================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JULY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________ TO _______________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES
OUTSTANDING AT
CLASS AUGUST 30, 1996
- - ------------------------------------- ----------------------------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
================================================================================
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.,
AND SUBSIDIARIES
FORM 10-Q
JULY 31, 1996
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1996 and
July 31, 1996........................ 3
Consolidated Statements of Operations
for the Three Months Ended
July 31, 1995 and 1996............... 4
Consolidated Statement of
Shareholders' Equity for the Three
Months Ended July 31, 1996........... 5
Consolidated Statements of Cash Flows
for the Three Months Ended
July 31, 1995 and 1996............... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 16
SIGNATURES................................... 16
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1996 AND JULY 31, 1996
JULY 31,
APRIL 30, 1996 1996
--------------- ------------
(UNAUDITED)
ASSETS
- - -------------------------------------
Receivables Held for Investment,
net................................ $ 96,263,092 $105,437,394
Cash and Short-Term Investments,
including restricted cash of
$3,048,148 and $2,645,770.......... 6,649,417 6,362,327
Other Receivables:
Due from servicer............... 5,266,531 6,270,917
Accrued interest................ 1,613,953 1,559,326
Assets Held for Sale................. 1,912,050 2,116,857
Other Assets:
Funds held under reinsurance
agreement..................... 2,830,689 2,895,521
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $446,603 and $490,913...... 828,613 782,869
Federal income tax receivable... 295,523 --
--------------- ------------
Total assets............... $ 115,659,868 $125,425,211
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- - -------------------------------------
Debt:
Secured credit facilities....... $ 91,048,636 $100,392,929
Other Liabilities:
Due to dealers.................. 806,634 629,297
Accounts payable and accrued
liabilities................... 1,692,942 1,476,828
Current income taxes payable.... 193,434 143,931
Deferred income taxes payable... 125,472 237,724
--------------- ------------
Total liabilities.......... 93,867,118 102,880,709
--------------- ------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares authorized,
5,566,669 and 5,566,669,
shares issued and
outstanding................... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 3,322,265 4,074,017
--------------- ------------
Total shareholders'
equity..................... 21,792,750 22,544,502
--------------- ------------
Total liabilities and
shareholders' equity....... $ 115,659,868 $125,425,211
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JULY 31,
--------------------------
1995 1996
------------ ------------
Interest Income...................... $ 2,926,692 $ 4,500,031
Interest Expense..................... 1,209,009 1,560,597
------------ ------------
Net interest income........ 1,717,683 2,939,434
Provision for Credit Losses.......... 100,000 359,606
------------ ------------
Net Interest Income After Provision
for Credit Losses.................. 1,617,683 2,579,828
------------ ------------
Other Income:
Late fees and other............. 95,057 171,949
------------ ------------
Operating Expenses:
Servicing fees.................. 239,201 352,314
Salaries and benefits........... 379,906 618,503
Other........................... 435,443 597,144
------------ ------------
Total operating expenses... 1,054,550 1,567,961
------------ ------------
Income Before Provision for Income
Taxes.............................. 658,190 1,183,816
------------ ------------
Provision for Income Taxes:
Current......................... 119,846 319,812
Deferred........................ 116,875 112,252
------------ ------------
Total provision for income
taxes.................... 236,721 432,064
------------ ------------
Net Income........................... $ 421,469 $ 751,752
Preferred Stock Dividends............ (28,000) --
------------ ------------
Net Income Allocable to Common
Shareholders....................... $ 393,469 $ 751,752
============ ============
Net Income Per Common Share.......... $0.11 $0.14
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, April 30, 1996.............. $5,567 $ 18,464,918 $ 3,322,265 $ 21,792,750
Net income...................... -- -- 751,752 751,752
------- -------------- ------------ --------------
Balance, July 31, 1996............... $5,567 $ 18,464,918 $ 4,074,017 $ 22,544,502
======= ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1996
(UNAUDITED)
1995 1996
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 421,469 $ 751,752
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 219,438 406,700
Provision for credit
losses................... 100,000 359,606
Charge-offs, net of
recoveries............... (100,460) (301,401)
(Increase) decrease in:
Accrued interest
receivable............... (132,437) 54,627
Restricted cash............ (298,457) 402,378
Deferred financing costs
and other, net........... (441,456) (32,897)
Funds held under
reinsurance agreement.... (180,930) (64,832)
Due from servicer.......... (142,427) (1,004,386)
