- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- ------------------------------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
Commission File No. 1-11121
T F C E N T E R P R I S E S, I N C.
(Exact name of registrant as specified in its charter)
Delaware 54-1306895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5425 Robin Hood Road
Suite 101 B
Norfolk, Virginia 23513
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code -- (757) 858-1400
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
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
As of November 5, 1997, there were 11,290,308 outstanding shares of the
registrant's $.01 par value per share common stock.
<PAGE>
TFC ENTERPRISES, INC.
REPORT ON FORM 10-Q FOR THE THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Table of Contents and 10-Q Cross Reference Index
Part I - Financial Information Page No.
- ------------------------------ --------
Financial Highlights 3
Financial Statements (Item 1)
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Changes in Shareholders' Equity 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 12
Part II - Other Information
Exhibits and Reports on Form 8-K (Item 6) 17
Signatures 18
2
<PAGE>
<TABLE>
<CAPTION>
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
Three months Nine months
(dollar amounts in thousands, ended September 30, ended September 30,
except per share amounts) 1997 1996 1997 1996
- ----------------------------------------------------- ------------------ ------------------- ------------------ -----------------
<S> <C>
Net income (loss) $ (70) $ (916) $ 825 $ (540)
Net income (loss) per common share (.01) (.08) .07 (.05)
Average common and common equivalent
shares outstanding (in thousands) 11,677 11,290 11,590 11,288
Performance ratios (annualized, as appropriate):
Return on average common equity NM NM 3.59% NM
Return on average assets NM NM .73 NM
Yield on interest-earning assets 21.11% 21.49% 21.27 21.71%
Cost of interest-bearing liabilities 11.25 9.68 10.82 9.54
Net interest margin 13.01 14.24 13.32 14.56
Operating expense as a percentage of average
interest-earning assets 13.21 14.15 12.90 12.79
Total net charge-offs to average gross contract
receivables net of unearned interest 16.19 19.11 19.10 22.52
60+ days delinquencies to period-end gross
contract receivables 8.66 7.94 8.66 7.94
Total allowance and nonrefundable reserve to
period-end gross contract receivables net of
unearned interest 15.17 15.71 15.17 15.71
Equity to assets, period end 21.94 21.14 21.94 21.14
- ----------------------------------------------------- ------------------ ------------------- ------------------ -----------------
Average balances:
Interest-earning assets (a) $147,261 $176,097 $151,609 $194,699
Total assets 145,002 177,027 149,739 189,920
Interest-bearing liabilities 106,001 131,723 111,361 145,841
Equity 31,277 36,909 30,612 37,041
- ----------------------------------------------------- ------------------ ------------------- ------------------ -----------------
</TABLE>
Note: Throughout this report, ratios are based on unrounded numbers and factors
contributing to changes between periods are noted in descending order
of materiality.
NM - Not meaningful
(a) Average interest-bearing deposits and gross contract receivables net of
unearned interest revenue and unearned discount.
3
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
(dollars in thousands) 1997 1996
----------- --------
<S> <C>
Assets
Cash and cash equivalents $ 1,763 $ 2,688
Restricted cash -- 5,532
Net contract receivables 121,848 126,252
Recoverable income taxes 1,238 5,831
Property and equipment, net 2,389 2,823
Intangible assets, net 12,342 13,161
Deferred income taxes 188 188
Other assets 2,442 2,108
-------- --------
Total assets $142,210 $158,583
======== =======
Liabilities and shareholders' equity
Liabilities:
Revolving line of credit $ 91,926 $ 72,562
Term notes -- 19,464
Automobile receivables-backed notes -- 15,843
Subordinated notes 12,485 12,509
Accounts payable and accrued expenses 2,510 3,960
Income taxes 2,075 2,075
Refundable dealer reserve 1,304 2,208
Other liabilities 712 100
---------- ----------
Total liabilities 111,012 128,721
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized;
11,290,308 shares outstanding 49 49
Additional paid-in capital 55,844 55,333
Retained deficit (24,695) (25,520)
------- -------
Total shareholders' equity 31,198 29,862
------ ------
Total liabilities and shareholders' equity $142.210 $158.583
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
<S> <C>
Sept. 30, Sept. 30,
(in thousands, except per share amounts) 1997 1996
- ---------------------------------------------------------------------------- --------------------- ---------------------
Interest and other finance revenue $ 24,185 $ 31,707
Interest expense 9,040 10,440
- ---------------------------------------------------------------------------- --------------------- ---------------------
Net interest revenue 15,145 21,267
Provision for credit losses 466 2,630
- ---------------------------------------------------------------------------- --------------------- ---------------------
Net interest revenue after provision for credit losses 14,679 18,637
Other revenue:
