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 December 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction (I.R.S. Employer
of 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 February 13, 1998
Class A Common Stock, without par value 4,376,446 Shares
- --------------------------------------- ----------------
Class B Common Stock, without par value 8,855,036 Shares
- --------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements :
Consolidated Condensed Balance Sheets as of
December 31, 1997 and June 30, 1997 3
Consolidated Condensed Statements of Earnings for the Three
Months and Six Months Ended December 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended December 31, 1997 and 1996 5
Consolidated Condensed Statement of Shareholders' Equity for
Six Months Ended December 31, 1997 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION 18
Signatures 19
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
Dollars in thousands, except share data
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1997 1997
-----------------------------
(Unaudited)
<S> <C> <C>
Cash $ 55,500 $ 58,801
Restricted cash 18,394 16,657
Loans, net 174,140 121,381
Accrued interest receivable 1,779 1,232
Furniture and equipment, net 4,979 2,150
Excess servicing 106,098 98,841
Spread accounts 67,424 71,744
Other assets 20,878 21,360
-----------------------------
Total Assets $ 449,192 $ 392,166
=============================
Liabilities
Amounts due under warehouse facilities 102,612 44,455
Long-term debt 221,000 221,000
Accrued interest payable 5,796 5,793
Amounts due to trusts 12,779 16,067
Dealer premiums payable 1,514 1,372
Other payables and accrued expenses 2,688 2,318
Deferred income tax payable 15,898 15,046
-----------------------------
Total Liabilities 362,287 306,051
-----------------------------
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; 4,376,446 and 4,011,358 shares
issued and outstanding at December 31, 1997 and
June 30, 1997, respectively 58,360 58,270
Class B Common Stock, without par value,
authorized 20,000,000 shares; 8,855,036 and 9,200,000 shares
issued and outstanding at December 31, 1997 and
June 30, 1997, respectively -- --
Net unrealized loss on excess servicing (1,750) --
Retained earnings 30,295 27,845
-----------------------------
Total Shareholders' Equity 86,905 86,115
-----------------------------
Total Liabilities and Shareholders' Equity $ 449,192 $ 392,166
=============================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Earnings
Dollars in thousands, except share data
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------ ------------------------------------
1997 1996 1997 1996
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
Interest on loans $ 6,476 $ 9,096 $ 13,124 $ 18,329
Interest on spread accounts and
restricted cash 1,672 1,545 3,397 3,055
------------------------------------ ------------------------------------
Total interest income 8,148 10,641 16,521 21,384
Interest expense 6,167 6,265 12,220 12,675
------------------------------------ ------------------------------------
Net interest margin 1,981 4,376 4,301 8,709
Provision for credit losses 1,770 993 3,275 1,848
------------------------------------ ------------------------------------
Net interest margin
after provision 211 3,383 1,026 6,861
Gain on sales of loans, net 3,089 7,790 4,555 14,665
Servicing fees, net 6,429 6,258 12,621 12,084
Other 985 910 2,005 1,844
------------------------------------ ------------------------------------
Total revenues 10,714 18,341 20,207 35,454
------------------------------------ ------------------------------------
Salaries and benefits 4,871 3,900 9,481 7,532
Other 4,165 3,932 8,178 7,446
------------------------------------ ------------------------------------
Total operating expenses 9,036 7,832 17,659 14,978
------------------------------------ ------------------------------------
Earnings before provision for
income taxes 1,678 10,509 2,548 20,476
Provision (benefit) for income taxes (268) 4,316 98 8,365
------------------------------------ ------------------------------------
Net earnings $ 1,946 $ 6,193 $ 2,450 $ 12,111