Deferred income tax
asset.................... 116,875 --
Federal income tax
receivable............... -- 295,523
Increase (decrease) in:
Due to dealers............. 12,573 (177,337)
Accounts payable and
accrued liabilities...... 531,843 (216,114)
Due to shareholders........ (28,000) --
Current income taxes
payable.................. (512,282) (49,503)
Deferred income taxes
payable.................. -- 112,252
--------------- ---------------
Net cash provided by
(used in) operating
activities.......... (434,251) 536,368
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables......... (13,350,179) (20,398,180)
Principal payments from
receivables................... 7,039,763 10,661,681
Purchase of furniture and
equipment..................... (5,776) (28,874)
--------------- ---------------
Net cash used in
investing
activities.......... (6,316,192) (9,765,373)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on
secured debt.................. 12,956,889 19,586,478
Principal payments made on
secured debt.................. (6,610,609) (10,242,185)
Preferred stock dividends
paid.......................... (52,000) --
--------------- ---------------
Net cash provided by
financing
activities.......... 6,294,280 9,344,293
--------------- ---------------
Increase (Decrease) in Cash and
Short-Term Investments............. (456,163) 115,288
Cash and Short-Term Investments at
Beginning of Period................ 1,517,438 3,601,269
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 1,061,275 $ 3,716,557
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 1,205,836 $ 1,454,800
Income taxes............... 630,900 73,792
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1996
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its direct and indirect subsidiaries (collectively
referred to as the Company) is principally involved in the business of acquiring
and holding for investment retail installment contracts secured by new and used
automobiles and light trucks (receivables) originated by factory authorized
franchised dealers. As of July 31, 1996, approximately 52 percent of receivables
held for investment had been originated in Texas. The Company currently operates
in 17 states.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
Company's financial position as of July 31, 1996, and the results of its
operations for the three months ended July 31, 1995 and 1996, and its cash flows
for the three months ended July 31, 1995 and 1996.
The consolidated financial statements for the interim periods have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information not misleading.
Certain reclassifications have been made to the 1995 amounts to conform
with the 1996 presentation.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders after preferred dividends, if any,
divided by the weighted average number of shares of common stock outstanding,
adjusted for a 3-for-1 stock split paid on June 7, 1995, in the form of a stock
dividend. The weighted average common shares outstanding for the three months
ended July 31, 1995 and 1996, were 3,666,669 and 5,566,669, respectively.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, JULY 31,
1996 1996
-------------- ---------------
Receivables.......................... $ 94,357,356 $ 103,135,552
Unamortized premium and deferred
fees............................... 2,535,863 2,990,174
Allowance for credit losses.......... (630,127) (688,332)
-------------- ---------------
Net receivables................. $ 96,263,092 $ 105,437,394
============== ===============
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORE PROGRAM. At July 31, 1996, the Company had investments in receivables
pursuant to the core program with an aggregate principal balance of $94,782,875.
Activity in the allowance for credit losses for the three months ended July
31, 1996, was as follows:
Balance, beginning of period......... $ 630,127
Provision for credit losses.......... 359,606
Charge-offs, net of recoveries....... (301,401)
------------
Balance, end of period............... $ 688,332
============
PARTICIPATING PROGRAM. At July 31, 1996, the Company had investments in
receivables pursuant to the dealer recourse program with an aggregate principal
balance of $8,065,724. The Company was reimbursed by participating dealers for
$3,437 of losses incurred during the three months ended July 31, 1996. During
the three months ended July 31, 1996, excess cash flows of $19,743 were remitted
to the dealers pursuant to this program.
The following table summarizes activity in the dealer reserves for the
three months ended July 31, 1996.
Balance, beginning of period......... $ 765,504
Additions............................ 7,112
Charges to dealer reserve accounts,
net of recoveries.................. (150,590)
Amounts remitted to dealers.......... (2,382)
------------
Balance, end of period............... $ 619,644
============
PORTFOLIO ACQUISITIONS. At July 31, 1996, the Company had receivables with
an aggregate principal balance of $286,953 which were acquired in portfolio
transactions.
4. DEBT
Borrowings under the warehouse credit facility and commercial paper
facility were $52,390,000 and $48,002,929, respectively, at July 31, 1996, and
had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees, and hedge instruments, as applicable, of 6.28 percent
and 6.12 percent, respectively.
