THIS REPORT HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION VIA EDGAR
- ---------------------------------------------------------------------------
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 March 31, 1999
Commission File No. 0-22910
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 101B
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 April 28, 1999, there were 11,404,882 outstanding shares of the
registrant's $.01 par value per share common stock.
<PAGE>
TFC ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR
THE THREE MONTHS ENDED MARCH 31, 1999
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 Income 5
Consolidated Statements of Changes in Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
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) 20
Signatures 21
Index to Exhibits 22
<PAGE>
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
March 31,
-------------------
(in thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
Net income $ 1,402 $ 341
Net income per basic/diluted common share $ 0.12 $ 0.03
Average common shares outstanding (in 11,405 11,290
thousands)
- --------------------------------------------------------------------------------
Performance ratios (annualized, as
appropriate)
Return on average common equity 15.58% 4.37%
Return on average assets 3.13 0.90
Yield on interest-earning assets 23.27 21.64
Cost of interest-bearing liabilities 8.96 10.91
Net interest margin 16.92 13.82
Operating expense as a percentage of
average interest-earning assets 12.15 13.48
Total net charge-offs to average
gross contract receivables,
net of unearned interest 14.58 18.20
60+ days delinquencies to period-end
gross contract receivables 5.03 7.35
Total allowance and nonrefundable reserve
to period end gross contract
receivables, net of unearned interest 11.50 13.70
Equity to assets, period end 19.86 20.37
- --------------------------------------------------------------------------------
Average balances:
Interest-earning assets (a) 191,712 $157,459
Total assets 179,136 151,244
Interest-bearing liabilities 135,833 112,972
Equity 35,979 31,252
- --------------------------------------------------------------------------------
Note: Throughout this report, ratios are based on unr ounded numbers and
factors contributing to changes between periods are noted in descending order
of materiality.
(a) Gross contract receivables net of unearned interest revenue.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in thousands) 1999 1998
-------- -----------
Assets
Cash and cash equivalents $ 1,876 $ 1,868
Net contract receivables 167,861 155,895
Property and equipment, net 1,961 1,949
Intangible assets, net 10,705 10,978
Other assets 2,283 1,907
------- -------
Total assets $ 184,686 $ 172,597
========= =======
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $ 130,343 $ 121,281
Subordinated notes 9,663 9,636
Accounts payable and accrued expenses 3,543 3,180
Income taxes and other liabilities 3,920 2,394
Refundable dealer reserve 533 824
Total liabilities 148,002 137,315
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000
shares authorized; 11,404,882
shares issued and outstanding 50 50
Additional paid-in capital 56,020 56,020
Retained deficit (19,386) (20,788)
---------- --------
Total shareholders' equity 36,684 35,282
---------- --------
Total liabilities and shareholders' $ 184,686 $172,597
equity ========== ========
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31,
-------------------
(in thousands, except per share amounts) 1999 1998
---- ----
Interest and other finance revenue $11,153 $ 8,520
Interest expense 3,044 3,080
------- -------
Net interest revenue 8,109 5,440
Provision for credit losses 98 121
------- -------
Net interest revenue after provision 8,011 5,319
for credit losses
Other revenue:
Commissions on ancillary products 201 243
Other 107 85
------- ------
Total other revenue 308 328
Operating expense:
Salaries 3,047 2,682
Employee benefits 642 483
Occupancy 230 222
Equipment 313 305
Amortization of intangible assets 273 273
Other 1,320 1,341
------ ------
Total operating expense 5,825 5,306
------ ------
Income before income taxes 2,494 341
Provision for income taxes 1,092 --
------ ------
Net income $1,402 $ 341
====== ======
Net income per common share:
Basic $ 0.12 $0.03
====== ======
Diluted $ 0.12 $0.03
====== ======
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Three months
ended
March 31,
------------
(in thousands) 1999 1998
---- ----
Common stock
Balance at beginning and end of period $ 50 $ 49
===== =====
Additional paid-in capital
Balance at beginning and end of period $ 56,020 $ 55,844
====== ======
Retained deficit
Balance at beginning of period $(20,788) $(24,813)
Net income (a) 1,402 341
------ ------
Balance at end of period $(19,386) $(24,472)
======== ========
(a) There are no adjustments to net income to determine comprehensive income
for the periods presented.
