UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended April 30, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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)
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Texas |
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76-0465087 |
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
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675
Bering Drive, Suite 710 |
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77057 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
(713) 977-2600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class |
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Common Stock - $.001 par value |
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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 ý No ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of October 31, 2002, based on the closing price of the Common Stock on the NASDAQ National Market on said date, was $11,074,504.
There were 5,000,269 shares of Common Stock of the registrant outstanding as of June 30, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its annual meeting of shareholders to be held on September 10, 2004, which is to be filed with the Securities and Exchange Commission not later than 120 days after April 30, 2004, are incorporated by reference into part III hereof.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-K
APRIL 30, 2004
TABLE OF CONTENTS
General
First Investors Financial Services Group, Inc., together with its wholly-owned subsidiaries, (“Company”) is a consumer finance company engaged in originating and holding for investment retail installment sales contracts and promissory notes receivable secured by new and used automobiles and light trucks arising from the sale of the vehicle by factory authorized franchised dealers or refinanced by the vehicle owner (consumer). The Company specializes in lending to consumers with impaired credit profiles. Additionally, the Company has purchased receivables in portfolio acquisitions or from other third party originators. The Company does not utilize off-balance sheet securitization to finance its Receivables Held for Investment. As of April 30, 2004, the Company had Receivables Held for Investment in the aggregate principal amount of approximately $207 million having an effective yield of 13.9% and a net interest spread to the Company of 10.3% (net of cost of funds and other carrying costs).
During the fiscal year ended April 30, 2003, the Company began performing servicing and collection activities for third parties through First Investors Servicing Corporation (“FISC”), a wholly owned subsidiary located in Atlanta, Georgia. The total managed portfolio serviced by FISC was approximately $488 million as of April 30, 2004.
History
The Company was organized in 1989 by Tommy A. Moore, Jr. and Walter A. Stockard to conduct an automobile finance business, with Mr. Moore providing the operating expertise and Mr. Stockard and members of his family furnishing the initial financial support. During the first three years of the Company’s existence, its operations consisted primarily of purchasing and pooling receivables for resale to financial institutions and others. In March 1992, the Company obtained additional capital from a group of private investors and expanded its operations and reoriented its business towards originating receivables for retention. In October 1995, the Company completed the initial public offering of common stock which resulted in net proceeds of $18.5 million.
On October 2, 1998, the Company completed the acquisition of First Investors Servicing Corporation (“FISC”), formally known as Auto Lenders Acceptance Corporation, from Fortis, Inc. Headquartered in Atlanta Georgia. FISC engaged in essentially the same business as the Company and additionally performed servicing and collection activities on a portfolio of receivables originated for investment as well as on a portfolio of receivables originated and sold pursuant to two asset securitizations. As a result of the acquisition, the Company increased the total dollar value on its balance sheet of receivables, acquired an interest in certain trust certificates related to the asset securitizations and acquired certain servicing rights, along with furniture, fixtures, equipment and technology to perform the servicing and collection functions for the portfolio of receivables under management.
Industry
The automobile finance industry is the second largest consumer finance market in the United States. Most automobile financing is provided by captive finance subsidiaries of major automobile manufacturers, banks, thrifts, credit unions and independent finance companies such as the Company. The overall industry is generally segmented according to the type of vehicle sold (new vs. used), the nature of the dealership (franchised vs. independent) and the credit characteristics of the borrower (prime vs. non-prime). The non-prime market is comprised of individuals who are relatively high credit risks and who have limited access to traditional financing sources, generally due to unfavorable past credit experience, low income or limited financial resources and/or the absence or limited extent of prior credit history.
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Originating Dealer Base
General. The Company primarily originates receivables from the new and used car departments of dealers that operate under franchises from the major automobile manufacturers. The Company does not generally do business with “independent” dealers who operate used car lots with no manufacturer affiliation. No dealer or group of dealers (who are affiliated with each other through common ownership) accounted for more than 5% of the receivables owned by the Company at April 30, 2004, and no dealer or group of related dealers originated more than 5% of the receivables held by the Company at that date. The volume and frequency of receivable originations from particular dealers vary widely with the size of the dealerships as well as market and competitive factors in the various dealership locations.
Location of Dealers. Approximately 23% of the dealers with whom the Company has agreements are located in Texas, where the Company has operated since 1989. The Company’s expansion beyond Texas began in 1992 and today the Company operates in28 states.