The Company's credit facilities bear interest at floating interest rates
which are reset on a short-term basis whereas its receivables bear interest at
fixed rates which are generally at the maximum rates allowable by law which do
not generally vary with changes in interest rates. To manage the risk of
fluctuation in the interest rate environment, the Company enters into interest
rate swaps and caps to lock in what management believes to be an acceptable net
interest spread. However, the Company will be exposed to limited rate
fluctuation risk to the extent it cannot perfectly match the timing of net
advances from its credit facilities and acquisitions of additional interest rate
protection agreements.
5. SHAREHOLDERS' EQUITY
STOCK OPTION PLAN. On June 20, 1996, the Compensation Committee granted
options covering a total of 10,000 shares of Common Stock to an employee of the
Company. The exercise price is $11 per share and the options vest in cumulative
annual increments of 20 percent beginning on June 20, 1997.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended July 31, 1996 was $751,752, an
increase of 78% from that reported for the comparable period in the preceding
year of $421,469. Earnings per common share from operations were $0.14 for the
three months ended July 31, 1996, compared to $0.11 per common share for the
prior year period. All share and per share data has been restated to reflect the
3:1 stock split paid on June 7, 1995, effected in the form of a stock dividend.
NET INTEREST INCOME
The continued profitability of the Company during these periods has been
achieved by the growth of the receivables portfolio and effective management of
net interest income. The following table summarizes the Company's growth in
receivables and net interest income (dollars in thousands):
AS OF OR FOR THE
THREE MONTHS ENDED
JULY 31,
---------------------
1995 1996
--------- ----------
Investment in receivables:
Number.......................... 6,311 9,284
Principal balance, net(1)....... $ 68,735 $ 105,437
Average principal balance of
receivables outstanding during
the
period(1)..................... $ 66,110 $ 100,572
THREE MONTHS ENDED
JULY 31,
---------------------
1995 1996
--------- ----------
Interest income(2)................... $ 2,927 $ 4,500
Interest expense..................... 1,209 1,561
--------- ----------
Net interest income............. $ 1,718 $ 2,939
========= ==========
- - ------------
(1) Represents principal balance of receivables inclusive of unamortized premium
and net of allowance for credit losses.
(2) Amounts shown are net of yield participations paid to dealers pursuant to
the participating program of $67 and $20, respectively.
9
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
receivables and the Company's average cost of debt, and its net interest margin
(averages based on month-end balances):
THREE MONTHS
ENDED
JULY 31,
--------------------
1995 1996
--------- ---------
Effective yield on receivables(1).... 17.7% 17.9%
Average cost of debt(2).............. 7.1 6.5
--------- ---------
Net interest spread(3)............... 10.6% 11.4%
========= =========
Net interest margin(4)............... 10.4% 11.7%
========= =========
- - ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
outstanding.
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest income increased 71% for the three
months ended July 31, 1996 to $2.939 million from $1.718 million for the
comparable period in the preceding year.
Changes in the principal amount and rate components associated with the
receivables and debt can be segregated to analyze the periodic changes in net
interest income. The following table analyzes the changes attributable to the
principal amount and rate components of net interest income (dollars in
thousands):
THREE MONTHS ENDED
JULY 31,
1995 TO 1996
----------------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN
---------------------
AVERAGE TOTAL
PRINCIPAL AVERAGE NET
AMOUNT RATE INCREASE
--------- ------- --------
Interest income...................... $ 1,526 $ 47 $1,573
Interest expense..................... 499 (147) 352
--------- ------- --------
Net interest income.................. $ 1,027 $ 194 $1,221
========= ======= ========
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for the 1996 period increased to $4,500.
This result compares with $2,927 for the comparable period in 1995, an increase
of 54%. Primarily all of the increase is due to an increase in the average
principal balance of receivables held of 52% from 1995 to 1996. The remaining
increase was attributable to a 0.2% increase in the effective yield realized on
the receivables. Management believes that the increase in yield results from
financing more late model used automobiles that generally have a higher annual
percentage rate than loans on new automobiles, offset by higher rate
participations paid to dealers as incentive to utilize the Company's financing
program.
INTEREST EXPENSE. Interest expense in 1996 increased to $1,561 as compared
to $1,209 in 1995. The increase of 29% was due to an increase in the weighted
average borrowings outstanding of 41%. The weighted average cost of debt
declined 0.6% for the three months ended July 31, 1996, as compared to the same
three months in 1995, reflecting a general decline in market rates and the
expiration of certain interest rate swaps during the period.