=================================== ====================================
Earnings per share (diluted & basic) $ 0.15 $ 0.47 $ 0.19 $ 0.92
=================================== ====================================
Weighted average common
shares outstanding 13,227,010 13,215,515 13,221,899 13,213,437
=================================== ====================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 2,450 $ 12,111
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Loan originations in excess of liquidations (476,782) (588,707)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (21,175) (28,355)
Securitization of loans held for sale 422,537 625,192
Gain on sales of loans (11,656) (22,526)
Proceeds on sale of interest-only strip 7,137 18,293
Return of excess servicing cash flows 10,103 18,074
Impairment of Excess Servicing 3,756 --
Provision for estimated credit losses 3,275 1,848
Amortization and depreciation 2,067 1,860
Spread accounts 4,320 (9,054)
Restricted cash (1,737) (1,430)
Other assets and accrued interest receivable (2,265) (3,473)
Amounts due to trusts (3,288) 3,802
Other payables and accrued expenses 3,056 3,218
--------- ---------
Net cash provided (used) by operating activities (58,202) 30,853
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (3,256) (561)
--------- ---------
Cash flows from financing activites:
Net change in warehouse credit facilities 58,157 (31,340)
Payment of borrowing fees -- (4)
--------- ---------
58,157 (31,344)
Change in cash (3,301) (1,052)
Cash, beginning of period 58,801 13,459
--------- ---------
Cash, end of period $ 55,500 $ 12,407
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid $ 20 $ 4,200
========= =========
Interest paid $ 12,768 $ 13,399
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended December 31, 1997
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Number of Common Stock Net
Shares Outstanding Unrealized
Loss on Total
Common Retained Excess Shareholders'
Class A Class B Stock Earnings Servicing Equity
----------------------------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 4,016,788 9,200,000 $ 58,270 $ 27,845 $ - $ 86,115
Grants of Common Stock 14,694 - 90 - - 90
Conversion of Class B
Common Stock into Class A
Common Stock 200,000 (200,000) - - - -
Net Earnings - - - 2,450 - 2,450
------------------------------------------------------------------------------------
4,376,446 8,855,036 58,360 30,295 - 88,655
Net unrealized loss on excess
servicing - - - - (1,750) (1,750)
------------------------------------------------------------------------------------
Balance at December 31, 1997 4,376,446 8,855,036 $ 58,360 $ 30,295 $(1,750) $ 86,905
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Six Months Ended December 31, 1997 and December 31, 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 and its subsidiaries.
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.
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. Circle City Car Company and Union Acceptance
Receivables Corporation were formed as wholly-owned subsidiaries of UAC during
the first and second quarters, respectively, of fiscal 1998.
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
The Corporation has implemented Statement of Financial Accounting
Standards 128, "Earnings per Share" (EPS) which is effective for interim and
annual periods ending after December 15, 1997, and requires the presentation of
basic and dilutive earnings per share. Accordingly, these amounts appear on the
consolidated financial statements in this Form 10-Q. EPS have been computed on
the basis of the weighted average number of common shares outstanding. The
effect of stock options not exercised during the periods presented are
anti-dilutive and therefore not included in diluted earnings per share. The
weighted average number of shares used in the basic and diluted EPS computations
for the three months ended December 31, 1997 and 1996 were 13,227,010 and
13,215,515, respectively. The weighted average number of shares used in the
basic and dilutive EPS computations for the six months ended December 31, 1997
and 1996 were 13,221,899 and 13,213,437, respectively.