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
------------------
(in thousands) 1999 1998
---- ----
Operating activities
Net income $1,402 $ 341
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 273 273
Depreciation and other amortization 250 319
Provision for credit losses 98 121
Changes in operating assets and liabilities:
Decrease in recoverable income taxes -- 1,067
(Increase) decrease in other assets (400) 38
Increase in accounts payable and accrued expenses 363 640
Increase in income taxes and other liabilities 1,526 5
Decrease in refundable dealer reserve (291) (235)
----- -----
Net cash provided by operating activities 3,221 2,569
Investing activities
Net cost of acquiring contract receivables (34,675) (29,575)
Repayment on contract receivables 22,611 21,730
Purchase of property and equipment (211) (31)
------ ------
Net cash used in investing activities (12,275) (7,876)
Financing activities
Net borrowings on revolving lines of credit 9,062 5,498
------ -----
Net cash provided by financing activities 9,062 5,498
------ -----
Increase in cash and cash equivalents 8 191
Cash and cash equivalents at beginning of period 1,868 1,975
------ -----
Cash and cash equivalents at end of period $ 1,876 $ 2,166
====== =====
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Organization and business
TFC Enterprises, Inc. ("TFCE") is a holding company that operates three primary
wholly-owned subsidiaries, The Finance Company ("TFC"), First Community Finance,
Inc. ("FCF") and Recoveries, Inc. ("RI"). 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 bulk basis ("bulk"
purchase). Based in Norfolk, Virginia, TFC also has eight loan production
offices throughout the United States in communities with a large concentration
of military personnel. FCF is involved in the direct origination and servicing
of small consumer loans. FCF operates 16 branches throughout Virginia and North
Carolina. Recoveries Inc., a third party debt collection agency, services
foreclosed or troubled loan portfolios and receivables for medical organizations
and others.
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
1998 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 months ended March 31, 1999, are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1999.
2. Contract receivables
The following is a summary of contract receivables at March 31, 1999, and
December 31, 1998:
March 31, Dec. 31,
(in thousands) 1999 1998
-------- -------
Contract receivables:
Auto finance $ 219,819 $209,341
Consumer finance 17,053 16,472
-------- -------
Gross contract receivables 236,872 225,813
Less:
Unearned interest revenue 40,344 37,710
Unearned discount 3,967 3,539
Unearned commissions 602 637
Unearned service fees 1,289 1,186
Payments in process 7 3,915
Escrow for pending acquisitions 203 736
Allowance for credit losses 836 859
Nonrefundable reserve 21,763 21,336
------- -------
Net contract receivables $ 167,861 $ 155,895
======= =======
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements
2. Contract receivables (continued)
Changes in the allowance for credit losses and nonrefundable reserve for the
three months ended March 31, 1999 and 1998 were as follows:
Three months ended
March 31,
------------------
(in thousands) 1999 1998
---- ----
Balance at beginning of period $22,195 $23,029
Provision for credit losses 98 121
Allocation for credit losses 7,292 6,253
Charge-offs (8,507) (8,422)
Recoveries 1,521 1,215
------- -------
Balance at end of period $22,599 $22,196
======= =======
3. Computation of primary and fully diluted earnings per share
Basic and diluted earnings per share for the three months ended March 31, 1999
and 1998 were as follows:
Three months
ended
March 31,
----------------
(in thousands, except per share amounts) 1999 1998
---- ----
Numerator:
Net income $1,402 $ 341
Denominator:
Denominator for diluted earning per 11,405 11,290
share-weighted-average shares
Effect of dilutive securities:
Employee stock options 147 378
Warrants 589 61
------ ------
Dilutive potential common shares 736 439
------ ------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 12,141 11,729
====== ======
Basic/diluted earnings per share 0.12 .03
====== ======
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
4. Segments
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", (SFAS No.
131) which was issued by the Financial Accounting Standards Board in June 1997
and became effective for financial statements for periods beginning after
December 15, 1997. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision makers in deciding how to allocate
resources and in assessing performance.
The Company is a specialty finance company with two business segments. Through
TFC, the auto finance segment, the Company is engaged 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") throughout the United States. This segment
consists of two business units (i) point-of-sale which contracts are acquired on
an individual basis from dealers after the Company has reviewed and approved the
purchasers credit application and (ii) bulk which contracts are acquired through
the purchase of dealer portfolios. The point-of-sale business focuses on
military enlisted personnel whereas the bulk purchases are primarily contracts
with civilian customers. Through FCF, the consumer finance segment, the Company
is involved in the direct origination and servicing of small consumer loans
through a branch network in Virginia and North Carolina. The other column
consists of corporate support functions not allocated to either of the business
segments. All revenue is generated from external customers in the United States.
