================================================================================
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 JANUARY 31, 1997
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 MARCH 3, 1997
----- ----------------
COMMON STOCK -- $.001 PAR VALUE 5,566,669
================================================================================
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.,
AND SUBSIDIARIES
FORM 10-Q
JANUARY 31, 1997
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1996 and
January 31, 1997..................... 3
Consolidated Statements of Operations
for the Three Months and
Nine Months Ended January 31, 1996 and
1997................................. 4
Consolidated Statement of
Shareholders' Equity for the Nine
Months Ended January 31, 1997........ 5
Consolidated Statements of Cash Flows
for the Nine Months Ended
January 31, 1996 and 1997............ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 18
SIGNATURES................................... 18
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1996 AND JANUARY 31, 1997
APRIL 30, JANUARY 31,
1996 1997
--------------- ------------
(UNAUDITED)
ASSETS
Receivables Held for Investment,
net................................ $ 96,263,092 $112,461,633
Cash and Short-Term Investments,
including restricted cash of
$3,048,148 and $2,446,015.......... 6,649,417 3,853,196
Other Receivables:
Due from servicer............... 5,266,531 7,160,107
Accrued interest................ 1,613,953 1,946,411
Assets Held for Sale................. 1,912,050 2,027,727
Other Assets:
Funds held under reinsurance
agreement..................... 2,830,689 2,077,400
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $446,603 and $604,565...... 828,613 1,060,227
Federal income tax receivable... 295,523 --
Deferred income tax asset....... -- 151,977
--------------- ------------
Total assets............... $ 115,659,868 $130,738,678
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Secured credit facilities....... $ 91,048,636 $104,836,667
Other Liabilities:
Due to dealers.................. 806,634 471,654
Accounts payable and accrued
liabilities................... 1,692,942 1,217,517
Current income taxes payable.... 193,434 331,879
Deferred income taxes payable... 125,472 --
--------------- ------------
Total liabilities.......... 93,867,118 106,857,717
--------------- ------------
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 5,410,476
--------------- ------------
Total shareholders'
equity..................... 21,792,750 23,880,961
--------------- ------------
Total liabilities and
shareholders' equity....... $ 115,659,868 $130,738,678
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------- ----------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income...................... $ 3,776,238 $ 4,553,835 $10,035,925 $13,631,492
Interest Expense..................... 1,325,653 1,739,780 3,817,379 4,968,603
----------- ----------- ----------- -----------
Net interest income........ 2,450,585 2,814,055 6,218,546 8,662,889
Provision for Credit Losses.......... 280,000 521,000 500,000 1,281,974
----------- ----------- ----------- -----------
Net Interest Income After Provision
for Credit Losses.................. 2,170,585 2,293,055 5,718,546 7,380,915
----------- ----------- ----------- -----------
Other Income:
Late fees and other............. 186,802 163,292 413,513 480,886
----------- ----------- ----------- -----------
Operating Expenses:
Servicing fees.................. 294,118 389,116 797,927 1,123,641
Salaries and benefits........... 527,151 602,618 1,325,851 1,720,048
Other........................... 357,089 631,544 1,372,694 1,729,591
----------- ----------- ----------- -----------
Total operating expenses... 1,178,358 1,623,278 3,496,472 4,573,280
----------- ----------- ----------- -----------
Income Before Provision for Income
Taxes.............................. 1,179,029 833,069 2,635,587 3,288,521
----------- ----------- ----------- -----------
Provision for Income Taxes:
Current......................... 526,388 834,379 858,463 1,477,759
Deferred........................ (101,937) (530,309) 90,348 (277,449)
----------- ----------- ----------- -----------
Total provision for income
taxes.................... 424,451 304,070 948,811 1,200,310
----------- ----------- ----------- -----------
Net Income........................... $ 754,578 $ 528,999 $ 1,686,776 $ 2,088,211
----------- ----------- ----------- -----------
Preferred Stock Dividends............ -- -- (50,033) --
----------- ----------- ----------- -----------
Net Income Allocable to Common
Shareholders before Redemption of
Preferred Stock.................... 754,578 528,999 1,636,743 2,088,211
Premium Paid Upon Redemption of
Preferred Stock.................... -- -- (160,000) --
----------- ----------- ----------- -----------
Net Income Allocable to Common
Shareholders after Redemption of