Commission on ancillary products 587 1,280
Other 226 103
- -------------------------------------------------------------------------------------------------------------------------
Total other revenue 813 1,383
- ---------------------------------------------------------------------------- --------------------- ---------------------
Operating expense:
Salaries 7,233 9,634
Employee benefits 1,086 1,465
Occupancy 668 752
Equipment 930 945
Amortization of intangibles 819 819
Severance benefits -- 1,804
Other 3,931 5,098
- ---------------------------------------------------------------------------- --------------------- ---------------------
Total operating expense 14,667 20,517
- ---------------------------------------------------------------------------- --------------------- ---------------------
Income (loss) before income taxes 825 (497)
Provision for (benefit from) income taxes -- 43
- ---------------------------------------------------------------------------- --------------------- ---------------------
Net income (loss) $ 825 $ (540)
- ---------------------------------------------------------------------------- --------------------- ---------------------
Primary net income (loss) per common share $ .07 $ (.05)
Fully diluted net income (loss) per common share .07 (.05)
- ---------------------------------------------------------------------------- --------------------- ---------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<S> <C>
Three months ended
Sept. 30, June 30, March 31, Sept. 30,
1997 1997 1997 1996
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
$ 7,770 $ 8,140 $ 8,275 $ 9,459
2,981 3,032 3,027 3,189
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
4,789 5,108 5,248 6,270
214 160 92 130
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
4,575 4,948 5,156 6,140
176 158 253 345
42 160 23 30
- ---------------------------------------------------------------------------------------------------------------------------
218 318 276 375
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
2,397 2,393 2,443 3,318
457
390 373 323
216 214 236 271
300 335 294 326
273 273 273 273
-- -- -- 1,804
1,287 1,262 1,384 1,620
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
4,863 4,850 4,953 8,069
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
(70) 416 479 (1,554)
-- (283) 283 (638)
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
$ (70) $ 699 $ 196 $ (916)
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
$ (.01) $ .06 $ .02 $ (.08)
(.01) .06 .02 (.08)
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
</TABLE>
6
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
Sept. 30,
(in thousands) 1997 1996
---- ----
<S> <C>
Common stock
Balance at end of period $ 49 $ 49
Additional paid-in capital
Balance at beginning of period 55,333 54,279
Stock options exercised -- 11
Deferred compensation termination, net of taxes -- 620
Issuance of warrants 511 --
------- --------
Balance at end of period $ 55,844 $ 54,910
====== ======
Retained deficit
Balance at beginning of period $ (25,520) $ (17,924)
Net income (loss) 825 (540)
---- -----
Balance at end of period $ (24,695) $ (18,464)
======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
Sept 30,
(In thousands) 1997 1996
---- ----
<S> <C>
Operating activities
Net income (loss) $ 825 $ (540)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Amortization of intangible assets 819 819
Depreciation and other amortization 647 1,306
Provision for deferred income taxes -- 4,895
Provision for credit losses 466 2,630
Gain on disposal of assets 2 --
Changes in operating assets and liabilities:
Decrease in recoverable income taxes 4,593 778
Decrease (increase) in other assets (299) 1,436
(Decrease) increase in accounts payable and accrued expenses (1,450) 379
Decrease in refundable dealer reserve (904) (1,432)
Increase (decrease) in other liabilities 560 (196)
------------ ------------
Net cash provided by operating activities 5,259 10,075
Investing activities
Net cost of acquiring contract receivables (72,722) (63,654)
Repayment on contract receivables 76,661 92,993
Purchase of property and equipment (246) (1,602)
Proceeds on disposal of assets 24 --
-- --
Net cash provided by investing activities 3,717 27,737
Financing activities
Net borrowings on revolving lines of credit 19,875 9,282
Payments on term notes (19,864) (25,000)
Payments on automobile receivables-backed notes (15,843) (25,683)
Borrowings on term note 400 --
Decrease in restricted cash 5,532 3,745
Proceeds from stock options exercised -- 11
-- --
Net cash used in financing activities (9,900) (37,645)
-------- --------
Decrease in cash and cash equivalents (925) 167
Cash and cash equivalents at beginning of period 2,688 2,110
------ ------
Cash and cash equivalents at end of period $ 1,763 $ 2,277
===== =====
Supplemental disclosures:
Interest paid $8,317 $9,664
Income taxes paid -- --
Noncash transactions:
Issuance of stock warrants $ 511 $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Organization and business
Organization and business. TFC Enterprises, Inc. ("TFCE") is a holding company
that owns two primary subsidiaries, The Finance Company ("TFC") and First
Community Finance, Inc. ("FCF"). TFCE has no significant operations of its own.
