United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q/A-1
(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, 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: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction of (I.R.S. Employer
incorporation 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 7, 1997
Class A Common Stock, without par value 4,031,482 Shares
- --------------------------------------- ----------------
Class B Common Stock, without par value 9,200,000 Shares
- --------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q/A
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) :
Consolidated Condensed Balance Sheets as of
September 30, 1997 and June 30, 1997 3
Consolidated Condensed Statements of Earnings (Loss)
for the Three Months Ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended September 30, 1997 and 1996 5
Consolidated Condensed Statement of Shareholders' Equity for the
Three Months Ended September 30, 1997 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. OTHER INFORMATION 18
Signatures 19
Registrant is amending this report to give effect to previously announced
restatement of its results of operations for the period covered by this report.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Assets September 30, 1997 June 30, 1997
- ------ ------------------ -------------
(Unaudited)
<S> <C> <C>
Cash $ 78,313 $ 58,801
Restricted cash 17,173 16,657
Loans, net 140,981 121,156
Accrued interest receivable 1,371 1,232
Property and equipment, net 4,196 2,150
Excess servicing 95,923 99,047
Spread accounts 69,914 71,744
Other assets 22,171 20,481
-------- --------
Total Assets $430,042 $391,268
======== ========
Liabilities
- -----------
Amounts due under warehouse facilities $ 93,190 $ 44,455
Long term debt 221,000 221,000
Accrued interest payable 2,421 5,793
Amounts due to trusts 14,838 16,067
Dealer premiums payable 2,156 1,372
Other payables and accrued expenses 2,942 1,874
Deferred income tax payable 10,950 13,859
-------- --------
Total Liabilities 347,497 304,420
-------- --------
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; 4,016,788 and 4,011,358 shares
issued and outstanding at September 30, 1997 and
June 30, 1997, respectively 58,270 58,270
Class B Common Stock, without par value, authorized 20,000,000
shares; 9,200,000 shares issued and outstanding at
September 30, 1997 and June 30, 1997, respectively -- --
Net unrealized gain on excess servicing 4,816 2,252
Retained earnings 19,459 26,326
-------- --------
Total Shareholders' Equity 82,545 86,848
-------- --------
Total Liabilities and Shareholders' Equity $430,042 $391,268
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings (Loss)
Dollars in thousands, except share data
(Unaudited)
Three Months Ended
September 30,
------------------------------
1997 1996
------------ ------------
Interest on loans $ 6,627 $ 9,233
Interest on spread accounts
and restricted cash 1,572 1,510
------------ ------------
Total interest income 8,199 10,743
Interest expense 6,053 6,410
------------ ------------
Net interest margin 2,146 4,333
Provisions for losses 1,505 855
------------ ------------
Net interest margin after provision 641 3,478
Gain (loss) on sales of loans (10,847) 6,875
Servicing fees, net 6,286 5,826
Other revenues 1,020 934
------------ ------------
Total revenues (2,900) 17,113
------------ ------------
Salaries and benefits 4,610 3,632
Other expenses 4,013 3,514
------------ ------------
Total operating expenses 8,623 7,146
------------ ------------
Earnings (loss) before provision
for income taxes (11,523) 9,967
Provision (benefit) for income taxes (4,656) 4,049
------------ ------------
Net earnings (loss) $ (6,867) $ 5,918
============ ============
Net earnings (loss) per share $ (0.52) $ 0.45
============ ============
Weighted average number of
common shares outstanding 13,216,788 13,211,358
============ ============
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) $ (6,867) $ 5,918
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Loan acquisitions in excess of liquidations (239,015) (287,166)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (9,860) (14,185)
Securitization of loans held for sale 218,390 310,999
Gain on sales of loans (7,489) (9,756)
Proceeds on sale of interest-only strip 3,782 9,139
Return of excess and servicing asset cash flows,
net of present value effect 3,951 9,869
Impairment of Excess Servicing 16,397 --
Provision for estimated credit losses 1,505 855
Amortization and depreciation 1,027 960
Spread accounts 1,830 (7,899)
Restricted cash (516) (1,330)
Other assets and accrued interest receivable (3,678) 492
Amounts due to trusts (1,229) 3,630
Other payables and accrued expenses (5,214) (1,628)
--------- ---------
Net cash provided (used) by operating activities (26,986) 19,898
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (2,237) (297)
--------- ---------
Cash flows from financing activites:
Net change in warehouse credit facilities 48,735 (23,273)
--------- ---------
Change in cash 19,512 (3,672)
Cash, beginning of period 58,801 13,459
--------- ---------
Cash, end of period $ 78,313 $ 9,787
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid $ 9 $ --
========= =========
Interest paid $ 9,672 $ 9,880
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Shareholders' Equity
For the Three Months Ended September 30, 1997