Note 3- Conversion of Common Stock
The Company's charter provides that shares of Class B Common Stock
convert automatically to shares of Class A Common Stock on a share-for-share
basis upon transfer outside a prescribed group of initial holders and certain
affiliates. Pursuant to such provision, 344,964 shares of Class B Common Stock
were converted to shares of Class A Common Stock in the fiscal quarter ended
December 31, 1997.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to the Consolidated Condensed Financial Statements
For the Six Months Ended December 31, 1997 and December 31, 1996
(Unaudited)
Note 4- Excess Servicing
Excess servicing is as follows (in thousands) at:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
----------- -----------
<S> <C> <C>
Estimated value of excess servicing cash
flows, net of estimated prepayments $ 152,403 $ 148,788
Allowance for estimated credit losses (70,911) (79,013)
Estimated dealer premium rebates 26,855 28,175
Discount to present value (13,166) (11,916)
----------- -----------
95,181 86,034
Accrued interest on securitized loans 13,720 12,807
Unrealized loss on excess servicing (2,803) --
----------- -----------
Excess Servicing $ 106,098 $ 98,841
=========== ===========
Outstanding balance of loans serviced
through securitized trusts $ 1,829,869 $ 1,818,163
Allowance for estimated credit losses as
a percentage of securitized loans serviced 3.88% 4.35%
</TABLE>
Note 5-Current Accounting Pronouncements
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 non-owner 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 6-Year 2000 Compliant
A Year 2000 Committee has been established by the Company consisting of
directors, officers, and employees of the Company to address problems which
could arise from the forthcoming Year 2000 rollover. The Committee is charged
with providing regular reports to the Board of Directors detailing progress in
this area. Based on progress by the Committee to date, it is not anticipated
that the Year 2000 rollover will present material financial or operational
burdens for 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 51 major
metropolitan areas in 30 states from over 3,300 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 through 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 to improve the overall credit quality of
the portfolio over the long-term. These changes coupled with intense competition
in the consumer finance markets and the cyclical nature of the automotive
industry continue to negatively impact the volume of loan acquisitions. Total
loan acquisitions were $227.4 million for the quarter ended December 31, 1997, a
decrease from $252.9 million for the quarter ended September 30, 1997, and
$307.4 million for the quarter ended December 31, 1996. Prime loan acquisitions
for the quarter ended December 31, 1997, decreased by 8.8% from the previous
quarter, and 25.2% from the quarter ended December 31, 1996. Non-prime loan
acquisitions for the quarter ended December 31, 1997, decreased by 34.2% from
the quarter ended September 30, 1997, and 46.7% from the quarter ended December
31, 1996. Loan acquisitions for the marine business decreased 70.1% from the
quarter ended September 30, 1997, and 44.2% from the quarter ended December 31,
1996.
Gross and Net Spreads. Market interest rates (i.e. treasury rates) on
the second quarter securitization decreased significantly from the first quarter
securitization. The gross and net spreads on the second quarter securitization
of fiscal 1998 were 6.71% and 5.07% compared to 7.39% and 5.37%, 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 and trustee fees, and hedging gains or losses. Net spread on the
most recent prime securitization (November 1997) was 5.07% compared to 5.38% in
the first quarter securitization and 5.37% in the quarter ended December 31,
1996. Because of the higher spread to treasury rates in the asset-backed
securities market, the net spread on the second quarter securitization of fiscal
1998 was lower compared to the second quarter securitization of fiscal 1997.
Management is currently targeting net spreads of 4.85% to 5.35% on
prime securitizations (assuming a pricing spread for asset-backed certificates
over the two-year treasury note of 65 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, 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".
<PAGE>
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, the net spread and the level of estimated 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. Increasing delinquency and credit losses prior
to this quarter have been attributed to the deterioration of consumer credit
despite low unemployment and relatively good economic conditions. There has been
a slight improvement in delinquency and credit losses since September 1997,
which is primarily attributable to strategic efforts made by the Company.
Beginning in March 1997, UAC implemented tighter credit standards in loan
acquisitions to help ensure adequate credit quality. Several collection
strategies have been implemented to target problem accounts, including forming
specialized collection teams to concentrate on specific classes of accounts and
utilization of new scoring tools to focus collection efforts most effectively.
Recovery rates are a contributing factor to higher credit losses. The
market for the sale of used-cars at auction has continued to decline due to
saturation by used leased vehicles and repossessed vehicles due to bankruptcy.
Recoveries as a percentage of gross charge-offs increased to 38.11% for the
quarter ended December 31, 1997, up from 35.28% for the quarter ended September
30, 1997, and 37.52% for the quarter ended December 31, 1996. Although recovery
rates showed signs of improvement during the most recent quarter, management
continues to look for ways to improve recovery rates including expansion of the
Company's reconditioning and remarketing operations. See - "Other Matters"
Provisions are made for estimated credit losses in conjunction with
each loan sale. Current assumptions in the calculation of the gain allowance for
the second quarter securitization were 4.00% over the life of the pool.
Allowance for estimated credit losses on securitized loans (inherent in the
excess servicing asset) declined to 3.88% at December 31, 1997, compared to
4.16% at September 30, 1997, and increased from 3.40% at December 31, 1996. The
decline from September 30, 1997, to December 31, 1997, is due primarily to the
mix of the seasoning of the securitized pools.