Management measures segment performance based on revenue earned (yields
achieved) on the outstanding portfolio of contract receivables as well as net
income (loss) before taxes.
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
4. Segments (continued)
The accounting policies are the same as those described in the summary of
significant accounting policies.
<TABLE>
<CAPTION>
(in thousands) Auto Finance Consumer Finance Other Total
- -------------- --------------- --------------------- ------------- -------------
<S> <C> <C> <C> <C>
March 1999
Interest revenues $10,150 $1,003 $-- $11,153
---------------------------------------------------------------------------------------------
Interest expense $2,741 $303 $-- $3,044
---------------------------------------------------------------------------------------------
Income before taxes: $2,764 $75 $11 $2,850
----------------------------------------------------------------------
Unallocated amounts:
Intangible amortization (273)
Corporate expenses (83)
-------------
Consolidated income $2,494
before taxes =============
Contract receivables $152,119 $15,733 $9 $167,861
----------------------------------------------------------------------
Other assets 16,825
-------------
Total assets $184,686
=============
<CAPTION>
Auto Finance Consumer Finance Other Total
--------------------------------------------------------------------------------------------------------------------------
March 1998
Interest revenues $7,728 $792 $-- $8,520
---------------------------------------------------------------------------------------------
Interest expense $2,816 $264 $-- $3,080
---------------------------------------------------------------------------------------------
Income (loss) before taxes: $1,039 $(71) $(281) $687
----------------------------------------------------------------------
Unallocated amounts:
Intangible amortization (273)
Corporate expenses (73)
=============
Consolidated income
before taxes $341
=============
Contract receivables $124,164 $12,063 $-- $136,227
----------------------------------------------------------------------
Other assets 17,993
=============
Total assets $154,220
=============
</TABLE>
<PAGE>
TFC ENTERPRISES, INC.
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Cautionary statement under the "Safe-Harbor" provisions of the Private
Securities Litigation Reform Act of 1995: Included in this Report and other
written and oral information presented by management from time to time,
including but not limited to, reports to shareholders, quarterly shareholder
letters, filings with the Commission, news releases, discussions with analysts
and investor presentations, are forward-looking statements about business
strategies, market potential, potential for future point-of-sale and bulk
purchases, future financial performance and other matters that reflect
management's expectations as of the date made. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "seeks," and similar
expressions are intended to identify forward-looking statements. Future events
and the Company's actual results could differ materially from the results
reflected in these forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation: the Company's dependence on its line of credit, intense
competition within its markets, the fluctuating interest rates associated with
its line of credit, the impact of installment contract defaults and the Year
2000 issue. Please refer to a discussion of these and other factors in this
Report and the Company's other Commission filings. The Company disclaims any
intent or obligation to update these forward-looking statements, whether as a
result of new information, future events or otherwise.
Results of Operations
Net income and earnings per basic common share
First quarter 1999 net income was $1.4 million, or $0.12 per basic common share,
compared to net income of $0.3 million, or $0.03 per basic common share, in the
first quarter of 1998.
Volume
Gross contracts purchased or originated totaled $58.5 million in the first
quarter of 1999, or 14% above the $51.3 million purchased in the first quarter
of 1998. The increase was attributable primarily to a $4.1 million increase in
bulk purchases.
<PAGE>
TFC ENTERPRISES, INC.
Gross contracts purchased or originated were as follows for the three months
ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
--------------- -----------------
(in thousands) Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Contracts purchased or originated:
Auto finance:
Point-of-sale $ 39,303 67.2% $37,876 73.8%
Bulk 14,304 24.4 10,225 19.9
Consumer finance 4,916 8.4 3,220 6.3
-------- ------- ------- ----
Total $ 58,523 100.0% $51,321 100.0%
======== ======= ====== =====
Number of contracts purchased or originated:
Auto finance:
Point-of-sale 3,150 38.2% 3,079 45.5%
Bulk 2,745 33.2 1,923 28.4
Consumer finance 2,361 28.6 1,763 26.1
-------- ------- ------- -----
Total 8,256 100.0% 6,765 100.0%
======== ======= ======= =====
</TABLE>
Net interest revenue
Net interest revenue for the first quarter of 1999 totaled $8.1 million, an
increase of 50%, from $5.4 million in the prior year period. The increase was
attributable to higher average interest-earning assets and improvement in the
yield on interest-earning assets to 23.27% in the first quarter of 1999,
compared to 21.64% in the first quarter of 1998. The increase in yield was
attributable to improved pricing.