TFC specializes in purchasing and servicing installment sales contracts
originated by automobile and motorcycle dealers in the sale of used automobiles,
vans, light trucks, and new and used motorcycles (collectively "vehicles") both
on an individual basis ("point of sale" purchase) and on a portfolio basis
("portfolio" purchase). Based in Norfolk, Virginia, TFC also has offices in
Dallas, Texas; Jacksonville, Florida; and San Diego, California. FCF is involved
in the direct origination and servicing of small consumer loans. FCF operates
branch offices in Virginia and North Carolina.
Basis of presentation. The unaudited consolidated financial statements of the
Company are prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. These financial statements should be read in
conjunction with the Company's 1996 Annual Report on Form 10-K. In the opinion
of management, all normal recurring adjustments which management of the Company
considers necessary for a fair presentation of the financial position and
results of operations for the periods are reflected in the financial statements.
Operating results for the three and nine months ended September 30, 1997, are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1997.
2. Contract receivables
The following is a summary of contract receivables as of September 30, 1997 and
December 31, 1996:
Sept. 30, Dec. 31,
(in thousands) 1997 1996
--------- --------
Contract receivables
Auto finance $159,978 $177,388
Consumer finance 11,311 9,645
-------- --------
Gross contract receivables 171,289 187,033
Less:
Unearned interest revenue 25,036 27,200
Unearned discount 898 504
Unearned commissions 540 1,132
Unearned service fees 502 324
Payments in process 9 2,560
Escrow for pending acquisitions 271 486
Allowance for credit losses 1,723 11,730
Nonrefundable reserve 20,462 16,845
------- -------
Net contract receivables $121,848 $126,252
======= =======
9
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
2. Contract receivables (continued)
Changes in the allowance for credit losses and nonrefundable reserve for the
three and nine months ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(in thousands) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Allowance for credit losses
Balance at beginning of period $3,407 $17,262 $11,730 $23,046
Provision for credit losses 214 130 466 2,630
Charge-offs (3,023) (6,239) (14,070) (18,703)
Recoveries 1,125 1,351 3,597 5,531
------- --------- ------- ---------
Balance at end of period $ 1,723 $12,504 $ 1,723 $12,504
====== ====== ====== ======
Nonrefundable reserve
Balance at beginning of period $19,614 $12,027 $16,845 $20,436
Allocation for credit losses 4,879 5,076 14,504 11,816
Charge-offs (4,031) (3,213) (10,887) (18,362)
------ ------ ------- -------
Balance at end of period $20,462 $13,890 $20,462 $13,890
====== ====== ====== ======
</TABLE>
10
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
3. Computation of primary and fully diluted net income (loss) per common share
Primary and fully diluted net income (loss) per common share for the three and
nine months ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(in thousands, except per share amounts) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Primary net income (loss) per common share:
Net income (loss) $ (70) $ (916) $ 825 $ (540)
Stock and stock equivalents (average shares):
Common shares outstanding 11,290 11,290 11,290 11,288
Stock options (a) 387 -- 300 --
-------- ------- ------- -------
Total stock and stock equivalents 11,677 11,290 11,590 11,288
------- ------- ------ ------
Primary net income (loss) per common share (b) $ ( .01) $ (.08) $ .07 $ (.05)
======== ======= ====== =======
Fully diluted net income (loss) per common share:
Net income (loss) $ (70) $ (916) $ 825 $ (540)
Stock and stock equivalents (average shares):
Common shares outstanding 11,290 11,290 11,290 11,288
Stock options (a) 387 -- 300 --
--------- ------- ------ --------
Total stock and stock equivalents 11,677 11,290 11,590 11,288
-------- ------- ------ --------
Fully diluted net income (loss) per common share (b) $ (.01) $ (.08) $ .07 $ (.05)
======= ======= ====== ========
</TABLE>
(a) Shares were assumed to be repurchased at the average closing common stock
price of $1.46 and $1.51 in the third quarter and first nine months of 1997,
respectively.