Preferred Stock.................... $ 754,578 $ 528,999 $ 1,476,743 $ 2,088,211
=========== =========== =========== ===========
Net Income Per Common Share before
Redemption of Preferred Stock...... $0.14 $0.10 $0.36 $0.38
=========== =========== =========== ===========
Net Income Per Common Share after
Redemption of Preferred Stock...... $0.14 $0.10 $0.33 $0.38
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 1997
(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...................... -- -- 2,088,211 2,088,211
------- -------------- ------------ --------------
Balance, January 31, 1997............ $5,567 $ 18,464,918 $ 5,410,476 $ 23,880,961
======= ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1996 AND 1997
(UNAUDITED)
1996 1997
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 1,686,776 $ 2,088,211
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities --
Depreciation and
amortization expense..... 807,107 1,296,635
Provision for credit
losses................... 500,000 1,281,974
Charge-offs, net of
recoveries............... (429,531) (1,078,110)
(Increase) decrease in:
Accrued interest
receivable............... (551,518) (332,458)
Restricted cash............ 185,491 602,133
Deferred financing costs
and other................ (245,196) (351,911)
Funds held under
reinsurance agreement.... (1,007,408) 753,289
Due from servicer.......... (1,404,488) (1,893,576)
Deferred income tax
asset.................... 90,348 (151,977)
Federal income tax
receivable............... -- 295,523
Increase (decrease) in:
Due to dealers............. (187,766) (334,980)
Accounts payable and
accrued liabilities...... 80,484 (475,425)
Due to shareholders........ (46,667) --
Current income taxes
payable.................. 4,813 138,445
Deferred income taxes
payable.................. -- (125,472)
--------------- ---------------
Net cash provided by
(used in) operating
activities.......... (517,555) 1,712,301
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables......... (48,874,338) (50,343,166)
Principal payments from
receivables................... 23,901,652 32,708,055
Purchase of furniture and
equipment..................... (53,655) (59,308)
--------------- ---------------
Net cash used in
investing
activities.......... (25,026,341) (17,694,419)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on
secured debt.................. 39,261,938 43,578,774
Principal payments made on --
Secured debt............... (22,780,000) (29,790,744)
Unsecured debt............. (5,000,000) --
Proceeds from issuance of common
stock, net of issuance costs.. 18,466,818 --
Redemption of preferred stock... (960,000) --
Preferred stock dividends
paid.......................... (50,033) --
--------------- ---------------
Net cash provided by
financing
activities.......... 28,938,723 13,788,030
--------------- ---------------
Increase (Decrease) in Cash and
Short-Term Investments............. 3,394,827 (2,194,088)
Cash and Short-Term Investments at
Beginning of Period................ 1,517,438 3,601,269
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 4,912,265 $ 1,407,181
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 3,553,304 $ 4,610,661
Income taxes............... 854,100 1,043,793
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1997
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 January 31, 1997, approximately 46 percent of
receivables held for investment were located 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 January 31, 1997, and the results of its
operations for the three months and nine months ended January 31, 1996 and 1997,
and its cash flows for the nine months ended January 31, 1996 and 1997.
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 1996 amounts to conform
with the 1997 presentation.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders after preferred dividends, if any, and
in the case of the three and nine months ended January 31, 1996, the premium
paid to the holders of the 1993 preferred stock upon its redemption, 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. The weighted average common shares
outstanding for the three months ended January 31, 1996 and 1997, were 5,566,669
and 5,566,669, respectively; and for the nine months ended January 31, 1996 and
1997, were 4,492,756 and 5,566,669, respectively.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, JANUARY 31,
1996 1997
-------------- ---------------
Receivables.......................... $ 94,357,356 $ 109,773,043
Unamortized premium and deferred
fees............................... 2,535,863 3,522,581
Allowance for credit losses.......... (630,127) (833,991)
-------------- ---------------
Net receivables................. $ 96,263,092 $ 112,461,633
============== ===============
7
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORE PROGRAM. At January 31, 1997, the Company had investments in
receivables pursuant to the core program with an aggregate principal balance of
$104,031,422.
