United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
250 N. Shadeland Avenue, Indianapolis, IN 46219
(Address of principal executive office) (Zip Code)
(317) 231-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether 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
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:
Class Outstanding at November 14, 1996
Class A Common Stock, without par value 4,016,788 Shares
--------------------------------------- ----------------
Class B Common Stock, without par value 9,200,000 Shares
--------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements :
Condensed Consolidated Balance Sheets as of
September 30, 1996 and June 30, 1996 3
Condensed Consolidated Statements of Earnings
for the Three Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1996 and 1995 5
Condensed Consolidated Statement of Shareholders' Equity for
Three Months Ended September 30, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION 14
Signatures 15
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
Dollars in thousands, except share data
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- -----------
Assets (Unaudited)
<S> <C> <C>
Cash $ 9,787 $ 13,459
Restricted cash 16,119 14,789
Loans, net 232,412 259,290
Accrued interest receivable 2,063 2,127
Furniture and equipment, net 2,149 2,026
Excess servicing 89,182 83,434
Spread accounts 71,489 63,590
Other assets 11,480 12,480
======== ========
Total Assets $434,681 $451,195
======== ========
Liabilities
Amounts due under warehouse facilities 164,483 187,756
Long-term debt 156,000 156,000
Accrued interest payable 2,350 5,820
Amounts due to trusts 11,561 7,931
Dealer premiums payable 2,220 3,381
Other payables and accrued expenses 2,695 3,326
Income tax payable 1,134 -
Deferred income tax payable 9,696 8,357
-------- --------
Total Liabilities 350,139 372,571
-------- --------
Shareholders' Equity
Preferred Stock, without par value,
authorized 10,000,000 shares; none issued
and outstanding - -
Class A Common Stock, without par value,
authorized 30,000,000 shares; 4,011,358 shares
issued and outstanding 58,180 58,180
Class B Common Stock, without par value,
authorized 20,000,000 shares; 9,200,000 shares
issued and outstanding - -
Retained earnings 26,362 20,444
-------- --------
Total Shareholders' Equity 84,542 78,624
======== ========
Total Liabilities and Shareholders' Equity $434,681 $451,195
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Statement of Earnings
Dollars in thousands, except share data
(Unaudited)
Three Months Ended
September 30,
--------------------------------
1996 1995
---------- -----------
Interest on loans $ 9,233 $ 6,946
Interest on spread accounts and
restricted cash 1,510 1,370
---------- -----------
Total interest income 10,743 8,316
Interest expense 6,410 5,289
---------- -----------
Net interest margin 4,333 3,027
Provision for credit losses 855 1,150
---------- -----------
Net interest margin
after provision 3,478 1,877
Gain on sales of loans, net 6,875 6,724
Servicing fees, net 5,826 3,966
Other 934 750
---------- -----------
Total revenues 17,113 13,317
---------- -----------
Salaries and benefits 3,632 2,321
Other 3,514 2,398
---------- -----------
Total operating expenses 7,146 4,719
---------- -----------
Earnings before provision for
income taxes 9,967 8,598
Provision for income taxes 4,049 3,482
---------- -----------
Net earnings $ 5,918 $ 5,116
========== ===========
Earnings per share $ 0.45 $ 0.39
========== ===========
Weighted average common
shares outstanding 13,211,358 13,205,622
========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1996 1995
------------- ------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 5,918 $ 5,116
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sales of loans (9,756) (8,943)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (14,185) (12,918)
Return of excess servicing cashflows 9,869 9,286
Provision for credit losses 855 1,150
Spread accounts (7,899) (3,027)
Amortization and depreciation 960 1,023
Restricted cash (1,330) (4,142)
Other assets and accrued interest receivable 492 (572)
Amounts due to trusts 3,630 1,070
Other payables and accrued expenses (1,628) 4,978
Loan acquisitions in excess of liquidations (287,166) (224,773)
Securitization of loans held for sale 310,999 236,410
Proceeds on sale of interest only strip 9,139 6,601
------------- ------------
Net cash provided by operating activities 19,898 11,259
------------- ------------
Cash flows used in investing activities:
Purchase of fixed assets (297) (166)
------------- ------------
Cash flows provided (used) in financing activities:
Net change in Due to Union Federal, including
regulatory equity distribution - (337,423)
Net change in warehouse facilities (23,273) 157,004
Proceeds from issuance of senior notes - 110,000
Payment of borrowing fees - (2,424)
Net proceeds from issuance of common stock - 58,000
------------- ------------
Net cash used by financing activities (23,273) (14,843)
------------- ------------
Change in cash (3,672) (3,750)
Cash, beginning of period 13,459 9,483
------------- ------------
Cash, end of period $ 9,787 $ 5,733
============= ============
Supplemental disclosures of cash flow information:
Income taxes paid $ - $ 3,171
============= ============
Interest paid $ 9,880 $ 4,401
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
For the Three Months Ended September 30, 1996
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Number of Common Stock Total
Shares Outstanding Common Retained Shareholders'
Class A Class B Stock Earnings Equity
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 4,011,358 9,200,000 $58,180 $20,444 $78,624
--------- --------- ------- ------- -------
Net Earnings 5,918 5,918
Balance at September 30, 1996 4,011,358 9,200,000 $58,180 $26,362 $84,542
========= ========= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended September 30, 1996 and September 30, 1995
(Unaudited)
Note 1 - Basis of Presentation
The forgoing condensed consolidated financial statements are unaudited. However,
in the opinion of management, all adjustments necessary for a fair presentation
of the results of the interim period presented have been included. All
adjustments are of a normal and recurring nature. Results for any interim period
are not necessarily indicative of results to be expected for the year. The
condensed consolidated financial statements include the accounts of Union
Acceptance Corporation and Subsidiaries (formerly the "Union Division"). On
August 7, 1995, the Company ("UAC") issued 4 million shares of Class A Common
Stock at $16.00 per share with net proceeds of $58.0 million simultaneously with
a private placement of $110.0 million of Senior Notes with net proceeds of
$108.6 million. These proceeds and fundings under a $350.0 million Prime
Warehouse Facility and a $50.0 million Non-prime Warehouse Facility were used to
eliminate amounts due to its former parent, and to capitalize UAC's business and
fund ongoing operations. The Business Transfer was completed at this time. The
Company's business is conducted solely by UAC and its subsidiaries. A summary of
the Corporation's significant accounting policies is set forth in "Note 1" of
the "Notes to Consolidated Financial Statements" in the Corporation's Annual
Report on Form 10-K for the year ended June 30, 1996.