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Number of Common Stock Net
Shares Outstanding Unrealized
Gain on Total
Common Excess Retained Shareholders'
Class A Class B Stock Servicing Earnings Equity
-------------------------------- ------------ ----------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 4,016,788 9,200,000 $ 58,270 $ 2,252 $ 26,326 $ 86,848
Net Earnings (Loss) - - - - (6,867) (6,867)
-------------------------------------------------------------------------------------------
4,016,788 9,200,000 58,270 2,252 19,459 79,981
Net change in unrealized gain
on excess servicing - - - 2,564 - 2,564
-------------------------------------------------------------------------------------------
Balance at September 30, 1997 4,016,788 9,200,000 $ 58,270 $ 4,816 $ 19,459 $ 82,545
===========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended September 30, 1997 and 1996
(Unaudited)
Note 1- Basis of Presentation
The forgoing consolidated condensed 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 consolidated condensed financial statements include the accounts of Union
Acceptance Corporation ("UAC") and its subsidiaries.
In contemplation of a public offering to sell common stock, UAC was
formed as a wholly-owned subsidiary of Union Federal Savings Bank of
Indianapolis ("Union Federal") in December 1993. During fiscal 1995, Union
Acceptance Funding Corporation, UAC Securitization Corporation, Performance
Funding Corporation and Performance Securitization Corporation were formed as
wholly owned subsidiaries of UAC and selected assets and operations of the Union
Division were transferred to UAC. In August of 1995, the Company completed an
initial public offering simultaneously with a tax free spin-off from its parent,
Union Federal. During fiscal 1996, UAC Boat Funding Corp. was formed as a
wholly- owned subsidiary of UAC. In fiscal 1997, UAC Finance Corporation was
formed as a wholly-owned subsidiary of UAC. During the first quarter of fiscal
1998, Circle City Car Company was formed as a wholly-owned subsidiary of UAC.
The consolidated condensed interim financial statements 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. 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, 1997.
Note 2- Earnings Per Share
Earnings per share for the three months ended September 30, 1997, and
September 30, 1996 were computed by dividing net earnings by the average common
shares outstanding during the period. The effect of unexercised stock options on
earnings per share is not or is less than three percent dilutive as of September
30, 1997 and 1996, respectively, and has not been included in the earnings per
share computations.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended September 30, 1997 and 1996
(Unaudited)
Note 3 - Excess Servicing
Excess servicing is as follows (in thousands) at:
September 30, June 30,
1997 1997
----------- -----------
Estimated value of excess servicing cash
flows, net of estimated prepayments $ 154,921 $ 145,872
Allowance for estimated credit losses (97,871) (79,923)
Estimated dealer premium rebates 25,569 26,447
Discount to present value (7,826) (9,941)
----------- -----------
74,793 82,455
Accrued interest on securitized loans 13,033 12,807
Unrealized gain on excess servicing 8,097 3,785
----------- -----------
Excess Servicing $ 95,923 $ 99,047
=========== ===========
Outstanding balance of loans serviced
through securitized trusts $ 1,837,423 $ 1,818,363
Allowance for estimated credit losses as
a percentage of securitized loans serviced 5.33% 4.40%
Note 4 -Current Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 provides computation, presentation, and disclosure requirements
for earnings per share. The traditional presentation of primary and fully
diluted earnings per share will be replaced with basic and diluted earnings per
share. The Statement is effective for financial statements for both interim and
annual periods ending after December 15, 1997, and earlier application is not
permitted. Management does not expect earnings per share to change materially as
a result of this pronouncement as the effect of unexercised stock options on
earnings per share is not dilutive, and has not been included in the earnings
per share computations for historical periods.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 129 provides guidance for disclosure
regarding dividend policies, voting rights, liquidation preferences and other
miscellaneous items related to capital structure. This Statement is effective
for reporting periods ending after December 15, 1997. There may be disclosure
requirements which apply to the Company as a result of this pronouncement for
the fiscal year ended June 30, 1998.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended September 30, 1997 and 1996
(Unaudited)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all nonowner changes in
shareholders' equity. The Statement is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Statement will
require new disclosures by the Company, but is not expected to have an impact on
the financial statements or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131"), which introduces new guidance
on segment reporting. The Statement is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. The Statement is
not expected to have a material impact on the financial condition or results of
operations of the Company.
