayments of principal and interest to
the lenders in amounts which, in general, correspond with and are
exceeded by the scheduled repayment of the secured loans and
leases receivable.
EFFECTS OF INFLATION
Inflationary pressures may have an effect on the Company's
internal operations and on its overall business. The Company's
operating costs are subject to general economic and inflationary
pressures. While operating costs have increased during the past
years, the Company does not believe that its operations have been
significantly affected by inflation. The Company's business is
subject to risk of inflation. Significant increases in interest
rates that are normally associated with strong periods of
inflation may have an impact upon the number of individuals that
are likely or able to afford the purchase of an automobile
through consumer finance or lease transactions. The Company
believes, however, that because of its customer profile, and the
need of its customers for basic transportation, such factors are
not likely to have a material adverse impact on the Company's
business.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is hereby made to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1994.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant caused this Form 10-QSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
NAL FINANCIAL GROUP INC.
BY:Robert R. Bartolini Dated: November 14 , 1995
Robert R. Bartolini
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
BY:Robert J. Carlson Dated: November 14 , 1995
Robert J. Carlson
Vice President, Finance
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,335,754
<SECURITIES> 0
<RECEIVABLES> 102,335,591
<ALLOWANCES> 3,057,193
<INVENTORY> 2,483,616
<CURRENT-ASSETS> 0
<PP&E> 4,731,240
<DEPRECIATION> 316,667
<TOTAL-ASSETS> 112,206,308
<CURRENT-LIABILITIES> 0
<BONDS> 86,977,416
<COMMON> 982,552
0
0
<OTHER-SE> 20,046,324
<TOTAL-LIABILITY-AND-EQUITY> 112,206,308
<SALES> 0
<TOTAL-REVENUES> 12,368,194
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,514,227
<LOSS-PROVISION> 1,412,138
<INTEREST-EXPENSE> 4,636,356
<INCOME-PRETAX> 1,725,473
<INCOME-TAX> 655,680
<INCOME-CONTINUING> 1,069,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,069,793
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