The following table summarizes, with respect to each state in which the Company operates, the number of receivables (and percentage of total receivables) outstanding which were originated by the Company from dealers in such state or purchased through bulk portfolio acquisitions during the last two fiscal years:
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Receivables Held for Investment |
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Year Ended |
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Year Ended |
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State |
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Loan Count |
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Loan Count |
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% |
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Texas |
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4,769 |
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25.7 |
% |
4,565 |
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28.0 |
% |
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Georgia |
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3,421 |
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18.4 |
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3,050 |
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18.7 |
% |
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Ohio |
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2,798 |
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15.1 |
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2,119 |
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13.0 |
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Oklahoma |
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1,747 |
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9.4 |
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1,090 |
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6.7 |
% |
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Tennessee |
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678 |
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3.7 |
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672 |
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4.1 |
% |
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North Carolina |
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610 |
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3.3 |
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588 |
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3.6 |
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Missouri |
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813 |
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4.4 |
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581 |
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3.6 |
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Florida |
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414 |
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2.2 |
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447 |
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2.7 |
% |
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Illinois |
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354 |
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1.9 |
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440 |
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2.7 |
% |
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California |
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175 |
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0.9 |
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406 |
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2.5 |
% |
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Colorado |
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425 |
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2.3 |
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313 |
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1.9 |
% |
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Michigan |
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421 |
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2.3 |
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301 |
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1.9 |
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Virginia |
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383 |
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2.1 |
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270 |
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1.7 |
% |
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Arizona |
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167 |
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0.9 |
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198 |
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1.2 |
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Indiana |
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153 |
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0.8 |
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194 |
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1.2 |
% |
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Kansas |
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220 |
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1.2 |
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161 |
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1.0 |
% |
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Washington |
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183 |
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1.0 |
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146 |
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0.9 |
% |
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Kentucky |
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139 |
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0.7 |
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121 |
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0.7 |
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New Jersey |
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178 |
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1.0 |
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109 |
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0.7 |
% |
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All others (1) |
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525 |
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2.7 |
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540 |
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3.2 |
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18,573 |
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100.0 |
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16,311 |
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100.0 |
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(1) Includes dealers located in Connecticut, Delaware, Iowa, Idaho, Massachusetts, Maryland, Minnesota, Nebraska, Nevada, New Hampshire, Alabama, New York, Oregon, Pennsylvania, South Carolina, South Dakota, Utah, Vermont, New Mexico and Wisconsin.
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Marketing Representatives. The Company utilizes a system of regional marketing representatives to recruit, enroll and to provide new dealers with the Company’s underwriting guidelines and credit policies as well as to maintain relationships with the Company’s existing dealers. The representatives are full-time employees who reside in the region for which they are responsible.
In addition to soliciting and enrolling new dealers, the regional representatives assist new dealers in assimilating the Company’s system of credit application submission, review, acceptance and funding, as well as dealing with routine dealer relations on a daily basis. The role of the regional representatives is generally limited to marketing the Company’s core finance programs and maintaining relationships with the Company’s originating dealer base. The representatives do not enter into or modify dealer agreements on behalf of the Company, do not participate in credit evaluation or loan funding decisions and do not handle funds belonging to the Company or its dealers. Each representative reports to, and is supervised by, the Company’s sales and marketing manager in Houston.
It has been the policy of the Company to avoid the establishment of branch offices because it believes that the expenses and administrative burden of such offices are generally unjustified. Moreover, in view of the availability of modern data transmission technology, the Company has concluded that the critical functions of credit evaluation and loan origination are best performed and controlled on a centralized basis from its Houston facility. Accordingly, as the marketing representative system has operated satisfactorily, the Company does not currently expect to create branch offices.
Financing Programs
The Company originates loans from two sources: (i) dealer indirect (the “core program”), and (ii) consumer direct. The core program generates approximately 51% of the Company’s current origination volume and consists of loans originated directly from dealerships in states in which the Company operates. Consumer direct originations contribute approximately 49% of originations and involve applications for credit obtained through direct marketing efforts from consumers who are primarily seeking to acquire a vehicle or refinance an existing automobile loan.
Credit applications generated by each of the above sources are forwarded to the Company’s centralized credit department in Houston with decisions made based on the Company’s standard underwriting guidelines and credit scoring model. The internal credit decision and acceptance process is essentially the same regardless of the origination source. Third party originators have no credit approval authority and are subject to individual contracts that specify the obligations of the parties. Essentially all of the Company’s receivables are originated on a non-recourse basis.