The condensed consolidated financial statements for interim period have been
prepared in accordance with Form 10-Q specifications, and, therefore, do not
include all information and footnotes normally shown in full annual financial
statements.
Note 2 - Earnings Per Share
The initial public offering was completed on August 7, 1995. Earnings per share
for the three months ended September 30, 1995, were computed by dividing net
earnings by the average common shares outstanding during the period. Shares
outstanding from August 7, 1995, through September 30, 1995, were assumed to be
outstanding for the entire three months ended September 30, 1995. The effect of
unexercised stock options on earnings per share is less than three percent
dilutive and has not been included in the earnings per share computations.
Note 3 - Reclassifications
Certain amounts in the fiscal 1996 Condensed Consolidated Financial Statements
have been reclassified to conform to fiscal 1997 presentation.
Note 4 - "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities"
During June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. The financial components approach focuses on the assets
and liabilities that exist after the transfer.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. Due
to the timing of the issuance of this pronouncement, management is currently
reviewing SFAS 125 to determine the effect, if any, it will have on the
financial statements of the Company.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company derives substantially all of its earnings from the
acquisition, securitization and servicing of automobile loans originated by
dealerships affiliated with major domestic and foreign manufacturers. To fund
the acquisition of loans prior to securitization, the Company utilizes revolving
warehouse facilities, discussed in "Liquidity and Capital Resources." Through
securitizations, the Company periodically pools and sells loans to a trust which
issues Certificates to investors representing pro-rata interests in the loans
sold. When the Company sells loans in a securitization, it records a gain (or
loss) on sale of loans and establishes excess servicing as an asset. Excess
servicing cashflows are recorded against the excess servicing asset as received
over the life of the related securitization.
Acquisition Volume. The Company currently acquires loans in 45 major
metropolitan areas in 25 states from nearly 2,600 manufacturer-franchised auto
dealerships. The Company acquires loans on automobiles made to borrowers who
exhibit a favorable credit profile ("Prime lending") and, since October 1994, to
borrowers with adequate credit quality who would not qualify for a loan under
the Company's Prime lending program ("Non-prime lending"). The Company continues
to expand its operations by entering new cities and signing new dealers in
existing markets. Loan acquisition volume had remained relatively level since
the third quarter of fiscal 1995, but experienced a large seasonal increase in
the fourth quarter of fiscal 1996. First quarter loan acquisitions were lower
than in the previous quarter, as expected. Loan acquisitions continue to be
stronger than in corresponding periods of prior fiscal years. Prime loan
acquisitions increased 21.0% over the same quarter of last year. The non-prime
business more than doubled as compared to the same quarter of last year. The
Company made some strategic changes with respect to pricing and underwriting,
including an increase in cut-off scores in several of its existing markets
during the third quarter of fiscal 1996. This strategy was employed in order to
improve the average quality of the contracts being purchased. The Company has
been able to increase its acquisitions despite the tightening of credit
standards. Management continues to focus on controlled growth, recognizing that
the underlying credit quality of the portfolio is one of the most important
factors associated with long-term profitability. These strategies appear to be
providing the Company with the desired results, as not only has volume
increased, but the implied losses on the more recent loan pools are markedly
improved over the 1995 loan pools.
Gross and Net Spreads. Market interest rates experienced continued
decreases over most of fiscal 1996, but began to rebound in March 1996. Because
changes in loan rates on automobile loans tend to lag behind fluctuations in
market rates of interest, the decrease in market rates during fiscal 1996
resulted in very positive gross and net spreads on the prime securitizations
compared to previous years. Likewise, as market rates increased, beginning with
the non-prime securitization in March 1996 and the prime securitization in June
1996, compression of net spreads was experienced. Market interest rates had
dropped slightly for the first quarter securitization. Gross spread is defined
as the difference between the weighted average loan rate and the Certificate
rate. Net spread is defined as gross spread less servicing fees, upfront costs,
ongoing credit enhancement fees and trustee fees, and hedging gains or losses.