Note 5 -Restatement of Consolidated Condensed Financial Statements
The Company determined in August 1998 that it should measure impairment of
Excess Servicing on a disaggregate basis (pool by pool method). The resulting
adjustments were of sufficient significance to require restatement of the
consolidated condensed financial statements since the implementation of SFAS
125. This restatement had the effect of reducing net earnings by $7.5 million
(net of income taxes of $5.1 million), or $0.57 per share, for the quarter ended
September 30, 1997. This restatement decreased shareholders' equity at September
30, 1997 by $4.6 million. In conjunction with the restatement, the Company made
other adjustments, which were not individually significant, that increased net
earnings for the quarter ended September 30, 1997 by $147,000 (net of income
taxes of $100,000), or $0.01 per share, and increased shareholders' equity at
September 30, 1997 by $522,000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
As more fully described in Note 5 to the Consolidated Condensed
Financial Statements, this report contains financial information which has been
restated.
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 cash flows are recorded against the excess servicing asset as received
over the life of the related securitization.
Acquisition Volume. The Company currently acquires loans in 51 major
metropolitan areas in 30 states from over 3,200 manufacturer-franchised auto
dealerships. The Company primarily 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"). In
June 1996, the Company began acquiring loans under the Marine lending program
("Marine lending"). The Company continues to expand and is focusing on
penetrating the existing dealer base and on new high-quality dealers within the
existing markets. Over the last year the Company made some strategic decisions
with regard to pricing and underwriting with a view to improving the overall
credit quality of the portfolio over the long-term. These changes, coupled with
intense competition in the consumer finance markets, resulted in lower loan
acquisition volume in the third and fourth quarters of fiscal 1997. Because of
the competitive environment and tightened credit standards, the Company's loan
acquisitions for the first half of fiscal 1998 are expected to be lower than the
first half of fiscal 1997. Loan acquisition volume increased during the first
quarter of fiscal 1998 compared to the quarter ended June 30, 1997. Total loan
acquisitions were $252.9 million for the quarter ended September 30, 1997, up
from $238.4 million for the quarter ended June 30, 1997, and down from $296.6
million for the same quarter of last year. Prime loan acquisitions for the
quarter ended September 30, 1997 increased by 5.6% over the previous quarter,
but declined 14.0% over the same quarter of last year. Non-prime loan
acquisitions totaled $8.8 million for the quarter ended September 30, 1997, a
37.9% decrease over the same quarter of last year and a 53.3% increase over the
previous quarter. Loan acquisitions for the marine business increased 153.9% for
the first quarter ended over the same quarter of last year. However, due to the
seasonal nature of boats and personal watercraft, loan acquisitions have
decreased from the quarter ended June 30, 1997.