(b) Calculation based on unrounded numbers.
11
<PAGE>
TFC ENTERPRISES, INC.
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
This report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those factors set forth elsewhere in this report.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. For
example, during the remainder of 1997 and beyond, the Company's operations could
be materially adversely affected if interest rates were to rise, if credit
experience deteriorated, or the Company were to face increased competition.
Results of Operations
The net loss for the third quarter of 1997 decreased to $0.1 million, or $.01
per common share, compared to a net loss of $0.9 million, or $.08 per common
share, in the third quarter of 1996. Net income for the first nine months of
1997 was $0.8 million, or $.07 per common share, compared to a net loss of $0.5
million, or $.05 per common share, for the first nine months of 1996. The
primary causes of the improved 1997 results were a reduction in operating
expenses compared to 1996 and the improved performance of the Company's contract
portfolio, with a significant reduction in the rate of contract charge-offs
compared to 1996.
Volume. Gross contracts purchased or originated totaled $40.3 million in the
third quarter of 1997, or 5% below the $42.6 million purchased in the third
quarter of 1996. For the first nine months of 1997, gross contracts purchased or
originated totaled $117.3 million, or 20% above the $98.0 million purchased
during the first nine months of 1996. The increase in gross contract purchases
in the first nine months of 1997, relative to the comparable period in 1996, was
primarily attributable to increases in both the portfolio and point-of-sale
purchases of auto finance contracts. While point-of-sale purchases continued to
increase during the third quarter of 1997, the Company experienced a slight
decrease in portfolio purchases compared to the first two quarters of 1997. The
significant decrease in portfolio purchases for the third quarter of 1997
compared to the third quarter of 1996 results primarily from the unusually high
level of purchases in the third quarter of 1996 compared to other quarters of
1996 and 1997.
Gross contracts purchased or originated were as follows for the three and nine
months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Gross contract volume Three months ended Nine months ended
September 30 September 30,
<S> <C>
(dollars in thousands) 1997 1996 1997 1996
---- ---- ---- ----
Auto finance:
Point of sale $21,109 $15,536 $56,232 $43,972
Portfolio 15,907 23,472 51,724 45,755
Consumer finance 3,272 3,614 9,362 8,243
------ ------ ------ ------
Total $40,288 $42,622 $117,318 $97,970
-----== -----== ------== -----==
Number of contracts purchased or originated:
Auto finance:
Point of sale 1,823 1,563 4,970 4,795
Portfolio 2,976 4,458 10,059 8,657
Consumer finance 1,804 1,775 4,977 4,144
----- ----- ------ -----
Total 6,603 7,796 20,006 17,596
====== ===== ====== ======
</TABLE>
12
<PAGE>
TFC ENTERPRISES, INC.
Results of Operations (continued)
Net interest revenue. Net interest revenue for the third quarter of 1997 totaled
$4.8 million, a decrease of 24% compared with $6.3 million in the third quarter
of 1996. For the first nine months of 1997, net interest revenue was $15.1
million, down 38% from $21.3 million in the first nine months of 1996. The
decreases were attributable to a reduction in interest-earning assets and a
decrease in the net interest margin.
Interest-earning assets have decreased in 1997 compared to 1996 as a result of
the previously reported decrease in contract purchase volume in 1996 compared to
1995 and the high level of contract charge-offs in 1996.
The net interest margin was 13.01% in the third quarter of 1997, compared to
14.24% in the third quarter of 1996. For the first nine months of 1997, the net
interest margin was 13.32%, compared to 14.56% in the first nine months of 1996.
The decreases were primarily attributable to an increase in the cost of the
Company's credit facilities in 1997 compared to 1996. The cost of
interest-bearing liabilities was 11.25% in the third quarter of 1997 and 10.82%
in the first nine months of 1997 compared to 9.68% and 9.54%, respectively, in
the comparable periods in 1996. The increases were primarily attributable to
higher interest rates charged to the Company under new and amended agreements
with its lenders, as described in the TFC Enterprises, Inc. 1996 Annual Report
on Form 10-K.