Prime loan rates also decreased steadily over fiscal 1996, but increased during
the first quarter in response to earlier increases in market rates. Net spreads
have experienced steady compression since the first quarter of fiscal 1996. Net
spread on the most recent prime securitization was 5.11% compared to 6.12% in
the year ago quarter. Although there were compressions in net spreads during
fiscal 1996 and the first quarter of fiscal 1997, the net spreads are
significantly higher than those in fiscal 1995 and prior years.
Looking ahead, management is currently targeting net spreads of 5.00%
to 5.50% on prime securitizations (assuming a pricing spread for asset-backed
certificates over the two-year treasury note of 50 basis points) for fiscal
1997. Management believes that by targeting a spread of 7.00% to 7.50% between
loan rates and the two-year treasury rate, these net spreads can be achieved.
Although management believes these spreads can be achieved, material factors
affecting the net spreads are difficult to predict and could cause management's
projections to be materially inaccurate. These include current market conditions
with respect to market interest rates and demand for asset-backed securities
generally, and for Certificates representing interests in securitizations
sponsored by the Company. See - "Discussion of Forward-Looking Statements ,"
below.
Gain on Sales of Loans. Gain on Sales of Loans continues to be a
significant element of the Company's net earnings. The gain on sales of loans is
affected by several factors, but is primarily affected by the amount of loans
securitized and the net spread. The Company adjusts its pricing frequently and
employs a hedging strategy to help ensure an adequate net spread in the ensuing
securitization, while mitigating the risks of increasing interest rates and the
volatility in net spreads.
Portfolio Performance. Set forth below is certain information
concerning the Company's experience pertaining to delinquencies and net
charge-offs on the Prime fixed rate retail automobile, light truck and van
receivables serviced by the Company. There can be no assurance that future
delinquency and net loss experience on receivables will be comparable to that
set forth below.
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996 June 30, 1995
--------------------- --------------------- ---------------------
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 155,853 $1,648,523 147,722 $1,548,538 117,837 $1,159,349
Delinquencies
30-59 days 1,498 16,605 1,602 17,030 1,169 12,097
60-89 days 907 10,650 694 7,629 377 4,124
90 days or more 499 6,047 333 3,811 -- --
------- ---------- ------- ---------- ------- ----------
Total delinquencies 2,904 33,302 2,629 28,470 1,546 16,221
Delinquencies as a
percentage of servicing
portfolio 1.86% 2.02% 1.78% 1.84% 1.31% 1.40%
</TABLE>
<PAGE>
As indicated in the above table, current delinquency rates showed a
slight increase at September 30, 1996 compared to June 30, 1996; however, there
was improvement compared to the September 30, 1995, delinquency statistics.
Delinquency rates based upon outstanding loan balances of accounts 30 days past
due and over were 2.02% at September 30, 1996, compared to 3.06% at September
30, 1995, for the prime servicing portfolio. Delinquency based on the number of
receivables 30 days past due and over was 1.86% at September 30, 1996, compared
to 2.89% at September 30, 1995. The Company believes the increase in delinquency
since June 30, 1996, is attributable primarily to the cyclical nature of the
delinquency trends in the business of the Company since delinquencies tend to be
higher in the September and December quarters as compared to the March and June
quarters. The Company believes that this slight increase is not indicative of a
material change in the underlying credit quality of the portfolio.
Non-prime portfolio delinquency was 3.20% based on outstanding loan
balances of accounts 30 days past due and over at September 30, 1996, compared
to 3.35% at June 30, 1996, and 4.79% at September 30, 1995. Delinquency based on
the number of receivables 30 days past due and over was 3.13%, 3.29%, and 4.49%
at September 30, 1996, June 30, 1996, and September 30, 1995, respectively. The
Company began acquiring non-prime loans in October 1994. Management expects
fluctuations in delinquency rates on the non-prime portfolio as it becomes more
seasoned. The non-prime portfolio makes up less than 3.5% of the Company's total
servicing portfolio. The Company has historically focused on the prime end of
the credit spectrum and will continue to do so.
<TABLE>
<CAPTION>
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing portfolio 153,203 $1,616,606 132,363 $1,343,770 104,455 $982,875
Gross charge-offs 986 10,751 3,663 40,815 3,493 28,628
Recoveries 4,339 19,543 15,258
---------- ---------- --------
Net charge-offs 6,412 21,272 13,370
Gross charge-offs as
a percentage of
average servicing
portfolio 2.57% 2.66% 2.77% 3.04% 3.34% 2.91%
Recoveries as a % of gross
charge-offs 40.36% 47.88% 53.30%
Net charge-offs as a % of avg.
servicing portfolio 1.59%* 1.58% 1.36%
* Annualized
</TABLE>
As indicated on the table above, quarterly net charge-offs totaled
approximately $6.4 million on the prime servicing portfolio. Annualized net
charge-offs were 1.59% of the average prime servicing portfolio for the three
months ended September 30, 1996, compared to 1.58% for the fiscal year ended
June 30, 1996, and 1.73% for the three months ended September 30, 1995.