The cost of interest-bearing liabilities was 8.96% in the first quarter of 1999,
compared with 10.91% in the first quarter of 1998. The decrease was primarily
attributable to a 50 basis point decrease in the rate on the Company's primary
line of credit and a decrease in the one-month LIBOR rate. Additionally,
interest expense for 1998 included the costs related to warrants and structuring
fees that were fully amortized at December 31, 1998. The Company continues to
explore ways to reduce its overall cost of interest bearing liabilities.
<PAGE>
TFC ENTERPRISES, INC.
Net interest revenue, net interest spread, and net interest margin were as
follows for the three months ended March 31, 1999 and 1998:
Three months ended
March 31,
--------------------
(in thousands) 1999 1998
---- ----
Average interest earning assets (a) $ 191,712 $157,459
Average interest bearing liabilities 135,833 112,972
---------- --------
Net interest earning assets $ 55,879 $ 44,487
========== ========
Interest and other finance revenue $ 11,153 $ 8,520
Interest expense 3,044 3,080
--------- --------
Net interest revenue $ 8,109 $ 5,440
========= ========
Yield on interest-earning assets 23.27% 21.64%
Cost of interest-bearing liabilities 8.96 10.91
--------- --------
Net interest spread 14.31% 10.73%
========= ========
Net interest margin (b) 16.92% 13.82%
========= ========
(a) Gross contract receivables net of unearned interest revenue.
(b) Net interest margin is annualized net interest revenue divided by average
interest-earning assets.
Operating expense
Operating expense as a percentage of interest-earning assets, calculated on an
annualized basis, decreased from 13.48% in the first quarter of 1998 to 12.15%
in the first quarter of 1999. Operating expense was $5.8 million in the first
quarter of 1999, compared with $5.3 million in the first quarter of 1998. The
increase in operating expenses of $0.5 million, or 9%, in the first quarter of
1999 compared to the first quarter of 1998 primarily reflects increased salary
and benefit expenses associated with the additional employees in The Finance
Company's national sales department and three new loan production offices and an
increase in the branch offices for First Community Finance.
Provision for income taxes
The effective tax rate for the first quarter of 1999 is higher than the expected
statutory rates primarily due to the amortization of certain intangible assets.
The Company recorded no income tax provision in the first quarter of 1998 due to
the anticipation of the reversal of the deferred tax valuation allowance
recorded at year end 1997 which substantially offset the tax expense related to
the estimated income for fiscal year 1998.
<PAGE>
TFC ENTERPRISES, INC.
Other matter - Year 2000
As has been widely reported, the Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions and/or engaging in similar normal
business activities.
State of readiness
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and
certain hardware so those systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications
or replacements of existing software and certain hardware, the Year 2000
problem can be mitigated. However, if such modifications and replacements
are not made, or are not completed in a timely manner, the Year 2000
problem could have a material adverse impact on the Company's business,
financial condition and results of operations.
The Company's plan to resolve the Year 2000 problem involves the following
four phases: assessment, remediation, testing and implementation. To date,
the Company has completed its assessment of all systems that could be
significantly affected by the Year 2000 problem. The assessment indicated
that most of the Company's significant information technology systems could
be affected, particularly the loan servicing systems. In addition, the
Company has gathered information about the Year 2000 compliance status of
its significant third party vendors and continues to monitor their
compliance.
To date, the Company has completed the remediation phase for the Company's
loan servicing systems, and expects to complete software reprogramming,
testing and replacement no later than June 30, 1999. Once software is
reprogrammed or replaced, the Company will begin implementation. To date
the Company has completed approximately 85% of its testing and has
implemented approximately 85% of its remediated systems. Completion of the
testing phase for all significant systems was completed on March 31, 1999
with all remediated systems fully tested and implemented by June 30, 1999.
To date, the Company is approximately 80% complete on the remediation phase
for operating equipment, such as the phone systems, fax machines, etc.
Testing of this equipment is primarily dependent upon the vendor to confirm
that the proper changes have been made and the system will function
correctly. To date, testing of the remediated operating equipment is
approximately 75% complete. Once testing is complete, the equipment is
ready for immediate use. Testing and implementation of affected equipment
is expected to be completed by June 30, 1999.
The Company has queried its significant vendors regarding their Year 2000
compliance status. To date, the Company is not aware of any external agent
with a Year 2000 problem that would materially impact the Company's
business, financial condition, or results of operations. The Company does
not share information systems with any significant external agent. However,
the Company has no means of ensuring that external agents will be Year 2000
ready. The effect of non-compliance by external agents is not determinable.