The following table summarizes net interest revenue and the net interest margin
for the three and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Average interest-earning assets (a) $147,261 $176,097 $151,609 $194,699
Average interest-bearing liabilities 106,001 131,723 111,361 145,841
------- ------- ------- -------
Net interest-earning assets $ 41,260 $ 44,374 $ 40,248 $ 48,858
======= ======= ======= =======
Interest and other finance revenue $ 7,770 $ 9,459 $ 24,185 $ 31,707
Interest expense 2,981 3,189 9,040 10,440
------ ------ ------ -------
Net interest revenue $ 4,789 $ 6,270 $ 15,145 $ 21,267
====== ====== ======= =======
Yield on interest earning assets 21.11% 21.49% 21.27% 21.71%
Cost of interest bearing liabilities 11.25% 9.68% 10.82% 9.54%
------ ----- ----- -----
Net interest spread 9.86% 11.81% 10.45% 12.17%
===== ===== ===== =====
Net interest margin (b) 13.01% 14.24% 13.32% 14.56%
===== ===== ===== =====
</TABLE>
(a) Average gross contract receivables net of unearned interest
revenue and unearned discount.
(b) Net interest margin is annualized net interest revenue divided
by average interest-earning assets.
13
<PAGE>
TFC ENTERPRISES, INC.
Results of Operations (continued)
Operating expense. Operating expense for the third quarter and first nine months
of 1997 was $4.9 million and $14.7 million, respectively, compared with $8.1
million and $20.5 million, respectively, in the third quarter and first nine
months of 1996. The decreases reflect the impact of the Company's
previously-announced restructuring plans implemented during 1996 to consolidate
service center operations from three locations into two and to downsize the
management staff, as discussed more fully in the TFC Enterprises, Inc. 1996
Annual Report on Form 10-K.
Provision for income taxes. No income tax expense was provided for the first
nine months of 1997 because of a tax credit resulting from the reversal of a
portion of a deferred tax valuation allowance recorded at year-end 1996.
Other matters. The Company is testing and modifying its computer systems, as
necessary, to ensure that the situation commonly referred to as the "year 2000
problem" will not have a significant effect on operations or financial
condition. The problem arises when computer programs cannot process data for the
year 2000 and beyond. It is estimated that the cost of addressing the year 2000
problem and making the Company's computer systems year 2000 compliant will not
be material.
Financial Condition
Assets. Total assets decreased by $16.4 million, or 10%, to $142.2 million at
September 30, 1997, from $158.6 million at December 31, 1996. The decrease was
primarily attributable to a reduction in net contract receivables caused by
liquidations exceeding new contract purchases and originations.
The following table summarizes net contract receivables at September 30, 1997
and December 31, 1996:
Net contract receivables Sept. 30, Dec. 31,
(in thousands) 1997 1996
Auto finance:
Point-of-sale $ 72,816 $ 80,725
Portfolio 38,725 36,711
Consumer finance 10,307 8,816
-------- --------
Total $121,848 $126,252
======= =======
14
<PAGE>
TFC ENTERPRISES, INC.
Financial Condition (continued)
Liabilities. Total liabilities were $111.0 million at September 30, 1997, a
decrease of $17.7 million, or 14%, from December 31, 1996. The decrease in
liabilities from year-end 1996 primarily reflected decreased borrowings under
the Company's credit facilities, which, in turn, resulted from a contraction in
net contract receivables.
Credit Quality and Reserves
Net charge-offs. Net charge-offs to the allowance for credit losses and
nonrefundable dealer reserve were $5.9 million in the third quarter of 1997,
representing an annualized rate of 16.19% of average contract receivables net of
unearned interest revenue. This compares to $8.0 million, or 19.11%, in the
third quarter of 1996. For the first nine months of 1997, net charge-offs were
$21.4 million, or 19.10%, of average contract receivables net of unearned
interest revenue. This compares to $31.4 million, or 22.52%, of average contract
receivables net of unearned interest revenue in the first nine months of 1996.