Management believes that the stability of losses results from the fact that
loans acquired during late 1994 and early 1995, which have experienced higher
loss rates, are nearing or have reached the end of the peak period for credit
losses. Company management believes such period to be nine to sixteen months
from the date of closing.
Non-prime net charge-offs totaled approximately $477,000 for the
quarter. Annualized net charge-offs were 3.54% of the average Non-prime
servicing portfolio for the three months ended September 30, 1996, compared to
2.37% for the fiscal year ended June 30, 1996, and 1.49% for the three months
ended September 30, 1995. Management is closely monitoring the performance of
the Non-prime portfolio as it matures, and is comfortable with the level of risk
in relation to its earning potential.
Overall, the Company has made strategic changes with respect to pricing
and underwriting, including an increase in cut-off scores in several of its
markets during the third quarter of fiscal 1996, and the implementation of a
scoring matrix in October 1996. The scoring matrix combines the Company's custom
score with a credit bureau score in order to improve the average quality o the
contracts being acquired. The Company has been able to increase its loan
acquisitions despite the tightening of its credit standards. Management
continues to focus on controlled growth with an emphasis on credit quality.
These strategies appear to be providing the Company with the desired results;
not only has loan acquisition volume increased, but the current implied losses
on the more recent loan pools are improved over the 1995 loan pools.
Provisions are made for estimated credit losses in conjunction with
each loan sale. The allowance for estimated credit losses is inherent in the
excess servicing asset recorded upon sale. Management believes that the
allowance for estimated credit losses on securitized loans represents a
conservative estimate of potential credit losses. The allowance for estimated
credit losses as a percentage of outstanding securitized loans was 3.27% at
September compared to 3.22% at June 30, 1996, and 2.27% a year ago.
Results of Operations
The Company's loan acquisitions increased to $296.6 million for the
three months ended September 30, 1996, from $239.8 million for the corresponding
quarter of fiscal 1996. The increases resulted primarily from geographic
expansion as well as improved market penetration in many markets. Non-prime loan
acquisitions totaled $14.2 million for the three months ended September 30,
1996, compared to $7.0 million for the comparable quarter of fiscal 1996. The
Company's servicing portfolio increased 33.7% to over $1.7 billion at September
30, 1996, compared to $1.3 billion at September 30, 1995.
Net earnings for the quarter were up 15.7% compared to the year ago
quarter. The increase in net earnings is primarily attributable to improved net
interest margin and increased servicing fees.
Net interest margin increased 85.3% to $3.5 million for the quarter
ended September 30, 1996, compared to $1.9 million for the quarter ended
September 30, 1995. Interest on loans for the quarter increased 32.9% to $9.2
million compared to $6.9 million for the corresponding quarter of last year. The
increase in interest income resulted, in part, from an increase in the average
monthly balance of prime loans held for sale to $208.0 million for the quarter
ended September 30, 1996, from $156.8 million for the corresponding period ended
September, 1995, which was a result of increased loan acquisitions in the
quarter ended September 30, 1996, relative to the quarter ended September 30,
1995. The Non-prime portfolio also contributed to the increase in interest
income. The Company carried an average of over $23.1 million in non-prime
receivables held for sale during the quarter which produced over $1.1 million in
interest income. The Company's cost of funds has increased slightly to 7.74% for
the three months ended September 30, 1996, from 7.46% for the corresponding
period of fiscal 1996. The increase in cost of funds is primarily a result of a
slightly higher interest rate environment and the issuance of Senior
Subordinated Notes. The Company issued Senior Subordinated Notes with a 9.99%
rate in April 1996. The interest cost related to the warehouse facilities
(through which loan acquisitions are funded ) is variable and is based on
commercial paper rates.
<PAGE>
Gain on sales of loans increased slightly to $6.9 million for the three
months ended September 30, 1996, from $6.7 million for the corresponding period
ended September 30, 1995. The Company securitized nearly $311.0 million in loans
during the first quarter of fiscal 1997, compared to $236.4 million for the
first quarter of fiscal 1996. However, net spreads were down 101 basis points
compared to the year ago quarter. Net spreads suffered compression due to upward
moving market interest rates. There tends to be a lag between changes in market
rates of interest (i.e. treasury rates) and automobile rates. Treasury rates
sharply increased from the March 1996 securitization to June 1996 securitization
(107 b.p.) while contract rates during the same period increased by only 30 b.p.
Treasury rates were relatively stable from the June 1996 quarter to the
September 1996 quarter securitization; however, contract rates on loans sold in
August 1996 (acquired in May, June and July of 1996) had not risen in tandem
with treasury rates, thereby effecting a lower gross and net spread on the
August securitization
Servicing fees, net increased 46.9% to $5.8 million for the three
months ended September 30, 1996, compared to $4.0 million for the three months
ended September 30, 1995. Servicing fees consist of contractual servicing fees
(1% on prime securitizations), excess servicing, and excess rebates. The
increase in servicing fees, net is primarily a result of the increase in the
average securitized loans to more than $1.4 billion for the first quarter of
fiscal 1997, compared to just over $1.0 billion for the first quarter of fiscal
1996. Excess rebates were also increased over the prior year.
Other revenues increased to $934,000 for the three months ended
September 30, 1996, from $750,000 for the three months ended September 30, 1995.