Activity in the allowance for credit losses for the nine months ended
January 31, 1997, was as follows:
Balance, beginning of period......... $ 630,127
Provision for credit losses.......... 1,281,974
Charge-offs, net of recoveries....... (1,078,110)
------------
Balance, end of period............... $ 833,991
============
PARTICIPATING PROGRAM. At January 31, 1997, the Company had investments in
receivables pursuant to the dealer recourse program with an aggregate principal
balance of $5,610,016. The Company was reimbursed by participating dealers for
$9,697 of expenses incurred during the nine months ended January 31, 1997.
During the nine months ended January 31, 1997, excess interest of $69,357 was
remitted to the dealers pursuant to this program.
The following table summarizes activity in the dealer reserves for the nine
months ended January 31, 1997.
Balance, beginning of period......... $ 765,504
Additions............................ 14,837
Charges to dealer reserve accounts,
net of recoveries.................. (315,088)
Amounts remitted to dealers.......... (2,382)
------------
Balance, end of period............... $ 462,871
============
PORTFOLIO ACQUISITIONS. At January 31, 1997, the Company had receivables
with an aggregate principal balance of $131,605 which were acquired in portfolio
transactions.
4. DEBT
Borrowings under the warehouse credit facility and commercial paper
facility were $33,450,000 and $71,386,667, respectively, at January 31, 1997,
and had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees, and hedge instruments, as applicable, of 6.25 percent
and 6.24 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 and 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.
On October 22, 1996, the Company completed a $105 million commercial paper
conduit financing through Enterprise Funding Corporation, a commercial paper
conduit administered by NationsBank, N.A. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation. It replaced an existing $75 million commercial paper
conduit facility which was provided by Enterprise Funding to another special-
purpose, wholly-owned subsidiary of the Company, F.I.R.C., Inc. Credit
enhancement for the new $105 million facility is provided to the commercial
paper investors by a surety bond issued by MBIA Insurance Corporation.
Borrowings under the commercial paper facility bear interest at
8
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the commercial paper rate plus a borrowing spread equal to 0.25% per annum.
Additionally, the agreement provides for additional fees based on the unused
amount of the facility and dealer fees associated with the issuance of the
commercial paper. A surety bond premium equal to 0.35% per annum is assessed
based on the outstanding borrowings under the facility. The commercial paper
facility has been initially provided for a term of one year, expiring October
21, 1997. If the facility were not extended, receivables pledged as collateral
would be allowed to amortize; however, no new receivables would be allowed to be
transferred from the warehouse credit facility.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended January 31, 1997 was $528,999, a
decrease of 30% from that reported for the comparable period in the preceding
year of $754,578. Net income for the nine months ended January 31, 1997 was
$2,088,211, an increase of 24% from that reported for the comparable period in
the preceding year of $1,686,776. Earnings per common share from operations were
$0.10 and $0.38 for the three and nine months ended January 31, 1997,
respectively. 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
NINE MONTHS ENDED
JANUARY 31,
---------------------
1996 1997
--------- ----------
Investment in receivables:
Number.............................................. 7,754 10,021
Principal balance................................... $ 84,868 $ 109,773
Average principal balance of
receivables outstanding during
the period......................................... $ 74,207 $ 103,577
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
Interest income(1).................. $ 3,776 $ 4,554 $ 10,036 $ 13,631
Interest expense.................... 1,326 1,740 3,817 4,968
--------- --------- --------- ---------
Net interest income............ $ 2,450 $ 2,814 $ 6,219 $ 8,663
========= ========= ========= =========
- - ------------
(1) Amounts shown are net of yield participations paid to dealers pursuant to
the participating program of $56, $29, $175 and $69, respectively.
10
<PAGE>
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 NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
Effective yield on receivables(1).. 18.6% 16.9% 18.0% 17.5%
Average cost of debt(2)............ 6.7 6.7 6.9 6.6
--------- --------- --------- ---------
Net interest spread(3)............. 11.9% 10.2% 11.1% 10.9%
========= ========= ========= =========
Net interest margin(4)............. 12.0% 10.4% 11.2% 11.2%
========= ========= ========= =========
- - ------------
(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 for the three and
nine months ended January 31, 1997 to $2.814 million and $8.663 million,
respectively, from $2.450 million and $6.219 million for the comparable periods
in the preceding year. Net interest income in 1997 represents increases of 15%
and 39% from the same periods in 1996.