In addition to originating receivables from dealers under the core program or making loans directly to consumers, the Company has acquired seasoned receivables in portfolio acquisitions or from other third party originators and may continue to do so from time to time.
The Company had active dealership agreements with 1,435 dealers at April 30, 2004. These are non-exclusive agreements terminable at any time by either party and they require no specific volume levels. The agreements with the core program dealers contain customary representations and warranties concerning title to the receivables sold, validity of the liens on the underlying vehicles, compliance with applicable laws and related matters. Although the dealers are obligated to purchase receivables that do not conform to these warranties, the dealers do not guarantee collectibility or obligate themselves to purchase receivables solely because of payment default. The receivables are originated at par or at prices that may reflect a discount or premium depending on the annual percentage rates of particular receivables and the Company’s assessment of relative credit risk. The pricing and credit terms upon which the Company agrees to originate receivables is governed by the Company’s credit policy and a credit score generated by the Company’s proprietary, empirical scoring model.
Credit Evaluation
General. In connection with the origination of a receivable for purchase by the Company, the Company follows systematic procedures designed to eliminate unacceptable risks. This involves a three-step process in which (i) the creditworthiness of the borrower and the terms of the proposed transaction are evaluated and either approved,
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declined or modified by the Company’s credit verification department, (ii) the loan documentation and collateralization is reviewed by the Company’s funding department, and (iii) additional collateral verification procedures and customer interviews are conducted by the Company. During the course of this process, the Company’s credit verification and funding personnel coordinate closely with the finance and insurance departments of the dealers or with individuals to whom the Company lends directly. The Company has developed financing programs under which it approves loans that vary in pricing and loan terms depending on the relative credit risk determined for each loan. Credit or default risk is evaluated by the Company’s loan officers in conjunction with a proprietary, empirical credit scoring model developed from the Company’s 15 year database of non-prime lending results.
Collateral Verification. As a condition to the origination of each receivable by the Company, the Company performs an individual audit evaluation consisting of personal telephonic interviews with each vehicle purchaser to verify the details of the credit application and to confirm that the material terms of the sale conform to the purchaser’s understanding of the transaction. The Company will originate a receivable under its core program only after receipt and review of a satisfactory audit report.
Servicing
The Company believes that competent, attentive and efficient loan servicing is as important as sound credit evaluation for purposes of assuring the integrity of a receivable.
In addition to servicing its owned portfolio, in December 2002, the Company began servicing and collection activities for third parties in exchange for servicing fees. The Company completed two transactions during the fiscal year ended April 30, 2003, both of which related to portfolio acquisitions from collateral previously originated by Union Acceptance Corporation. Under the first transaction, the Company invested $475,061 for 40% of the common stock and $712,591 in junior mezzanine debt of First Auto Receivables Corporation (“FARC”). FARC purchased a $197.5 million automobile loan portfolio. In addition to the equity and debt investments, the Company collects a fee for servicing the portfolio. The second transaction was an agreement to service, for a third party, a $276 million auto loan portfolio. The Company will continue to seek opportunities to increase servicing income through investments in portfolio acquisitions.
Portfolio Characteristics
General. In selecting receivables for inclusion in its portfolio, the Company seeks to identify potential borrowers whom it regards as creditworthy despite credit histories that limit their access to traditional sources of consumer credit. In addition to personal credit qualifications, the Company attempts to assure that the characteristics of the automobile sold and the terms of the sale are likely to result in a consistently performing receivable. These considerations include amount financed, monthly payments required, duration of the loan, age of the automobile, mileage on the automobile and other factors.
Customer Profile. The Company’s primary goal in credit evaluation is to make loans to customers having stable personal situations, predictable incomes and the ability and inclination to perform their obligations in a timely manner. Many of the Company’s customers are persons who have experienced credit difficulties in the past by reason of illness, divorce, job loss, reduction in pay or other adversities, but who appear to the Company to have the capability and commitment to meet their obligations. Through its credit evaluation process, the Company seeks to distinguish these persons from those applicants who are chronically poor credit risks.
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Certain information concerning the Company’s obligors for the past two fiscal years (based on credit information compiled at the time of loan origination) is set forth in the following table:
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April 30, |
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2003 |
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2004 |
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Average monthly gross income. |
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$ |
4,195 |
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$ |
4,300 |
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Average ratio of consumer debt to gross income |
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