Prime Portfolio. Set forth below is certain information concerning the
Company's experience 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
-----------------------------------------------------------------------------------------------
December 31, 1997 September 30, 1997 December 31, 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 179,962 $1,920,930 177,377 $1,896,748 165,270 $1,766,525
Delinquencies
30-59 days 3,954 41,778 4,310 45,766 1,743 18,973
60-89 days 2,274 25,933 2,196 25,156 1,235 14,388
90 days or more 688 8,048 934 11,131 892 10,744
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies 6,916 75,759 7,440 82,053 3,870 44,105
Delinquency as a
percentage of servicing portfolio 3.84% 3.94% 4.19% 4.33% 2.34% 2.50%
</TABLE>
As indicated by the above table, delinquency rates based upon
outstanding loan balances of accounts 30 days past due and over decreased to
3.94% at December 31, 1997, compared to 4.33% at September 30, 1997, and
increased from 2.50% at December 31, 1996, for UAC's prime servicing portfolio.
The decreased delinquency is primarily attributed to collection strategies
implemented to target problem accounts as well as the utilization of new scoring
tools to focus collection efforts most effectively.
<PAGE>
<TABLE>
<CAPTION>
Prime Credit Loss Experience
For the Three Months Ended
-----------------------------------------------------------------------------------
December 31, 1997 September 30, 1997 December 31, 1997
----------------------- --------------------------- -----------------------
(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 179,334 $1,916,778 175,920 $ 1,881,603 162,427 $1,731,548
Gross charge-offs 1,977 22,373 2,054 23,056 1,268 14,144
Recoveries 8,527 8,134 5,307
---------- ------------ ----------
Net charge-offs 13,846 14,922 8,837
Gross charge-offs as a percentage
of average servicing portfolio (1) 4.41% 4.67% 4.67% 4.90% 3.12% 3.27%
Recoveries as a percentage of
gross charge-offs 38.11% 35.28% 37.52%
Net charge-offs as a percentage
of average servicing portfolio (1) 2.89% 3.17% 2.04%
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------- ---------------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
<S> <C> <C> <C> <C>
Average servicing portfolio 177,627 $1,899,190 157,815 $1,674,077
Gross charge-offs 4,031 45,429 2,254 24,895
Recoveries 16,661 9,646
---------- ----------
Net charge-offs 28,768 15,249
Gross charge-offs as a percentage
of average servicing portfolio (1) 4.54% 4.78% 2.86% 2.97%
Recoveries as a percentage
of gross charge-offs 36.68% 38.75%
Net charge-offs as a percentage
of average servicing portfolio (1) 3.03% 1.82%
</TABLE>
(1) Annualized
As indicated in the table above, credit losses on the prime auto
portfolio totaled $13.8 million for the quarter ended December 31, 1997, or
2.89% (annualized) of the average servicing portfolio compared to 3.17% and
2.04% for the quarters ended September 30, 1997, and December 31, 1996,
respectively. Decreased credit losses are primarily a result of strategic
efforts made by the Company to improve the overall credit-quality of loans as
well as a slight improvement 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".
<PAGE>
<TABLE>
<CAPTION>
Non-prime Delinquency Experience At
-----------------------------------------------------------------------
December 31, 1997 September 30, 1997 December 31, 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 6,367 $70,439 6,288 $70,760 5,574 $64,746
Delinquencies
30-59 days 400 4,647 380 4,420 119 1,445
60-89 days 150 1,728 162 1,876 80 1,009
90 days or more - - - - - -
----- ------- ----- ------- ----- -------
Total delinquencies 550 6,375 542 6,296 199 2,454
Delinquency as a
percentage of servicing portfolio 8.64% 9.05% 8.62% 8.90% 3.57% 3.79%
</TABLE>
As indicated in the above table, Non-prime portfolio delinquency was
9.05% based on outstanding loan balances of accounts 30 days past due and over
at December 31, 1997, compared to 8.90% at September 30, 1997, and 3.79% at
December 31, 1996. The increase in delinquency at December 31, 1997, compared to
December 31, 1996, is due primarily to the seasoning of the portfolio.