Net charge-offs for the three and nine months ended September 30, 1997 and 1996
were as follows:
Net charge-offs
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(in thousands) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Auto finance:
Point-of-sale $3,491 $6,598 $15,594 $26,857
Portfolio 2,310 1,322 5,452 4,446
Consumer finance 128 51 314 101
------ --------- ------- --------
Total $5,929 $7,971 $21,360 $31,404
====== ====== ======= =======
</TABLE>
Delinquencies. Gross contract receivables that were 60 days or more delinquent
at September 30, 1997, and December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Delinquency Sept. 30, Dec. 31,
(dollars in thousands) 1997 1996
--------- ----------
<S> <C>
Gross contract receivables 60+ days delinquent $ 14,836 $ 18,495
Gross contract receivables 171,289 187,033
Percent 8.66% 9.89%
</TABLE>
15
<PAGE>
TFC ENTERPRISES, INC.
Provision for credit losses. Improved credit quality and servicing of the
Company's auto finance contracts eliminated the need for a loss provision on the
auto finance receivables in the first nine months of 1997 compared to a
provision of $2.42 million for the first nine months of 1996. The provision for
credit losses on the Company's consumer finance loan business increased to $0.21
million in the third quarter of 1997 compared to $0.13 million in the third
quarter of 1996, and increased to $0.47 million for the first nine months of
1997 compared to $0.21 million for the first nine months of 1996, due to growth
in the loan portfolio.
The Company's primary business involves purchasing motor vehicle installment
sales contracts at a discount to the remaining principal balance. An amount
ranging from 80 percent to 100 percent of the discount, based on experience, is
held in a nonrefundable dealer reserve against which credit losses are first
applied. Additional provisions for credit losses, if necessary, are charged to
income in amounts considered by management to be adequate to absorb future
credit losses. For the Company's consumer finance contracts, which are not
purchased at a discount, the reserve for credit losses must be established by a
charge to income in an amount considered to be adequate to absorb future credit
losses.
Provision for credit losses is dependent on a number of factors, including, but
not limited to, the level and trend of delinquencies and net charge-offs, the
amount of nonrefundable and refundable dealer reserves and the overall economic
conditions in the markets in which the Company operates. Due to the inherent
uncertainty involved in predicting the future performance of these factors,
there can be no assurance regarding the future level of provision for credit
losses.
Liquidity and Capital Resources
Liquidity management. As shown on the Consolidated Statements of Cash Flows,
cash and cash equivalents decreased by $0.9 million in the first nine months of
1997, to $1.8 million at September 30, 1997. The decrease reflected $3.7 million
of net cash provided by investing activities and $5.3 million of net cash
provided by operating activities, partially offset by $9.9 million of net cash
used in financing activities. Net cash provided by investing activities
principally reflected $3.9 million in net repayments on contract receivables.
Net cash used in financing activities primarily reflected $15.4 million of net
payments on the Company's revolving line of credit, term notes and Automobile
Receivables-Backed notes. In the first nine months of 1997 and 1996, the
combination of cash on hand and net cash provided by operating and financing
activities was sufficient to fund business volume.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 (FAS No. 128), "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options and warrants will be excluded. The impact
of FAS No. 128 on primary and fully diluted earnings per share for the third
quarter and first nine months of 1997 and 1996 is not expected to be material.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
TFC ENTERPRISES, INC.
(Registrant)
Date: November 6, 1997 By:/s/ Robert S. Raley, Jr.
------------------------
Robert S. Raley, Jr.
Chairman, President and
Chief Executive Officer and
Director
Date: November 6, 1997 By:/s/ David W. Karsten
--------------------------
David W. Karsten
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
of the Registrant)
18
<PAGE>
Index to Exhibits
Exhibit No. Description
27.1 Financial Data Schedule, which is submitted
electronically to the Securities and
Exchange Commission for information only and
not filed.
19
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<ARTICLE> 5
<LEGEND>
TFC Enterprises, Inc. quarterly report on Form 10-Q for the quarter ended
September 30, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,763
<SECURITIES> 0
<RECEIVABLES> 144,033
<ALLOWANCES> 22,185
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,005
<DEPRECIATION> 3,616
<TOTAL-ASSETS> 142,210
<CURRENT-LIABILITIES> 111,012
<BONDS> 0
0
0
<COMMON> 49
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<TOTAL-LIABILITY-AND-EQUITY> 142,210
<SALES> 24,185
<TOTAL-REVENUES> 24,998
<CGS> 0
<TOTAL-COSTS> 14,667
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<INTEREST-EXPENSE> 9,040
<INCOME-PRETAX> 825
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<EPS-PRIMARY> .07
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