<PAGE>
TFC ENTERPRISES, INC.
Cost to Address the Company's Year 2000 Problem
The Company will utilize both internal and external resources to reprogram,
or replace, test and implement the software and operating equipment for
Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $0.7 million and is being funded through operating cash flows.
To date, the Company has capitalized approximately $0.6 million for new
systems and equipment related to all phases of the Year 2000 project. Of
the total remaining project costs, most is attributable to the purchase of
new software and operating equipment, which will be capitalized.
Risks
Management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that
the Company does not complete any additional phases, the Company may be
unable to effectively book loans and collect payments. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans
The Company has contingency plans for certain critical applications. These
contingency plans involve, the manual processing of new business
applications, and collections maintained through a more manual and
elementary process until affected systems can be corrected.
Financial Condition
Assets
Total assets increased by $12.1 million, or 7%, to $184.7 million at March 31,
1999, from $172.6 million at December 31, 1998. The increase was primarily
attributable to an increase in net contract receivables.
Net contract receivables were as follows at March 31, 1999 and December 31,
1998:
March 31, Dec. 31,
(in thousands) 1999 1998
---- ----
Auto finance:
Point-of-sale $116,156 $104,125
Bulk 35,963 36,649
Consumer finance 15,742 15,121
-------- --------
Total $167,861 $155,895
======== ========
Liabilities
Total liabilities were $148.0 million at March 31, 1999, an increase of $10.7
million, or 8%, from $137.3 million at December 31, 1998. The increase in
liabilities compared with year-end 1998 primarily reflected increased borrowings
under the Company's credit facilities which, in turn, resulted in a increase in
net contract receivables.
<PAGE>
TFC ENTERPRISES, INC.
Credit Quality and Reserves
Auto finance contract receivables-Net charge-offs
Net charge-offs to the allowance for credit losses and nonrefundable reserve
were $6.9 million in the first quarter of 1999, representing an annualized rate
of 15.7% of average gross contract receivables net of unearned interest revenue.
This compares to $6.8 million, or 18.6% in the first quarter of 1998. The
decrease in net charge-offs in the first quarter of 1999, relative to the
comparable period in 1998 was due to improved credit quality, servicing and
recoveries.
Auto finance contract receivables-Provision for credit losses
TFC's primary business involves purchasing installment sales contracts at a
discount to the remaining principal balance. A portion of the discount is
generally 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. Improved credit quality and servicing of TFC's auto
finance contracts eliminated the need for a loss provision for all of 1998 and
the first quarter of 1999.
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 TFC 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.
Auto finance contract receivables- Reserves
The static pool reserve methodology is used to analyze and reserve for TFC's
credit losses. This methodology allows TFC to stratify its portfolio into
separate and identifiable annual pools. The loss performance of these annual
pools is analyzed monthly to determine the adequacy of the reserves. The loss
performance to date combined with estimated future losses by pool year
establishes the gross estimated loss for each pool year. The combined expected
losses are reduced by estimated future recoveries that are based on historical
recovery performance to establish the estimated required reserve for credit
losses.
At March 31, 1999, the combination of TFC's allowance for credit losses and
nonrefundable dealer reserve totaled $21.8 million, or 12.1%, of contract
receivables net of unearned interest revenue. This compares to $21.3 million, or
12.4%, at December 31, 1998. The decrease in reserves and in the percentage of
reserves to contract receivables is the result of the improved credit quality,
servicing and recoveries.
TFC's refundable dealer reserve, which is available to absorb losses relating to
contracts purchased from certain dealers, totaled $0.5 million at March 31,
1999, compared to $0.8 million at December 31, 1998. Under certain of TFC's
programs, contracts from dealers were purchased under a refundable, rather than
nonrefundable reserve relationship. Under certain circumstances, TFC may have to
remit some or all of the refundable reserve back
<PAGE>
TFC ENTERPRISES, INC.
to the dealer. No such liability exists under a nonrefundable reserve
relationship. Accordingly, the refundable reserve is carried as a liability on
the Company's Consolidated Balance Sheets. Programs with refundable reserves
were eliminated near the end of 1997.