The increase resulted primarily from increases in late charge fee income.
Salaries and benefits increased to $3.6 million for the three months
ended September 30, 1996, from $2.3 million for the corresponding period ended
September 30, 1995. This increase resulted primarily from increased full-time
equivalent ("FTE") employees. Average FTE's for the three months ended September
30, 1996, were 347 compared to 229 for the comparable period ended September 30,
1995. The Company has experienced growth in collections, credit, sales,
operations, and support. These increases are in response to, and in anticipation
of continued expansion and loan acquisition growth, as well as a growing
servicing portfolio. Additional levels of management and support staff have been
added to ensure efficiency in operations as the Company's acquisition volume and
servicing portfolio continues to grow. Increases in salary and benefit expense
were also due to increased profitability-based incentives during the three
months ended September 30, 1996.
Other expense increased 46.5% to $3.5 million for the three months
ended September 30, 1996, from $2.4 million for the three months ended September
30, 1995. Other operating expenses include occupancy and equipment costs,
outside and professional services, loan expenses, promotional expenses, travel,
office supplies and other. Many of these expenses vary directly with increased
loan acquisition volume and the increased size of the servicing portfolio. Both
loan acquisition volume and the servicing portfolio were increased during the
three months ended September 30, 1996, compared to the three months ended
September 30, 1995. Occupancy and equipment costs were increased as a result of
the Company's move to its new headquarters in January 1996. The employee growth
experienced by the Company required both additional square footage and furniture
and equipment. The Company updated its phone system in conjunction with the move
to its new headquarters. The Company obtained new equipment through an operating
lease, and implemented a voice messaging system. Additionally, increased
telephone usage resulting from an increase in collections staff and collection
hours contributed to increased office expense. Although there were increased
expenses related to the collections department as a whole (salaries and
benefits, equipment, telephone, etc.), there have been notable improvements in
both credit loss and delinquency, as described above.
<PAGE>
Financial Condition
Loans, Net and Servicing Portfolio. Loans, net includes the principal
balance of loans held for sale, net of unearned discount and allowance for
estimated credit losses, loans in process, and dealer premiums. The Company's
portfolio of loans, net decreased to $232.4 million at September 30, 1996, from
$259.3 million at June 30, 1996. Loan acquisition volume was higher in the three
months ended June 30, 1996, than in the three months ended September 30, 1996,
as discussed above. The Company had one prime securitization in the quarter
ended September 30, 1996, and the quarter ended June 30, 1996, for $311.0
million and $245.1 million of loans, respectively.
Excess Servicing increased to $89.1 million as of September 30, 1996,
from $83.4 million as of June 30, 1996. This balance increased by the amount
capitalized upon consummation of the UACSC 1996-C Grantor Trust ("1996-C") prime
securitization related to excess servicing and estimated dealer premium rebates.
Structuring of the securitization included the sale of an "interest only strip"
which generated more cash from the sale, but served to reduce the initial excess
servicing asset recorded. The amount capitalized was offset by the return of
excess cashflows as received over the three months ended September 30, 1996,
related to all outstanding securitizations. The Company made an additional $1.1
million provision to the allowance for estimated credit losses on securitized
loans during the first quarter of fiscal 1997. The provision was recorded as a
reduction of the gain recognized on the 1996-C securitization. Allowance for
estimated credit losses on securitized loans is included as a component of the
excess servicing asset. At September 30, 1996, the allowances, related to both
prime and non-prime securitized loans, totaled $48.7 million or 3.27% of the
total securitized loan portfolio.
Spread Accounts increased to $71.5 million at September 30, 1996, from
$63.6 million at June 30, 1996. These balances were increased by deposits made
monthly from excess servicing cashflows, and are reduced by any withdrawals of
funds from the Spread Accounts. Withdrawals of spread account funds are made
when the balance of the Spread Accounts are in excess of the requirements
stipulated in the servicing agreement. No initial spread account deposit was
made in connection with the last few prime transactions as a result of the
structuring which utilized alternative credit enhancements in lieu of initial
spread account deposits.
Warehouse Facilities and Notes. The Warehouse Facilities, Senior Notes,
and Senior Subordinated Notes constitute the Company's primary funding
facilities. The Company issued $110.0 million in 8.53% Senior Notes (Due 2002)
in August 1995, in conjunction with the spin-off from its former parent. In
April 1996, the Company issued $46 million in 9.99% Senior Subordinated Notes
(Due 2003) in a private placement. The balance of the Warehouse Facilities was
$164.5 million at September 30, 1996, compared to $187.8 million at June 30,
1996. The decrease in total borrowings was directly related to the decrease in
first quarter fiscal 1997 loan acquisitions as compared to the previous quarter
ended June 30, 1996.