NET INTEREST INCOME. Net interest income increased to $2,939 in 1996, an
increase of 71% over 1995. The increase resulted primarily from the growth of
the receivables portfolio and was partially attributable to a 0.8% increase in
the net interest spread. As of July 31, 1996, the Company had used approximately
$7.5 million of the proceeds from the issuance of common stock to purchase new
receivables which positively impacted the Company's net interest margin.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1996
increased to $360 as compared to $100 in 1995. The increase was the result of
the growth of the Company's receivables portfolio.
LATE FEES AND OTHER INCOME. Other income increased to $172 from $95 in
1995. Other income primarily represents interest income earned on short-term
marketable securities and money market instruments, which were higher in July
1996 than July 1995 due to the net proceeds received from the issuance of common
stock in October 1995.
SERVICING FEE EXPENSES. Servicing fee expenses increased to $352 in 1996
from $239 in 1995. Since these costs vary with the volume of receivables
serviced, this increase was primarily attributable to the growth in the number
of receivables serviced, which increased by 2,973 from 1995 to 1996.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased to $619 in
1996 from $380 in 1995. The increase was primarily due to an increase in full
time employees from 39 at July 31, 1995 to 51 at July 31, 1996, which was
necessitated by the expansion of the Company's operations.
OTHER EXPENSES. Other expenses increased to $597 in 1996 from $435 in
1995. The increase was primarily due to the overall expansion of the Company's
operations in additional states.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1996, income before
provision for income taxes increased to $1,184 or 80% from the comparable period
in 1995. The increase was the result of the increase in net interest income
after provision for credit losses of $360 and was partially offset by an
increase in operating expenses of $513.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. On October 4, 1995 the Company sold 1.9
million shares of common stock in a public offering and received proceeds of
$19.4 million, net of underwriting discounts and commissions. Approximately $7
million of the proceeds were used to prepay promissory notes plus accrued
interest, to redeem outstanding preferred stock including accrued dividends and
redemption premium, and to pay issuance costs.
11
The Company's business requires significant cash flow to support its
operating activities. The principal cash requirements include (i) amounts
necessary to acquire receivables from dealers and fund required reserve
accounts, (ii) amounts necessary to fund premiums for credit enhancement
insurance, and (iii) amounts necessary to fund costs to retain receivables,
primarily interest expense and servicing fees. The Company also requires a
significant amount of cash flow for working capital to fund fixed operating
expenses, primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables from dealers. The Company funds the purchase price of the
receivables through the use of a $55 million warehouse credit facility. The
current warehouse credit facility generally permits the Company to draw advances
up to the outstanding principal balance of qualified receivables. The Company
paid $20.4 million for receivables acquired for the three months ended July 31,
1996, compared to $13.4 million paid in the comparable 1995 period. Receivables
that have accumulated in the warehouse credit facility may be transferred to a
commercial paper conduit facility at the option of the Company. The commercial
paper facility provides additional liquidity of up to $75 million to fund the
Company's investment in the receivables portfolio. Substantially all of the
Company's receivables are pledged to collateralize these credit facilities.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolio. The Company received
such payments in the amount of $14.6 million and $10.0 million for the three
months ended July 31, 1996 and 1995, respectively. Such cash flow funds
repayment of amounts borrowed under the warehouse credit and commercial paper
facilities and other holding costs, primarily interest expense and servicing and
custodial fees. During the three months ended, the Company required net cash
flow of $9.7 million in 1996 and $6.3 million in 1995 (cash required to acquire
receivables net of principal payments on receivables) to fund the growth of its
receivables portfolio.