<TABLE>
<CAPTION>
Non-prime Credit Loss Experience
For the Three Months Ended
---------------------------------------------------------------
December 31, 1997 September 30, 1997 December 31, 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 6,340 $70,547 6,202 $69,825 5,402 $62,863
Gross charge-offs 195 2,163 229 2,474 67 733
Recoveries 708 933 184
------- ------ ------
Net charge-offs 1,455 1,541 549
Gross charge-offs as a percentage
of average servicing portfolio (1) 12.30% 12.26% 14.77% 14.17% 4.96% 4.66%
Recoveries as a percentage
of gross charge-offs 32.75% 37.71% 25.10%
Net charge-offs as a percentage
of average servicing portfolio (1) 8.25% 8.83% 3.49%
</TABLE>
For the Six Months Ended
----------------------------------------
December 31, 1997 December 31, 1996
----------------- -------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
Average servicing portfolio 6,271 $70,186 5,014 $58,386
Gross charge-offs 424 4,637 136 1,484
Recoveries 1,641 458
------- -------
Net charge-offs 2,996 1,026
Gross charge-offs as a percentage
of average servicing portfolio (1) 13.52% 13.21% 5.42% 5.08%
Recoveries as a percentage
of gross charge-offs 35.39% 30.86%
Net charge-offs as a percentage
of average servicing portfolio (1) 8.54% 3.51%
(1) Annualized
<PAGE>
As indicated in the table above, credit losses for the quarter ended
December 31, 1997, totaled $1.5 million or 8.25% (annualized) as a percentage of
the average Non-prime servicing portfolio compared to 8.83% and 3.49% for the
quarters ended September 30, 1997, and December 31, 1996, respectively.
Increased Non-prime credit losses are a result of seasoning in the portfolio.
The Non-prime portfolio represents less than 4.00% of the Company's total
servicing portfolio.
Marine Portfolio. Delinquency related to the Marine portfolio based on
outstanding loan balances of accounts 30 days past due and over at December 31,
1997, was 1.60%, an increase from 1.46% at September 30, 1997. Net credit losses
on the marine servicing portfolio for the second quarter of fiscal 1998 were
1.64%, compared to no credit losses for the quarter ended September 30, 1997.
The increase in net credit losses is expected as the portfolio becomes more
seasoned. The Marine portfolio accounts for less than 40 b.p. of the Company's
total servicing portfolio.
Results of Operations
Net earnings for the three months and six months ended December 31,
1997, were down 68.6% and 79.8% respectively, compared to the three months and
six months ended December 31, 1996. Net earnings for the three months ended
December 31, 1997, included a one-time income tax benefit of $860,000 resulting
from the change in commercial domicile of five of the Company's subsidiaries.
The change in commercial domicile should reduce the effective income tax rate
from 40.5% to approximately 38.2% on a continuing basis. The decrease in net
earnings is primarily attributable to lower net interest margins and lower gain
on sale of loans. The Company's total loan acquisitions for the quarter
decreased by 26.0% compared to the same quarter of last year. Year to date loan
acquisitions also decreased by 20.5% over the comparable period of fiscal 1997.
The servicing portfolio reached over $2.0 billion, a 9.0% increase over a year
ago.
Net interest margin after provision decreased 93.8% to $211,000 and
85.0% to $1.0 million for the three months and six months ended December 31,
1997, respectively, compared to $3.4 million and $6.9 million for the three
months and six months ended December 31, 1996. The decrease in interest income
resulted from a decrease in the average monthly balance of prime loans held for
sale to $142.6 million for the quarter ended December 31, 1997, from $213.5
million for the corresponding quarter ended December 31, 1996. Interest expense
for the three and six months ended December 31, 1997, was lower than in the
corresponding periods of the prior fiscal year as a result of lower average
borrowing needs resulting from lower loan acquisitions. The lower interest
expense was partially offset by increased interest on long-term debt due to the
issuance of $65.0 million of Senior Notes in March 1997. Provision for credit
losses increased 78.3% and 77.2% for the three and six months ended December 31,
1997, over the same periods in the prior fiscal year. The provision for credit
losses was increased in response to the prior periods' trend of increasing
credit losses and delinquencies.
Gain on sales of loans decreased to $3.1 million and $4.6 million for
the three and six months ended December 31, 1997, respectively, from $7.8
million and $14.7 million for the corresponding periods ended December 31, 1996.