Liquidity and Capital Resources
Sources and Uses of Cash in Operations. The Company's business requires
significant amounts of cash to support operations. Its primary uses of cash
include (i) acquisitions and financing of loans, (ii) payment of Dealer
Premiums, (iii) securitization costs including cash held in Spread Accounts and
similar cash collateral accounts under Warehouse Facilities, (iv) servicer
advances of payments on securitized loans pursuant to securitization trusts, (v)
losses on hedging transactions realized in connection with the closing of
securitization transactions where interest rates have declined during the period
covered by the hedge, (vi) operating expenses, (vii) interest expense, and
(viii) payment of income taxes. The Company's sources of cash from operations
include (i) standard servicing fees, generally 1.0% per annum of the prime
securitized portfolio, (ii) Excess Servicing Cash Flows, (iii) Dealer Premium
rebates, (iv) gains on hedging transactions realized in connection with the
closing of securitization transactions where interest rates have increased
during the periods covered by the hedge, (v) interest income, (vi) sales of
loans in securitization transactions, and (vii) sales of interest-only strips.
Net cash provided by operating activities increased to $19.9 million for the
three months ended September 30, 1996, from $11.3 million for the three months
ended September 30, 1995.
Hedging transactions may represent a source or a use of cash during a
given period depending on the change in interest rates. In the first quarter of
fiscal 1997, hedging transactions have required a use of cash of $1.6 million.
Financing Activities and Credit Facilities. The Company has substantial
capital requirements to support its ongoing operations and anticipated growth.
The Company's sources of liquidity are currently funds from operations,
securitizations and external financings including long-term debt and revolving
warehouse credit facilities. Historically, the Company has used the
securitization of loan pools as its primary source of long-term funding, and
intends to continue to do so. Securitization transactions enable the Company to
improve its liquidity, to recognize gains from the sales of the loan pools while
maintaining the servicing rights to the loans, and to control interest rate risk
by matching the repayment of amounts due to investors in the securitizations
with the actual cash flows from the securitized assets.
<PAGE>
The Company has borrowing arrangements with an independent financial
institution for the Prime Warehouse Facility of up to $350.0 million and a
similar Non-prime Facility of up to $50.0 million. The Prime Warehouse Facility
provides funding for loan acquisitions at a purchase price of up to 98.0% of the
outstanding principal balance of eligible loans at the time of purchase to the
extent allocable to loans which, upon origination, provided for 72 monthly
payments or less. Additional funding is provided for eligible loans with greater
than 72 monthly payments at a purchase price of up to 90.0% of the outstanding
principal balance. The advance rate may be reduced to as low as 88.0% (72
monthly payments and less) and 80.0% (greater than 72 monthly payments) if
certain financial tests are not met, and/or if a securitization has not been
effected in the preceding sixteen weeks. The Non-prime Warehouse Facility
provides funding for loan acquisitions at a purchase price of 80.0% of the
outstanding principal balance of eligible loans at the time of purchase. The
Company also issued $110.0 million in Senior Notes in connection with the
spin-off of the Company by Union Federal and the Company's initial public
offering, and completed a private placement of $46.0 million in Senior
Subordinated Notes in April 1996. Between securitization transactions, the
Company relies primarily on these Warehouse Facilities to fund ongoing loan
acquisitions (not including Dealer Premiums). In addition to loan acquisition
funding, the Company also requires substantial capital on an ongoing basis to
fund the advances of Dealer Premiums, securitization costs, servicing
obligations and other cash requirements described above. The Company's ability
to borrow under the Warehouse Facilities is dependent upon its compliance with
the terms and conditions thereof. The Company's ability to obtain successor
facilities or similar financing will depend on, among other things, the
willingness of financial institutions to participate in funding automobile
financing businesses and the Company's financial condition and results of
operations. Moreover, the Company's growth may be inhibited, at least
temporarily, if the Company is not able to obtain additional funding through
these or other facilities or if it is unable to satisfy the conditions to
borrowing under the Warehouse Facilities.
Management believes that the proceeds from the Company's initial public
offering, the Senior Notes, the Senior Subordinated Notes, the Warehouse
Facilities described above, future earnings, and periodic securitization of
loans should provide the necessary capital and liquidity for its operations
during the remainder of fiscal 1997.
The period during which its existing capital resources will continue to
be sufficient will, however, be affected by the factors described above
affecting the Company's cash requirements. A number of these factors are
difficult to predict, including particularly the cash-effect of hedging
transactions, the availability of outside credit enhancement in securitizations
or other financing transactions and other factors affecting the net cash
provided by securitizations. Depending on the Company's ongoing cash and
liquidity requirements, market conditions and investor interest, the Company may
seek to issue additional debt or equity securities in the near term. The sale of
additional equity, including Class A Common Stock or preferred stock, would
dilute the interests of current shareholders. The Company is currently
negotiating the terms of a $50 million warehouse facility for the funding of its
marine portfolio.