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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1996 TO 1997 1996 TO 1997
----------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
--------------------- ---------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 1,240 $ (462) $ 778 $ 3,972 $(377) $ 3,595
Interest expense..................... 419 (5) 414 1,352 (201) 1,151
--------- ------- --------- --------- ------- ---------
Net interest income.................. $ 821 $ (457) $ 364 $ 2,620 $(176) $ 2,444
========= ======= ========= ========= ======= =========
</TABLE>
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JANUARY 31, 1997 AND 1996 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for the 1997 periods increased to $4,554
and $13,631 for the respective periods. These results compare with $3,776 and
$10,036 for the comparable periods in 1996 and reflects an increase of 21% and
36%, respectively. The increase in interest income is due to an increase in the
average principal balance of receivables held of 33% and 40%, respectively from
the 1996 to 1997 comparable periods. The increase in average principal balance
of receivables held for the three and nine months ended offset a 1.7% and 0.5%
decline, respectively, in the effective yield realized on the receivables. The
effective yield for the nine months ended was flat relative to the prior period.
Management attributes the decrease in yield to a reduction in financing fees
paid by dealers and an increase in the percentage of receivables on which rate
participation is paid to dealers as incentive to utilize the Company's financing
programs.
11
<PAGE>
INTEREST EXPENSE. Interest expense in 1997 increased to $1,740 and $4,968
as compared to $1,326 and $3,817 in 1996. The increase of 31% and 30% was due to
an increase in the weighted average borrowings outstanding of 32% and 35%. The
weighted average cost of debt was unchanged in the three month period and
declined 0.3% in the nine month period as compared to 1996, 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 $2,814 and $8,663,
respectively in 1997, an increase of 15% and 39%, respectively over the
comparable 1996 period. The increase resulted from the growth of the receivables
portfolio which offset a decline of 1.7% and 0.2% in the net interest spread
over the prior year periods.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1997
increased to $521 and $1,282 as compared to $280 and $500 in 1996. The increase
was the result of the growth of the Company's receivables portfolio and the
continued strategy of building loan loss reserve in excess of net charge-offs.
LATE FEES AND OTHER INCOME. Other income decreased to $163 and $481 from
$187 and $414 in 1996. Other income primarily represents interest income earned
on short-term marketable securities and money market instruments, due to the
issuance of common stock in October 1995.
SERVICING FEE EXPENSES. Servicing fee expenses increased to $389 and $1,124
in 1997 from $294 and $798 in 1996. 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 2,267 from 1996 to 1997.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased to $603 and
$1,720 in 1997 from $527 and $1,326 in 1996. The increase was primarily due to
an increase in full time employees which was necessitated by the expansion of
the Company's operations.
OTHER EXPENSES. Other expenses increased to $632 from $357 for the three
months ended and increased to $1,730 from $1,373 for the nine months ended. The
increase was primarily due to the expansion of the Company's operations and an
increase on the volume of loan applications received.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1997, income before
provision for income taxes decreased to $833 or 29% and increased to $3,289 or
25% from the comparable periods in 1996. These changes were a result of the
increase in net interest income after provision for credit losses of $122 and
$1,662 partially offset by an increase in operating expenses of $445 and $1,077,
respectively.
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.
12
<PAGE>
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 $15.0 million and $50.3 million for receivables acquired for the three and
nine months ended January 31, 1997, compared to $16.4 million and $48.9 million
paid in the comparable 1996 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 $105 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.
On October 22, 1996, the Company completed a $105 million commercial paper
conduit financing through Enterprise Funding Corporation, a commercial paper
conduit administered by NationsBank, N.A. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). It replaced an existing $75 million
commercial paper conduit facility which was provided by Enterprise Funding to
another special-purpose, wholly-owned subsidiary of the Company, F.I.R.C., Inc
("FIRC"). Credit enhancement for the new $105 million facility is provided to
the commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. Credit enhancement for the replaced $75 million facility was
provided by an Auto Loan Protection Insurance ("ALPI") policy issued by
National Union Fire Insurance Company of Pittsburgh and reinsured by the
Company's captive insurance subsidiary. The ALPI policy continues to provide
credit enhancement for the $55 million warehouse credit facility.