Gross and Net Spreads. Market interest rates (i.e. treasury rates) on
the quarterly securitizations remained fairly constant over most of fiscal 1997,
increasing in the fourth quarter and declining slightly during the first quarter
ended September 30, 1997. The gross and net spreads on the first quarter
securitization of fiscal 1998 were 7.04% and 5.38% compared to 6.82% and 5.11%,
respectively over the same quarter of last year. 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. Net
spreads increased during fiscal 1997, dropping in the fourth quarter and
rebounding in the first quarter of fiscal 1998. There tends to be a lag between
changes in market rates of interest and automobile loan rates. As previously
stated, market interest rates declined from the June quarter to the September
quarter securitization; however, contract rates on loans sold in September 1997
(acquired in June, July and August, 1997) increased, thereby effecting a higher
gross and net spread on the September securitization.
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 1998. Management
believes that by targeting a spread of 7.00% to 7.50% between loan rates and the
two-year treasury rate that 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".
Gain on Sales of Loans. Gain on Sales of Loans can 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,
the net spread, and the level of estimation for credit losses. 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. There has been a general deterioration in the
consumer credit markets despite low unemployment and relatively good economic
conditions. UAC believes that this decline is due primarily to debtor over
extension, which results in higher consumer debt levels and the consumer's
increased readiness to declare bankruptcy. These factors have led to increased
delinquency and net credit losses, especially in the 1995 securitization pools.
According to industry loss curves, the losses on those loans acquired in 1995
should have peaked as they are currently in the 23rd to 32nd month of their
lives. However, delinquency and credit losses on these loan pools have remained
higher than expected. The delinquency and projected credit losses on those loans
acquired in 1996 are also higher than UAC expectations, however, the credit
quality on those loans appears stronger than on those loans acquired in 1995.
Moreover, the quality of loans acquired in 1997, to date, appears stronger than
the quality of loans acquired in 1996. UAC has and is continuing to address this
issue through tightened underwriting credit standards, forming collection teams
to specifically target problem accounts and utilizing new scoring tools that
allow UAC to focus its collection efforts in the most effective manner.
Recovery rates have continued to decline due to a soft used car market,
resulting from saturation of used leased vehicles and repossessed vehicles due
to bankruptcy. Recoveries as a percentage of gross charge-offs declined to
35.28% for the quarter ended September 30, 1997 from 43.00% and 40.36% for the
quarter ended June 30, 1997 and September 1996, respectively. Management
continues to look for ways to improve recovery rates. One step recently taken
was to increase tracking efforts on insurance and warranty refunds due to the
Company. Additionally, UAC has acquired a 6.5 acre property near its
Indianapolis headquarters for the purpose of expanding reconditioning and retail
remarketing operations which have outgrown their current facilities in
Indianapolis. See -"Other Matters"
Provisions are made for estimated credit losses in conjunction with
each loan sale. Current assumptions in the calculation of the estimated credit
loss allowance for the first quarter securitization was 4.00% over the life of
the pool. Allowance related to credit loss on securitized loan losses (inherent
in the excess servicing asset) increased to 5.33% at September 30, 1997 compared
to 4.40% at June 30, 1997, and 3.27% at September 30, 1996. During the quarter
ended September 30, 1997, the Company recorded a pre-tax charge of $16.4 million
primarily to increase the allowance for estimated credit losses on those pools
which were deemed to have other than temporary impairment.
Prime Portfolio. Set forth below is certain information concerning the
experience of UAC pertaining to delinquencies, and net credit losses 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 credit
loss experience on receivables will be comparable to that set forth below. See
"Discussion of Forward-Looking Statements".
<TABLE>
<CAPTION>
Prime Delinquency Experience At
-------------------------------------------------------------------------------------
September 30, 1997 June 30, 1997 September 30, 1996
----------------------------- ------------------------ -------------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 177,377 $1,896,748 173,693 $1,860,272 155,853 $1,648,523
Delinquencies
30-59 days 4,310 45,766 2,487 27,373 1,498 16,605
60-89 days 2,196 25,156 1,646 18,931 907 10,650
90 days or more 934 11,131 723 8,826 499 6,047
----------- ------------- ------- ---------- -------- ---------
Total delinquencies 7,440 82,053 4,856 55,130 2,904 33,302
Delinquency as a
percentage of
servicing portfolio 4.19% 4.33% 2.80% 2.96% 1.86% 2.02%
</TABLE>
<PAGE>
As indicated in the above table, delinquency rates based upon
outstanding loan balances of accounts 30 days past due and over increased to
4.33% at September 30, 1997 from 2.96% and 2.02% at June 30, 1997 and September
30, 1996, respectively, for UAC's prime servicing portfolio. The increased
delinquency is primarily due to the deterioration of consumer credit trends,
especially in those loans originated and securitized in 1995.