The decrease was due to both lower loan acquisitions resulting in lower
securitizations in both the first and second quarters of fiscal 1998 and a
higher provision for estimated credit losses. The Company securitized $218.4
million in loans during the first quarter and $204.1 million in the second
quarter of fiscal 1998, compared to $311.0 million and $314.2 million (including
$31.1 million in a non-prime securitization) for the first and second quarters
of fiscal 1997. The non-prime securitization in the second quarter of fiscal
1997 yielded a gain on sale of nearly $1.9 million, accounting for part of the
decrease in gain on sale during the current quarter securitization.
Servicing fees, net increased to $6.4 million and $12.6 million for
the three and six months ended December 31, 1997, respectively, compared to $6.3
million and $12.1 million for the corresponding periods ended December 31, 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 dealer rebates received in
excess of original estimates recorded in the gain calculation. Increased
servicing fees were primarily a result of the increase in the average
securitized loans of approximately 16.8% and 19.5% for the three and six months
ended December 31, 1997, respectively, as compared to the same periods of fiscal
1997.
<PAGE>
Other revenue increased to $985,000 and $2.0 million for the three and
six months ended December 31, 1997, respectively, from $910,000 and $1.8 million
for the three and six months ended December 31, 1996. Other revenue consists
primarily of late charge income and origination fee income. The increase
resulted primarily from an increase in late charge fee income, but was offset by
a decrease of 45.9% and 39.2% in origination fees for the three months and six
months ended December 31, 1997, respectively, as compared to the same periods of
the previous year. The increase in late charge income is primarily due to the
increase in the servicing portfolio. The decrease in origination fees is
primarily due to a lower volume of loans acquired during the three and six
months ended December 31, 1997 compared to same periods of fiscal 1997.
Additionally, origination fees have decreased due to the use of a greater
percentage of generic contracts which do not allow for an origination fee to be
charged.
Salaries and benefits increased 24.9% to $4.9 million and 25.9% to $9.5
million for the three and six months ended December 31, 1997, respectively, from
$3.9 million and $7.5 million for the corresponding periods ended December 31,
1996. These increases resulted primarily from increased full-time equivalent
("FTE") employees. Average FTE's for the three and six months ended December 31,
1997, were 441 and 431, respectively, compared to 373 and 360 for the comparable
periods ended December 31, 1996. The Company has experienced growth primarily in
collections, but modestly in other areas. Additional support staff has been
added to help ensure efficiency in operations as the Company's servicing
portfolio continues to increase.
Other operating expense increased 6.0% to $4.2 million and 9.8% to $8.2
million for the three and six months ended December 31, 1997, respectively, from
$3.9 million and $7.4 million for the three and six months ended December 31,
1996. Other operating expenses primarily include occupancy and equipment costs,
outside and professional services, loan expenses, promotional expenses, travel,
and office supplies. The increase resulted primarily from an increase in
consulting and professional fees for the Activity Based Management ("ABM")
project that began in July 1997 and the non-recurring fees related to the change
in commercial domicile for five of the Company's subsidiaries. The ABM project
focuses on improving the overall operating efficiency by identifying costs
associated with Company processes, and the change in commercial domicile has
currently provided an income tax benefit of $860,000.
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 $174.1 million at December 31, 1997, from $121.4 million at June
30, 1997. This increase was due primarily to the timing of the securitization in
the current quarter which was completed in the middle month of the quarter
compared to the securitization in the quarter ended June 30, 1997, which was
completed in the last month of the quarter.
Excess Servicing increased to $106.1 million as of December 31, 1997,
from $98.8 million as of June 30, 1997. Excess Servicing increased by the amount
capitalized upon consummation of the UACSC 1997-C and 1997-D Auto Trusts
("1997-C" and "1997-D") prime securitizations. Structuring of the securitization
includes the sale of an "interest only strip" which generates more cash from the
sale but serves to reduce the initial excess servicing asset recorded. The
amount capitalized was offset by the increased return of excess cashflows over
the six months ended December 31, 1997, related to all outstanding
securitizations. The excess servicing asset was decreased by a mark to market
unrealized loss adjustment to excess servicing totaling $2.8 million or $1.8
million after tax. The net unrealized loss was recorded as a component of
shareholder's equity in accordance with SFAS 125 during the current quarter. The
increase in excess servicing was also offset by the effect of the $3.7 million
impairment of the excess servicing asset recorded during the quarter ended
September 30, 1997, which reduced the gain on the 1997-C securitization.