Receivables originally purchased by the Company are financed with
borrowings under the warehouse credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the commercial paper facility used to repay borrowings
under the warehouse credit facility. Once receivables are transferred to the
FIARC subsidiary and pledged as collateral for commercial paper borrowings, the
ALPI policy with respect to the transferred receivables is cancelled with any
unearned premiums returned to FIRC. FIARC may borrow up to 90% of the face
amount of the receivables being transferred. In addition, a cash reserve equal
to 1% of the outstanding borrowings under the commercial paper facility must be
maintained in a reserve account for the benefit of the creditors and surety bond
provider.
Borrowings under the commercial paper facility bear interest at the
commercial paper rate plus a borrowing spread equal to 0.25% per annum.
Additionally, the agreement provides for additional fees based on the unused
amount of the facility and dealer fees associated with the issuance of the
commercial paper. A surety bond premium equal to 0.35% per annum is assessed
based on the outstanding borrowings under the facility. The commercial paper
facility has been initially provided for a term of one year, expiring October
21, 1997. If the facility were not extended, receivables pledged as collateral
would be allowed to amortize; however, no new receivables would be allowed to be
transferred from the warehouse credit facility.
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
13
<PAGE>
$45.1 million and $32.9 million for the nine months ended January 31, 1997 and
1996, 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 nine
months ended, the Company required net cash flow of $17.6 million in 1997 and
$25.0 million in 1996 (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
NINE MONTHS
ENDED
JANUARY 31,
--------------------
1996 1997
--------- ---------
WAREHOUSE CREDIT FACILITY:
At period-end:
Balance outstanding............. $ 37,790 $ 33,450
Weighted average interest
rate(1)........................ 6.73% 6.25%
During period(2):
Maximum borrowings
outstanding.................... $ 50,223 $ 55,000
Weighted average balance
outstanding.................... 38,040 47,335
Weighted average interest
rate........................... 6.95% 6.72%
COMMERCIAL PAPER FACILITY:
At period-end:
Balance outstanding............. $ 43,355 $ 71,387
Weighted average interest
rate(1)........................ 6.83% 6.24%
During period(2):
Maximum borrowings
outstanding.................... $ 46,921 $ 71,387
Weighted average balance
outstanding.................... 35,915 52,808
Weighted average interest
rate........................... 6.82% 6.52%
- - ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
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 and 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. On August 7, 1996, the Company
entered 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.
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
14
<PAGE>
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>
JANUARY 31,
-----------------------------------------------
1996 1997
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Core Program:
Insured by third party
insurer....................... $ 5,989 $ -- $ 2,720 $ --
Other receivables(1)............ 67,520 600(2) 101,443 834(2)
Participating Program................ 11,359 942(3) 5,610 463(3)
----------- -----------
$84,868 $ 109,773
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 0.9% 0.8%
Dealer reserves as a percentage of
participating program
receivables........................ 8.3% 8.3%
</TABLE>
- - ------------
(1) Represents receivables reinsured by Company's insurance affiliate or
receivables on which no credit loss insurance exists.
(2) Represents the balance of the Company's allowance for credit losses.
(3) 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 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. With the completion of the $105 million commercial paper conduit
financing in October 1996, credit loss insurance and the Company's reinsurance
liability is cancelled upon the transfer of receivables to FIARC utilizing
commercial paper borrowings. Provisions for credit losses of $521,000 and
$1,281,974 have been recorded for the three and nine months ended January 31,
1997, respectively, for losses which are reinsured by the Company's captive
insurance subsidiary and for losses on receivables pledged as collateral under
the commercial paper conduit facility.
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
15
<PAGE>
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 5% of the aggregate receivables held by
the Company as of January 31, 1997, representing a 8% decrease from 13% on
January 31, 1996. 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.