<TABLE>
<CAPTION>
Prime Credit Loss Experience
For the Quarter Ended
--------------------------------------------------------------------------------------
September 30, 1997 June 30, 1997 September 30, 1996
------------------------ --------------------- -----------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 175,920 $1,881,603 173,072 $1,855,488 153,203 $1,616,606
Gross charge-offs 2,054 23,056 1,887 21,907 986 10,751
Recoveries 8,134 9,421 4,339
---------- ---------- ----------
Net charge-offs 14,922 12,486 6,412
Gross charge-offs as a percentage
of average servicing portfolio 4.67%* 4.90%* 4.36%* 4.72%* 2.57%* 2.66%*
Recoveries as a percentage
of gross charge-offs 35.28% 43.00% 40.36%
Net charge-offs as a percentage
of average servicing portfolio 3.17%* 2.69%* 1.59%*
* Annualized
</TABLE>
As indicated in the table above, credit losses on the prime auto
portfolio totaled $14.9 million for the quarter ended September 30, 1997, or
3.17% (annualized) as a percentage of the average servicing portfolio compared
to 2.69% and 1.59% for the quarter ended June 30, 1997 and September 30, 1996,
respectively. Increased credit losses are primarily a result of higher gross
charge-off rates (due to consumer credit trends, especially in the 1995
securitization pools), as well as a decline in recovery rates.
Non-Prime Portfolio. Set forth below is certain information concerning
the Company's experience pertaining to delinquencies and net credit losses on
the Non-prime portfolio. There can be no assurance that future delinquency and
net credit loss experience on receivables will be comparable to that set forth
below. See "Discussion of Forward-Looking Statements".
<TABLE>
<CAPTION>
Non-prime Delinquency Experience At
---------------------------------------------------------------------------------------------
September 30, 1997 June 30, 1997 September 30, 1996
----------------------- ------------------------ -----------------------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 6,288 $70,760 6,056 $68,289 4,925 $57,603
Delinquencies
30-59 days 380 4,420 236 2,807 119 1,402
60-89 days 162 1,876 123 1,412 35 443
90 days or more -- -- -- -- -- --
----- ----------- ------- ------------ --------- --------
Total delinquencies 542 6,296 359 4,219 154 1,845
Delinquency as a
percentage of
servicing portfolio 8.62% 8.90% 5.93% 6.18% 3.13% 3.20%
</TABLE>
As indicated in the above table, Non-prime portfolio delinquency was
8.90% based on outstanding loan balances of accounts 30 days past due and over
at September 30, 1997, compared to 6.18% at June 30, 1997, and 3.20% at
September 30, 1996.
<PAGE>
<TABLE>
<CAPTION>
Non-prime Credit Loss Experience
For the Quarter Ended
-------------------------------------------------------------------------
September 30, 1997 June 30, 1997 September 30, 1996
--------------------- -------------------- ---------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 6,202 $69,825 6,041 $68,492 4,625 $53,908
Gross charge-offs 229 2,474 175 1,962 69 751
Recoveries 933 507 274
------- ------- -------
Net charge-offs 1,541 1,455 477
Gross charge-offs as a percentage
of average servicing portfolio 14.77%* 14.17%* 11.59%* 11.46%* 5.97%* 5.57%*
Recoveries as a percentage
of gross charge-offs 37.71% 25.84% 36.48%
Net charge-offs as a percentage
of average servicing portfolio 8.83%* 8.50%* 3.54%*
</TABLE>
* Annualized
As indicated in the above table, credit losses for the three months
ended September 30, 1997 totaled approximately $1.5 million or 8.83%
(annualized) as a percentage of the average Non-prime servicing portfolio
compared to 8.50% and 3.54% for the quarter ended June 30,1997 and September 30,
1996, respectively. Recovery rates as a percentage of average servicing
portfolio for the quarter ended September 30, 1997 have improved over the
previous quarter. The Company has historically focused on the prime end of the
credit spectrum and will continue to do so.