Discussion of Forward-Looking Information
The above discussions contain forward-looking statements made by the
Company regarding its results of operations, cash flow needs and liquidity, loan
acquisition volume, target spreads, potential credit losses, servicing income,
and other aspects of its business. Similar forward-looking statements may be
made by the Company from time to time. Such forward-looking statements are
subject to a number of important factors that cannot be predicted with certainty
and which could cause such forward-looking statements to be materially
inaccurate. See the "Discussion of Forward-Looking Information" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for fiscal 1996 which is
incorporated herein by this reference.
<PAGE>
Other Matters
During July of 1996, the Company began servicing receivables under
agreements with individual dealerships. These agreements provide for the
servicing of dealer originated loans for a servicing fee, but do not currently
entail any advances by the Company for the purchase of the vehicle. The Company
may, however, consider partial funding of loans in conjunction with dealer
servicing in the future.
As a part of its ongoing development of its business plan, the Company
is researching the possibilities of engaging in other finance-related businesses
such as leasing, and other non-auto consumer lending. Additionally, the Company
is researching the possibility of expanding its dealer base to include
nationally-recognized used rental car outlets which are not
manufacturer-franchised dealerships. Based on this research, the Company may
expand its current operations to include some or all of the above
finance-related businesses. It is management's philosophy to continually search
for new products and markets to grow and expand the Company in order to maximize
profits and shareholder value.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits- Exhibits Index appears on Page E-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Acceptance Corporation
November 14, 1996 By: /S/ John M. Stainbrook
-------------------------
John M. Stainbrook
President
November 14, 1996 By: /S/ Rick A. Brown
-------------------
Rick A. Brown
VP, Treasurer and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
5 Amendment No. 5 to Transfer and Administration Agreement
27 Financial Data Schedule
EXECUTION COPY
AMENDMENT NUMBER 5 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 5 TO TRANSFER AND ADMINISTRATION AGREEMENT
(this "Amendment"), dated as of October 31, 1996 between UNION ACCEPTANCE
FUNDING CORPORATION, a Delaware corpo ration, as transferor (in such capacity,
the "Transferor"), UNION ACCEPTANCE CORPORATION, an Indiana corporation, as col
lection agent (in such capacity, the "Collection Agent"), and ENTERPRISE FUNDING
CORPORATION, a Delaware corporation (the "Company") amending that certain
Transfer and Administration Agreement dated as of June 27, 1995, as amended as
of September 8, 1995, September 29, 1995, March 1, 1996 and September 5, 1996
(the "Transfer and Administration Agreement").
WHEREAS, the Transferor and the Company have agreed to make
certain amendments to the Transfer and Administration Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. Defined TermsDefined Terms. As used in this
Amendment and except as otherwise provided in this Section 1, capitalized terms
shall have the same meanings assigned thereto in the Transfer and Administration
Agreement:
(a) The definition of Securitized Pool is hereby deleted in its
entirety and replaced with the following text (solely for convenience of
reference, the revised language has been italicized):
"Securitized Pool" shall mean each pool of receivables
directly or indirectly transferred by UAFC or UAC to a securitization
vehicle in a structured finance transaction involving prime automobile
installment sales contracts and installment notes and security
agreements, similar to the Contracts, beginning with and including the
pool of receivables securitized in connection with the UACSC 1995-D
Auto Trust.
SECTION 2. Exhibit A. Exhibit A to the Transfer and
Administration Agreement is hereby replaced in its entirety with Exhibit A
attached hereto.
SECTION 3. Amendment to Sections 2.16(c) and 2.17(a). In
connection with the agreement of the undersigned to revise the minimum amount of
funds required to remain on deposit in the Reserve Account under certain
circumstances, Sections 2.16 ("Reserve Account; Withdrawals; Releases") and 2.17
("Optional Repurchase") are hereby amended as follows:
(a) Subsection (iii) of Section 2.16(c) of the Transfer and
Administration Agreement is hereby deleted in its entirety and replaced with the
following text (solely for convenience of reference, the revised language is
italicized):
"(iii) In the event that on the date of any Take-Out pursuant
to Section 2.17(a), the amount on deposit in the Reserve Account
exceeds 2.75% of the Maximum Net Investment, the Collateral Agent shall
release to the Transferor an amount equal to the excess of the amount
on deposit in the Reserve Account over the product of 2.75% and the
Maximum Net Investment."