The reserves as a percentage of gross auto finance contract receivables net of
unearned interest at March 31, 1999, of 12.1% are less than net charge-offs as a
percentage of average net contracts receivable for March 31, 1999, of 15.7% on
an annualized basis. This difference exists because the reserves include an
estimate of future recoveries on prior year charge-offs and future recoveries on
current year charge-offs that are not reflected in the current year charge-off
percentage. These estimated future recoveries are based on historical recovery
performance and this estimate is an integral part of the evaluation of the
adequacy of the reserves performed by management quarterly.
Consumer finance charge-offs, provision for credit losses and reserves (FCF)
Net charge-offs to the allowance for credit losses were $0.1 million in the
first quarter of 1999 and first quarter of 1998, representing an annualized rate
of 2.9% and 3.5% of average gross contract receivables net of unearned interest
revenue, respectively. The provision for credit losses was $0.1 million for the
first quarter of 1999 and for the first quarter of 1998 and the allowance for
credit losses was $0.8 million or 4.9% and $0.9 million or 5.2% of outstanding
gross contract receivables at March 31, 1999 and December 31, 1998. Management
has established the level of allowance that is considers to be adequate based on
FCF's experience through March 31, 1999.
Charge-offs net of recoveries, by line of business, for the three months ended
March 31, 1999 and 1998, were as follows:
Three months
ended
March 31,
------------------
(in thousands) 1999 1998
---- ----
Auto finance:
Point-of-sale $ 3,703 $ 3,455
Bulk 3,162 3,639
Consumer finance 121 113
----- -----
Total $ 6,986 $ 7,207
======= ======
Delinquencies
Gross auto finance contract receivables that were 60 days or more past due
totaled $11.5 million, or 5.2% of gross auto finance contract receivables at
March 31, 1999, compared to $12.9 million, or 6.2%, at December 31, 1998. This
improvement in delinquency was the result of improved underwriting and increased
collection efforts.
Gross consumer finance receivables that were 60 days or more past due totaled
$0.4 million, or 2.5% of gross receivables at March 31, 1999, compared to $0.4
million, or 2.9% at December 31, 1998.
<PAGE>
TFC ENTERPRISES, INC.
Delinquency at March 31, 1999 and December 31, 1998 was as follows:
March 31, Dec. 31,
(in thousands) 1999 1998
-------- -------
Gross contract receivables 60 days and more $11,926 $ 13,347
delinquent
Gross contract receivables 236,872 225,813
Percent 5.03% 5.91%
Liquidity and Capital Resources
Liquidity management
As shown in the Consolidated Statements of Cash Flows, cash and cash equivalents
remained at 1.9 million for the first quarter of 1999. This reflected $3.2
million of net cash provided by operating activities and $9.1 million of net
cash provided by financing activities partially offset by $12.3 million of net
cash used in investing activities. Net cash used in investing activities
resulted from net cost of acquiring contract receivables exceeding the repayment
of contract receivables resulting in an overall increase in net contract
receivables. Net cash provided by financing activities reflected net borrowings
on the revolving lines of credit used to fund the increase in net contract
receivables. For the first three months of 1998, net cash reflected $2.6 million
of net cash provided by operating activities and $5.5 million of net cash
provided by financing activities partially offset by $7.9 million of net cash
used in investing activities. In both the first quarter of 1999 and 1998, the
combination of cash on hand and net cash provided by financing activities was
sufficient to fund the growth in business volume. Management is currently
exploring additional sources of liquidity.
<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
On January 29, 1999, the Company filed a report on Form 8-K, under
Item 5, announcing an Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement with its principal lender dated as of January 1,
1999.
<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: April 28, 1999 By: /s/ Robert S. Raley Jr.
------------------------
Robert S. Raley, Jr.
Chairman, President,
Chief Executive Officer and
Director
Date: April 28, 1999 By: /s/ Craig D. Poppen
--------------------
Craig D. Poppen
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
of the registrant)
<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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TFC
ENTERPRISES INC REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,876
<SECURITIES> 0
<RECEIVABLES> 190,460
<ALLOWANCES> 22,599
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,445
<DEPRECIATION> 4,484
<TOTAL-ASSETS> 184,686
<CURRENT-LIABILITIES> 140,006
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0
0
<COMMON> 50
<OTHER-SE> 36,684
<TOTAL-LIABILITY-AND-EQUITY> 184,686
<SALES> 11,453
<TOTAL-REVENUES> 11,461
<CGS> 0
<TOTAL-COSTS> 5,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 98
<INTEREST-EXPENSE> 3,044
<INCOME-PRETAX> 2,494
<INCOME-TAX> 1,092
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<EPS-PRIMARY> .12
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