Marine Portfolio. Delinquency related to the Marine portfolio based on
outstanding loan balances of accounts 30 days past due and over at September 30,
1997 was 1.46%, an increase over 0.10% at June 30, 1997. There were no credit
losses on the average marine servicing portfolio for the first quarter of fiscal
1998. Management expects increases in marine delinquency and credit losses as
the portfolio becomes seasoned.
Results of Operations
Net loss for the quarter was $6.9 million or $0.52 per share compared
to net earnings of $5.9 million or $0.45 per share for the same quarter of last
year. The decrease in net earnings is primarily attributable to a $16.4 million
($9.8 million after tax) charge for pool by pool impairments of excess servicing
primarily related to an increase in the allowance for estimated credit losses on
the securitized portfolio as well as a decrease in net interest margin after
provision of $2.8 million.
Net interest margin, after provision for September 30, 1997 was
$641,000, a 81.6% decrease from the net interest margin after provision of $3.5
million for the same period of last year. Interest on loans for the quarter
decreased 28.2% to $6.6 million compared to $9.2 million for the corresponding
quarter of last year. The decrease in the net interest margin is due to a
combination of a lower amount of loans held for sale at June 30, 1997 of $116.4
million compared to loans held for sale at June 30, 1996 of $244.0 million and
lower loan acquisitions during the first quarter of fiscal 1998 compared to
first quarter of fiscal 1997. Interest expense for the three months ended
September 30, 1997 was $6.1 million compared to $6.4 million for the same period
of last year. The decrease in interest expense is due primarily to lower average
borrowing needs for the quarter ended September 30, 1997 resulting from lower
loan acquisitions. This was partially offset by a higher effective interest cost
due to a greater percentage of the borrowing being from long-term debt. The
Company issued $65 million in Senior Notes during March 1997 resulting in
increased interest expense on long-term debt beginning with the third quarter of
fiscal 1997.
Loss on sales of loans totaled $10.8 million for the quarter ended
September 30, 1997 compared to a gain of $6.9 million for the same quarter of
last year. The loss for the three months ended September 30, 1997 consisted of a
$5.6 million gain on sale from the current quarter securitization and a $16.4
million charge for other than temporary impairments of Excess Servicing. Gain on
sales of loans before impairment decreased due to loan acquisitions being down
which resulted in a lower securitization for the first quarter of fiscal 1998
compared to the first quarter securitization of fiscal 1997. The loans sold in
the securitization for the three months ended September 30, 1997 were $218.4
million compared to nearly $310.1 million for the three months ended September
30, 1996. This was offset, somewhat, by the improvement of gross and net spreads
on this quarter's securitization of 7.04% and 5.38%, compared to 6.82% and
5.11%, respectively over the securitization in the same quarter of last year.
Included in the gain on sale was an allowance for estimated credit loss of 4.00%
and 3.00%, respectively.
Servicing fees, net increased 7.9% to $6.3 million for the three months
ended September 30, 1997, compared to $5.8 million for the three months ended
September 30, 1996. Servicing fees consist of contractual servicing fees (1% on
prime securitizations), the scheduled accretion of discount established on the
excess servicing asset at the time of securitization, and rebates received in
excess of original estimates recorded inherent in the gain calculation. The
increase in servicing fees, net is primarily a result of the increase in average
securitized loans to nearly $1.8 billion for the first quarter of fiscal 1998,
compared to just over $1.4 billion for the first quarter of fiscal 1997.
Servicing fees are also impacted by the timing of excess servicing cash flows
and excess rebates. The Company's rebate receivable is marked to market as a
component of the excess servicing asset beginning with the fourth quarter of
fiscal 1997 and thus, the Company does not expect to receive excess rebates in
fiscal 1998. Prior to this, excess rebates received were included in servicing
fees, net and totaled $809,000 for the quarter ended September 30, 1996.