(b) The first complete paragraph of subsection (a) of Section
2.17(a) of the Transfer and Administration Agreement is hereby deleted in its
entirety and replaced with the following text (solely for convenience of
reference, the revised language is italicized):
"(a) On any Business Day, the Transferor shall have the right
to require the Company or the Liquidity Provider, as applicable, to
assign to the Transferor all of its right, title and interest in and to
the Contracts and the related Receivables (excluding any Contracts and
related Receivables booked on and after the cut-off date applicable to
the structured finance transaction established by or on behalf of the
Transferor or an affiliate, to which the reassigned Contracts and
related Receivables will be subject) on the terms and conditions set
forth herein. It shall be a condition precedent to any such assignment
that (i) the Transferor shall pay to the Company's account an amount
equal to the amount necessary to cause the Net Investment to be equal
to the product of (x) the Net Receivables Balance (allocated between
Contracts which upon origination provided for 72 monthly payments or
less and Contracts which upon origination provided for more than 72
monthly payments) calculated after giving effect to the proposed
reassignment and (y) with respect to each such group of Contracts, the
Transfer Percentage then in effect, (ii) the amount to be paid pursuant
to clause (i) above shall (x) not be greater than the principal
component of the Company's maturing Commercial Paper which was issued
to fund such portion of the Net Investment or the principal component
subject to the funding period utilized by the Liquidity Provider to
fund such portion of the Net Investment, as applicable and (y) be at
least $5,000,000, (iii) the Transferor shall deposit to the Collection
Account an amount equal to the sum of (x) all unreimbursed Servicer
Advances and (y) all interest costs associated with the Company's
Commercial Paper issued to fund its interest in the Contracts and
related Receivables proposed to be reassigned or all interest costs
associated with any funding periods utilized by the Liquidity Provider
with respect to its interest in such Contracts and related Receivables,
as applicable, as well as all Carrying Costs accrued through the date
of the maturity of such Commercial Paper or funding period, (iv) the
Transferor shall have given the Administrative Agent at least thirty
(30) days prior written notice of its intention to reacquire such
Contracts and Receivables, and (v) after giving effect to such
reassignment the amount on deposit in the Reserve Account shall be at
least 2.75% of the Maximum Net Investment. It is the intention of the
parties that the Transferor shall pay to the Company's account and the
Collection Account, as applicable, such amounts as are required under
this Section on the closing date of such structured finance transaction
(which closing date will generally also be the Business Day preceding
the maturity date of the Company's Commercial Paper issued to fund its
interest in the Contracts and related Receivables proposed to be
reassigned)."
SECTION 4. Amendment to Section 7.1(n). In connection with the
agreement of the undersigned to revise the requirements of the Transfer and
Administration Agreement relating to the minimum weighted average annual
percentage rate of the portfolio of Contracts, Section 7.1 ("Termination
Events") is hereby amended as follows:
(a) Section 7.1(n) of the Transfer and Administration
Agreement is hereby deleted in its entirety and replaced with the following text
(solely for convenience of reference, the revised language is italicized):
"(n) the weighted average annual percentage rate set forth in
the Contracts shall at any time be less than the sum of (i) the Base
Rate at such time, plus (ii) the percentage used to calculate the
Servicing Fee plus (iii) 2.00%."
SECTION 5. Limited Scope. This amendment is specific to the
circumstances described above and does not imply any future amendment or waiver
of rights allocated to the Company, the Transferor, Union Acceptance
Corporation, the Collection Agent, the Administrative Agent or the Collateral
Agent under the Transfer and Administration Agreement.
SECTION 6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. Severability; CounterpartsSeverability;
Counterparts. This Amendment may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which when taken together
shall constitute one and the same instrument. Any provisions of this Amendment
which are prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
SECTION 8. Ratification. Except as expressly affected by the
provisions hereof, the Transfer and Administration Agreement as amended shall
remain in full force and effect in accordance with its terms and ratified and
confirmed by the parties hereto. On and after the date hereof, each reference in
the Transfer and Administration Agreement to "this Agreement", "hereunder",
"herein" or words of like import shall mean and be a reference to the Transfer
and Administration Agreement as amended by this Amendment.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
7
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment Number 5 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stewart L. Cutler
Name: Stewart L. Cutler
Title: Vice President
UNION ACCEPTANCE
FUNDING CORPORATION
as Transferor
By: /s/ Melanie S. Otto
Name: Melanie S. Otto
Title: Assistant Secretary
UNION ACCEPTANCE CORPORATION
as Collection Agent
By: /s/ John M. Stainbrook
Name: John M. Stainbrook
Title: President
<PAGE>
Exhibit A
Actual Loss Percentage Transfer Percentage
Per Contract
Number of Monthly
Payments
72 or less +72
Less than 93.0% 98% 90%
93.0% to 95.9% 96% 88%
96.0% to 97.9% 94% 86%
98.0% to 100% 92% 84%
100.0% to 105.9% 90% 82%
106.0% to 110.0% 88% 80%
More than 110% 0% 0%
- -------------------------
Note: Solely for convenience of reference, the revisions to the previous form of
Exhibit A have been italicized.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927790
<NAME> Union Acceptance Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 97,395
<SECURITIES> 0
<RECEIVABLES> 233,558
<ALLOWANCES> (1,146)
<INVENTORY> 0
<CURRENT-ASSETS> 329,807
<PP&E> 4,125
<DEPRECIATION> (1,976)
<TOTAL-ASSETS> 434,681
<CURRENT-LIABILITIES> 194,139
<BONDS> 156,000
<COMMON> 0
0
58,180
<OTHER-SE> 26,362
<TOTAL-LIABILITY-AND-EQUITY> 434,681
<SALES> 0
<TOTAL-REVENUES> 24,378
<CGS> 0
<TOTAL-COSTS> 7,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 855
<INTEREST-EXPENSE> 6,410
<INCOME-PRETAX> 9,967
<INCOME-TAX> 4,049
<INCOME-CONTINUING> 5,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,918
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