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 NINE MONTHS ENDED OCTOBER 31,
----------------------------------------------------
1996 1997
----------------------- -----------------------
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.................... 115 $ 1,642 154 $ 2,412
60 - 89 days.................... 23 372 65 947
90 days or more................. 39 663 78 1,310
--- --------- --- ---------
Total delinquencies.................. 177 $ 2,677 297 $ 4,669
--- --------- --- ---------
Total delinquencies as a percentage
of outstanding receivables acquired
pursuant to portfolio acquisitions
and the core program............... 2.7% 2.5% 3.1% 3.2%
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)...................... -- 1.1% -- 1.5%
PARTICIPATING PROGRAM:
Delinquent amount outstanding:
30 - 59 days.................... 27 $ 269 32 $ 316
60 - 89 days.................... 11 96 7 54
90 days or more................. 18 224 10 112
--- --------- --- ---------
Total delinquencies.................. 56 $ 589 49 $ 482
--- --------- --- ---------
Total delinquencies as a percentage
of participating program
receivables........................ 4.0% 3.9% 5.4% 6.5%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to the
participating program.............. -- 0% -- 0%
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
16
<PAGE>
- - ------------
(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.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
10.38 -- Third Amendment dated January 20, 1997 to the Employment Agreement
dated as of March 20, 1992 between the Registrant and Tommy A. Moore
Jr.
27 -- Financial Data Schedule for the Third Quarter January 31, 1997 of
Fiscal Year April 30, 1997.
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: March 14, 1997 By: /s/ Tommy A. Moore, Jr.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 14, 1997 By: /s/ Bennie H. Duck
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER
18
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This Third Amendment to Employment Agreement dated as of November 26,
1996 is entered into among First Investors Financial Services, Inc., a Texas
corporation (the "Employer"), Tommy A. Moore, Jr., a resident of Harris County,
Texas (the "Employee"), and First Investors Financial Services Group, Inc., a
Texas corporation (the "Company"), who agree as follows:
WHEREAS, the Employer, the Employee and the Company are parties to that
certain Employment Agreement dated as of March 20, 1992 between the Employer and
the Employee, as amended by that certain First Amendment to Employment Agreement
dated as of March 15, 1995 and that certain Second Amendment to Employment
Agreement dated as of July 1, 1995 among the Employer, the Employee and the
Company (such agreement, as so amended, being referred to herein as the
"Employment Agreement"); and
WHEREAS, the Employer, the Employee and the Company desire to amend the
Employment Agreement in the respects set forth herein.
NOW THEREFORE, the parties agree as follows:
1. The first sentence of Section 3(B) of the Employment Agreement is
hereby amended in its entirety to provide as follows: "In addition to the salary
provided by Section 3(A) above, the Company may, at the sole discretion of the
Compensation Committee of the Board of Directors, pay to Employee an annual
incentive bonus in such amount as the Compensation Committee shall in its sole
discretion determine, but in no event shall the amount thereof exceed 5% of the
Company's consolidated net income before federal
<PAGE>
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
income taxes and any applicable state income taxes ("Pretax Net Income") for
each fiscal year of the Company ending during the term of this Agreement."
2. The third sentence of Section 3(B) of the Employment Agreement is
hereby amended in its entirety to provide as follows: "The bonus, if any, shall
be paid to Employee in cash at such time as the Compensation Committee shall
determine after the availability of audited results of operations for the fiscal
year to which such bonus pertains."
3. Except as expressly amended by this Amendment, the Employment
Agreement shall not be affected by this Amendment and shall remain in full force
and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties to this Amendment have hereunto set
their hands as of the date first set forth above.
First Investors Financial Services,
Inc.
By: ________________________________
Bennie H. Duck, Vice President
First Investors Financial Services
Group, Inc.
By: ________________________________
Bennie H. Duck, Vice President
--------------------------------
Tommy A. Moore, Jr.
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> JAN-31-1997
<CASH> 3,853,196
<SECURITIES> 0
<RECEIVABLES> 113,295,624
<ALLOWANCES> 833,991
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 130,738,678
<CURRENT-LIABILITIES> 0
<BONDS> 104,836,667
0
0
<COMMON> 5,567
<OTHER-SE> 23,875,394
<TOTAL-LIABILITY-AND-EQUITY> 130,738,678
<SALES> 13,631,492
<TOTAL-REVENUES> 13,631,492
<CGS> 4,968,603
<TOTAL-COSTS> 4,968,603
<OTHER-EXPENSES> 4,573,280
<LOSS-PROVISION> 1,281,974
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,288,521
<INCOME-TAX> 1,200,310
<INCOME-CONTINUING> 2,088,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,088,211
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