Other revenues increased to $1.0 million for the three months ended
September 30, 1997, from $934,000 for the three months ended September 30, 1996.
The increase resulted primarily from increases in late charge fee income, offset
by a decrease in origination fee income.
Salaries and benefits increased to $4.6 million for the three months
ended September 30, 1997, from $3.6 million for the corresponding period ended
September 30, 1996. This increase resulted primarily from increased full-time
equivalent ("FTE") employees. Average FTE's for the three months ended September
30, 1997, were 420 compared to 347 for the comparable period ended September 30,
1996. The Company has experienced growth primarily in collections, but modestly
in other areas. These increases are primarily in response to a growing servicing
portfolio. Additional support staff has been added to ensure efficiency in
operations as the Company's servicing portfolio continues to grow.
Other operating expenses increased 14.2% to $4.0 million for the three
months ended September 30, 1997, from $3.5 million for the three months ended
September 30, 1996. Operating expense as a percentage of average servicing
portfolio was 1.76% and 1.71% for the period ending September 30, 1997 and
September 30, 1996, respectively. Other operating expenses include occupancy and
equipment costs, outside and professional services, loan expenses, promotional
expenses, travel, office supplies and other. The increase resulted primarily
from an increase in consulting/professional fees for the Activity Based
Management ("ABM") project that began in July 1997, which will help the Company
identify costs of processes performed for use in pricing and improvement in
overall efficiency.
Financial Condition
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 prepaid dealer premiums. The Company's portfolio of loans, net
increased to $141.0 million at September 30, 1997, from $121.2 million at June
30, 1997. This increase was due to the net effect of higher loan originations in
the first quarter (over the previous quarter) and a lower securitization in the
first quarter (over the previous quarter).
Excess Servicing decreased to $95.9 million as of September 30, 1997,
from $99.0 million as of June 30, 1997. This balance increased by the amount
capitalized upon consummation of the UACSC 1997-C Auto Trust ("1997-C") prime
securitization related to excess servicing and estimated dealer premium rebates.
Structuring of the securitization includes the sale of "interest only strips"
which generates more cash from the sale, but serves to reduce the initial excess
servicing asset recorded. Total amounts capitalized for the three months ended
September 30, 1997 were $12.5 million. The Excess Servicing balance also
increased by an additional pre-tax unrealized gain on excess servicing of $4.3
million and a $200,000 increase in accrued interest. The increases to Excess
Servicing were offset by the return of excess cash flows of $3.7 million as
received over the three months ended September 30, 1997, related to all
outstanding securitizations and by the effect of the $16.4 million other than
temporary impairment of the excess servicing asset taken during the current
quarter. Allowance for estimated credit losses on securitized loans is included
as a component of the excess servicing asset. At September 30, 1997, the
allowances related to both prime and non-prime securitized loans totaled $97.9
million or 5.33% of the total securitized loan portfolio compared to $79.9
million or 4.40% at June 30, 1997 and $48.7 million or 3.27% at September 30,
1996.
Spread Accounts decreased to $69.9 million at September 30, 1997, from
$71.7 million at June 30, 1997. These balances are increased by deposits made
monthly from excess servicing cash flows, 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 is in excess of the requirements
stipulated in the servicing agreement or when a draw on the Spread Account is
required due to negative excess servicing.
The balance of the Revolving Warehouse Credit Facilities and the Senior
and Senior Subordinated Notes was $314.2 million at September 30, 1997, compared
to $265.5 million at June 30, 1997. The increase in total borrowings was
primarily related to the increase in first quarter loan acquisitions as compared
to the previous quarter ended June 30, 1997.
The net deferred income taxes payable totaled $11.0 million at
September 30, 1997, compared to $13.9 million at June 30, 1997. This decrease is
a result of the net operating loss carryforward net of the deferral of a portion
of the gain on sale of loans for the securitization effected during the quarter
ended September 30, 1997 in excess of previously deferred income recognized
currently for tax purposes.