The following table summarizes borrowings under the warehouse credit
facility and the commercial paper facility (dollars in thousands):
AS OF OR FOR THE
THREE MONTHS
ENDED
JULY 31,
--------------------
1995 1996
--------- ---------
WAREHOUSE CREDIT FACILITY:
At period-end:
Balance outstanding............. $ 38,960 $ 52,390
Weighted average interest
rate(1)........................ 6.64% 6.28%
During period(2):
Maximum borrowings
outstanding.................... $ 38,960 $ 52,779
Weighted average balance
outstanding.................... 33,309 48,375
Weighted average interest
rate........................... 7.16% 6.36%
COMMERCIAL PAPER FACILITY:
At period-end:
Balance outstanding............. $ 32,050 $ 48,003
Weighted average interest
rate(1)........................ 6.57% 6.12%
During period(2):
Maximum borrowings
outstanding.................... $ 36,878 $ 48,003
Weighted average balance
outstanding.................... 34,450 47,463
Weighted average interest
rate........................... 7.11% 6.67%
- - ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
12
INTEREST RATE MANAGEMENT. The Company's credit facilities bear interest at
floating interest rates which are reset on a short-term basis whereas its
receivables bear interest at fixed rates which are generally at the maximum
rates allowable by law which do not generally vary with changes in interest
rates. To manage the risk of fluctuation in the interest rate environment, the
Company enters into interest rate swaps and caps with notional principal amounts
which approximate the balance of its debt outstanding to lock in what management
believes to be an acceptable net interest spread. However, the Company will be
exposed to limited rate fluctuation risk to the extent it cannot perfectly match
the timing of net advances from its credit facilities and acquisitions of
additional interest rate protection agreements. At July 31, 1996, the Company
was a party to an interest rate swap agreement pursuant to which the Company's
interest rate exposure is fixed, through November 1998, at a rate of 5.69% on a
notional amount of $20 million. On August 7, the Company elected to terminate
this interest rate swap in connection with its decision to enter into a new swap
agreement with NationsBank of Texas, N.A. pursuant to which the Company's
interest rate exposure is fixed, through August 1997, at a rate of 5.545% on a
notional amount of $100 million. This agreement may be extended to August 1999,
at the sole discretion of NationsBank of Texas, N.A. In connection with the
termination of the $20 million notional swap, the Company received $100,000 in
proceeds which will be realized as other income over the course of subsequent
periods.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations and effective
collection procedures, (ii) providing recourse to dealers under its
participating program for a period of time and thereafter secured by cash
reserves in the event of losses and (iii) insurance against certain losses from
independent third party insurers. As a result of its recourse programs and third
party insurance, the Company is not exposed to credit losses on its entire
receivables portfolio. The following table summarizes the credit loss exposure
of the Company (dollars in thousands):
<TABLE>
<CAPTION>
JULY 31,
-----------------------------------------------
1995 1996
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Core Program:
Insured by third party
insurer....................... $ 8,990 $ -- $ 4,321 $ --
Reinsured by Company's insurance
affiliate..................... 43,158 530 (1) 90,749 688 (1)
Participating Program................ 15,985 1,189 (2) 8,066 620 (2)
----------- -----------
$68,133 $ 103,136
=========== ===========
Allowance for credit losses as a
percentage of receivables reinsured
by Company's insurance
affiliate.......................... 1.2 % 0.8 %
Dealer reserves as a percentage of
participating program
receivables........................ 7.4 % 7.7 %
</TABLE>
- - ------------
(1) Represents the balance of the Company's allowance for credit losses.
(2) Represents the balance of the dealer reserve accounts.
The Company considers a loan to be delinquent when the borrower fails to
make a scheduled payment of principal and interest. Accrual of interest is
suspended when the payment from the borrower is over 60 days past due.
Generally, repossession procedures are initiated 60 to 90 days after the payment
default.
CORE PROGRAM AND PORTFOLIO ACQUISITIONS. Under the core program and for
receivables acquired pursuant to bulk portfolio acquisitions, the Company
retains the credit risk associated
13
with the receivables acquired. The Company purchases credit enhancement
insurance from third party insurers which covers the risk of loss upon default
and certain other risks. Until March 1994, such insurance absorbed substantially
all credit losses. In April 1994, the Company established a captive insurance
subsidiary to reinsure certain risks under the credit enhancement insurance
coverage for all receivables acquired in March 1994 and thereafter. Provisions
for credit losses of $359,606 have been recorded for the three months ended July
31, 1996, for losses which are reinsured by the Company's captive insurance
subsidiary.
The allowance for credit losses represents management's estimate of losses
for receivables that may become uncollectable. In making this estimate,
management analyzes portfolio characteristics in the light of its underwriting
criteria, delinquency and repossession statistics, historical loss experience,
and size, quality and concentration of the receivables, as well as external
factors such as future economic outlooks. The allowance for credit losses is
based on estimates and qualitative evaluations and ultimate losses will vary
from current estimates. These estimates are reviewed periodically and as
adjustments, either positive or negative, become necessary, are reported in
earnings in the period they become known.