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) purchases and financing of loans, (ii) payment of Dealer Premiums,
(iii) securitization costs including cash held in Spread Accounts and similar
cash collateral accounts under revolving Warehouse Credit 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) payment of
income taxes, and (viii) interest expense. 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 and (vi) sales of
loans in securitization transactions and (vii) proceeds from sale of
interest-only strips in conjunction with securitization transactions. Net cash
used by operating activities decreased to $27.0 million for the three months
ended September 30, 1997, from net cash provided by operating activities of
$19.9 million for the three months ended September 30, 1996. This was primarily
attributable to a decrease in loans securitized relative to loans acquired. The
increase in cash used for investing activities was primarily due to the purchase
of property for the expansion of the retail remarketing operations in
Indianapolis. See - "Other Matters".
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 1998, hedging transactions have required a use of cash of $1.1 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
currently 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.
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 Warehouse Facility of up to $50.0 million. Additionally, the
Company has a Marine Warehouse Facility of up to $50.0 million that was
established in April 1997. The Prime Warehouse Facility provides funding for
loan acquisitions at a purchase price of up to 100.0% of the outstanding
principal balance of eligible loans at the time of purchase to the extent
allocable to loans which, upon acquisition, 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 92.0% of the outstanding principal
balance. The advance rate is adjusted monthly based upon actual loss statistics
in order to maintain the necessary enhancement level. The Non-prime Warehouse
Facility provides funding for loan acquisitions at a purchase price of up to
87.0% of the outstanding principal balance of eligible loans at the time of
purchase. The Marine Warehouse Facility provides funding for loan acquisitions
at a purchase price of up to 88.0% for any boat loan, up to 65.0% for personal
watercraft loans with 49 to 60 scheduled monthly payments, and personal
watercraft loans with less than 49 monthly payments at a purchase price of up to
83.0%. 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 and $65.0 million in Senior Notes in March
1997. Between securitization transactions, the Company relies primarily on the
Revolving Warehouse Credit 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 Credit
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 Credit 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 1998.
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, particularly including 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.
Other Matters
Corporate Domicile. During the second quarter, the commercial domicile
of the funding and securitization subsidiaries will be moved from Indiana to
Florida. This physical separation from the Company's Indiana office contributes
to more defined boundaries between the operations of the Company and those of
its subsidiaries. This move will enhance the independence of the subsidiaries as
viewed by creditors and investors with no adverse impact on the daily operations
of the Company.
An additional benefit derived from relocating the commercial domicile
of the subsidiaries may be a reduction in the Company's effective tax rate. This
reduction should enhance the Company's earnings and position the Company to be
more comparable with that of its competitors who are domiciled in more favorable
state tax jurisdictions. The tax benefit of this change has not been fully
determined at this point, and hence, first quarter tax provisions were recorded
at the historical tax rate.
Dealership. During the first quarter the Company acquired a 6.5 acre
property near its Indianapolis headquarters for the purpose of expanding its
reconditioning and retail remarketing operations which have outgrown its current
facilities in Indianapolis. The Company is currently in the final stages of
negotiation to obtain a new car franchise agreement. This strategy is being
employed in efforts to improve the recovery rates on repossessed vehicles by
offering them for retail sale at a manufacturer-franchised dealership which
typically brings a higher price than an independent lot. Renovation of the
facility is underway, and operations are expected to commence in the third
quarter of fiscal 1998.
The Company has no plans to finance any of the vehicle sales in-house.
The dealership will operate similarly to other dealerships by utilizing indirect
financing sources available as well as regional banks to fund vehicle purchases.
Management believes that by improving recovery rates, UAC can improve the net
credit loss rate.
Ongoing Development. 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.
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 1997 which is
incorporated herein by this reference.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-The following exhibits are filed as part of this report:
Exhibit 10.1 - Annual Bonus Plan for Management Employees, dated
July 1, 1997*
Exhibit 10.2 - Annual Bonus and Deferral Plan for Senior
Officers, dated July 1, 1997*
Exhibit 27 - Restated Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
*Previously filed
<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
December 30, 1998 By: /S/ Rick A. Brown
------------------------------
Rick A. Brown
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
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<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>
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