PARTICIPATING PROGRAM. Under the Company's participating program, the
dealer retains the credit risk for a period of time, usually twelve to eighteen
months. In the event of payment default, the dealer is obligated to repurchase
the receivable. A specified portion of the purchase price is set aside in a
reserve account to secure performance of the dealer's repurchase obligation.
Receivables purchased from each dealer are aggregated into pools of specified
size for purposes of tracking the dealer's participation. When the dealer's
participation in a pool is terminated, a portion of the reserve account
exceeding a specified percentage is released to the dealer and the balance is
retained in the reserve account to fund credit losses until all receivables in
the pool are paid in full. As a result of establishing relationships only with
franchised dealers and securing each dealer's repurchase obligation with a
funded reserve account, the Company has incurred no losses under the
participating program.
As a result of a shift in the preference of dealers to sell receivables to
the Company under the core program rather than the participating program, the
participating program accounted for only 8% of the aggregate receivables held by
the Company as of July 31, 1996, representing a 15% decrease from 23% on July
31, 1995. Management believes that this trend will continue and that the
significance of the participating program by comparison to the core program,
will diminish over future periods.
14
The following table summarizes the status and collection experience of
receivables acquired by the Company (dollars in thousands):
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE MONTHS ENDED JULY 31,
----------------------------------------------------
1995 1996
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
CORE PROGRAM AND PORTFOLIO
ACQUISITIONS:
Delinquent amount outstanding:
30 - 59 days.................... 62 $ 927 106 $ 1,702
60 - 89 days.................... 14 166 26 452
90 days or more................. 15 234 33 515
--- --------- --- ---------
Total delinquencies.................. 91 $ 1,327 165 $ 2,669
--- --------- --- ---------
Total delinquencies as a percentage
of outstanding receivables acquired
pursuant to portfolio acquisitions
and the core program............... 2.0% 1.8% 1.9% 2.0%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to portfolio
acquisitions and the core
program(2)(3)...................... -- 0.8% -- 1.4%
PARTICIPATING PROGRAM:
Delinquent amount outstanding:
30 - 59 days.................... 47 $ 574 24 $ 222
60 - 89 days.................... 12 167 5 26
90 days or more................. 12 171 9 124
--- --------- --- ---------
Total delinquencies.................. 71 $ 912 38 $ 372
--- --------- --- ---------
Total delinquencies as a percentage
of participating program
receivables........................ 4.3% 4.3% 3.4% 3.6%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to the
participating program.............. -- 0% -- 0%
</TABLE>
- - ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percent of outstanding receivables acquired in portfolio transactions and
pursuant to the core program are based on gross receivables balances, which
include principal outstanding plus unearned interest income.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed by third-party insurers. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
(3) The percentages have been annualized and are not necessarily indicative of
the results for a full year.
15
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.28 -- Confirmation for U.S. Dollar Rate Swap Transaction dated
August 7, 1996.
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.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: September 10, 1996 By: /s/Tommy A. Moore, Jr.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: September 10, 1996 By: /s/Bennie H. Duck
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER
16
EXHIBIT 10.28
NationsBank
CONFIRMATION FOR U.S. DOLLAR RATE SWAP TRANSACTION
UNDER EXISTING 1992 MASTER AGREEMENT
TO: F.I.R.C. (FIRST INVESTORS RECEIVABLES CORP)
ATTN: BENNIE DOCK
TEL: 713-977-2600 X 116/138*
FAX: 713-260-0028
FROM: NATIONSBANK OF TEXAS, N.A.
P.O. BOX 831000
DALLAS, TX 75283
FRANK TANTILLO / STUART ADAMS
Date: 07AUG96
Our Reference No. 518920TX
The purpose of this lettter agreement is to confirm the terms and conditions of
the Swap Transaction entered into between us on the Trade Date specified below
(the "Swap Transaction"). This letter agreement constitutes a "Confirmation" as
referred to in the ISDA Master Agreement specified below.
The definitions and provisions contained in the 1991 ISDA Definitions (as
published by the International Swaps and Derivatives Association, Inc.)
("Definitions") are incorporated into this Confirmation. In the event of any
inconsistency between the Definitions and this Confirmation this Confirmation
will govern.
1. This Confirmation supplements, forms part of, and is subject to, the ISDA
Master Agreement dated as of 12AUG94, as amended and supplemented from time to
time (the "Agreement"), between you and us. All provisions contained in the
Agreement shall govern this Confirmation except as expressly modified below.
2. The terms of the Swap Transaction to which this Confirmation relates to are
as follows:
Notional Amount: USD 100,000,000.00
Trade Date: 06AUG96
Effective Date: 16AUG96
Termination Date: 18AUG97, subject to adjustment in
accordance with the Modified Following
Business Day Convention and "Swap
Extension" provision
Fixed Amounts:
FIXED Rate Payer: F.I.R.C. (FIRST INVESTORS RECEIVABLES
CORP.)
Fixed Rate Payer Payment Dates: THE 16TH OF EACH MONTH COMMENCING
SEPTEMBER 16, 1996 AND ENDING AUGUST 18,
1997, SUBJECT TO ADJUSTMENT IN
ACCORDANCE WITH THE MODIFIED FOLLOWING
BUSINESS DAY CONVENTION and "Swap
Extension" provisions
<PAGE>
Fixed Rate Payer Business
Day Convention: MODIFIED FOLLOWING BUSINESS DAY
Fixed Rate Payer
Business Days: NEW YORK, LONDON
Fixed Rate: 5.545000%
Fixed Rate Payer Day
Count Fraction: ACTUAL/360
Floating Amounts:
Floating Rate Payer: NATIONSBANK OF TEXAS, N.A.
Floating Rate Payer
Reset Dates: First Day of Each Calculation Period
Floating Rate Payer
Payment Dates: THE 16TH OF EACH MONTH COMMENCING SEPTEMBER 16,
1996 AND ENDING AUGUST 18, 1997, SUBJECT TO
ADJUSTMENT IN ACCORDANCE WITH THE MODIFIED
FOLLOWING BUSINESS DAY CONVENTION. And "Swap
Extension" provisions
Floating Rate Payer
Business Days: NEW YORK, LONDON
Floating Rate Payer
Business Day Convention: MODIFIED FOLLOWING BUSINESS DAY
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: 1 Month
Spread: NONE
Floating Rate For Initial
Calculation Period: TO BE SET
Floating Rate Payer
Day Count Fraction: ACTUAL/360
Averaging: INAPPLICABLE
Rounding Factor: One-Hundred-Thousandth of One Percent
Calculation Agent: NATIONSBANK OF TEXAS, N.A.
Assignment: This Swap Transaction may be assigned only with
prior written consent.
Legal and Out-of-Pocket
Expenses: For each party's own account.
Governing Law: The Laws of the State of New York.
Recording of Conversations: Each party to this Agreement acknowledges and
agrees to the tape or electronic recording of
conversations between the parties to this
Agreement whether by one or other or both of the
parties, and that any such recordings may be
submitted in evidence in any action or proceeding
relating to the Agreement or any Transaction.
2
Swap Extension: Notwithstanding anything to the contrary
herein or in the Agreement, NationsBank
of Texas, N.A. may, in its sole
discretion and at no cost or expense to
NationsBank of Texas, N.A. extend the
Termination Date of this Transaction
confirmed hereby until 18AUG99;
PROVIDED, HOWEVER, that NationsBank of
Texas, N.A. may only extend such
Termination Date by delivering notice of
such extension to F.I.R.C. on 16AUG99,
on or before 3:00 p.m. New York City
time. Nothing herein shall obligate
NationsBank of Texas, N.A. to extend the
Termination Date as provided hereby.
Payment Instructions:
Payment to NationsBank of Texas: Payment to F.I.R.C. (FIRST INVESTORS
RECEIVABLES CORP.):
NATIONSBANK, N.A. - CHARLOTTE CREDIT NATIONSBANK OF TEXAS
ABA 053000196 ABA 111000012
ACCT:10852016511 ACCT 3750477809
ATTN: DERIVATIVE OPERATIONS REF F.I.R.C. LINDA STREBECK
Please confirm that the foregoing correctly sets forth the terms and conditions
of our agreement by responding within three (3) Business Days by returning via
telecopier an executed copy of this Confirmation to the attention of Swaps
Documentation Group at Fax No. (312) 234-3160. Failure to respond within such
period shall not affect the validity or enforceability of this Swap Transaction,
and shall be deemed to be an affirmation of the terms and conditions contained
herein, absent manifest error.
Yours Sincerely,
NationsBank of Texas, N.A.
By: /s/ JIM L. BENNETT
Jim L. Bennett
Vice President
Confirmed as of the date first written above:
F.I.R.C. (FIRST INVESTORS RECEIVABLES CORP.)
By: /s/ BENNIE H. DOCK
Bennie H. Dock
Authorized Signatory
3