Allowance for estimated credit losses on securitized loans is included as a
component of the excess servicing asset. At December 31, 1997, the allowance
related to both prime and non-prime securitized loans, totaled $70.9 million or
3.88% of the total securitized loan portfolio compared to $79.0 million or 4.35%
at June 30, 1997, and $55.2 million or 3.40% at December 31, 1996. Accrued
interest due to the Company at the cutoff date on securitized loan pools is also
included as a component of Excess Servicing.
<PAGE>
Spread Accounts decreased to $67.4 million at December 31, 1997, from
$71.7 million at June 30, 1997. These balances are 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 or when a draw on the Spread Account is
required to meet cash flow requirements of the securitization. An initial
deposit of $2.0 million was made in connection with the 1997-D securitization.
The balance of the Revolving Warehouse Credit Facilities and the Senior
and Senior Subordinated Notes was $323.6 million at December 31, 1997, compared
to $265.5 million at June 30, 1997. The increase in total borrowings was
primarily related to the timing of the securitization during the current
quarter. The second quarter securitization was effected during the second month
of the quarter while the fourth quarter securitization was effected during the
third month of the quarter. The difference in timing resulted in borrowing for
more days during the quarter ended December 31, 1997, compared to the quarter
ended June 30, 1997.
The net deferred income taxes payable totaled $15.9 million at December
31, 1997, compared to $15.0 million at June 30, 1997. The increase is a result
of the deferral of a portion of the gain on sales of loans for the
securitizations effected during the first and second quarters of fiscal 1998 in
excess of previously deferred income recognized currently for tax purposes,
which is offset by the $860,000 reduction in deferred state income taxes.
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, (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 $58.2 million for the six months ended
December 31, 1997, from net cash provided by operating activities of $30.9
million for the six months ended December 31, 1997. 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 reconditioning and 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 and second
quarters of fiscal 1998, hedging transactions have required a use of cash of
$1.7 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.
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 consistently assesses its long-term
loan funding arrangements with a view to optimizing cash flows and reducing
costs.
<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 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 - 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 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.
During the fiscal quarter ended December 31, 1997, the Company was
notified by Fitch IBCA ("Fitch") that its ratings of the Company's senior and
subordinated notes were being reduced one grade. Fitch also informed the Company
that it would consider a further downgrade of such securities in the third
quarter of fiscal 1998 if the Company failed to show material improvement in
asset quality unless the Company obtained additional equity capital. In view of
the improvement in the asset quality of the Company's servicing portfolio in the
second quarter and the adequacy for the time being of the Company's capital
resources as discussed herein, the Company does not intend to seek additional
equity investment in the current year. There is no assurance as to what, if any,
further action Fitch will take with respect to its ratings of the Company's debt
securities.
Management believes that the Company's existing capital resources, 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.
<PAGE>
Other Matters
Remarketing of Repossessed Autos. During the first quarter of fiscal
1998 the Company acquired a 6.5 acre property near its Indianapolis headquarters
for the purpose of expanding its reconditioning and remarketing operations which
have outgrown its current facilities in Indianapolis. Renovation of the facility
is progressing and operations are expected to commence in the fourth quarter of
fiscal 1998.
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.
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.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders, on October 29, 1997,
the following nominees were elected to the Board of Directors.
Affirmative Votes
Votes Withheld
Howard L. Chapman 49,425,040 27,659
John M. Davis 49,425,040 27,659
Fred M. Fehsenfeld 49,425,040 27,659
Donald A. Sherman 49,425,040 27,659
John M. Stainbrook 49,425,040 27,659
Jerry D. Von Deylen 49,425,040 27,659
Richard D. Waterfield 49,423,040 27,659
Thomas M. West 49,425,040 27,659
The following proposal was approved at the Company's Annual Meeting on October
29, 1997:
Ratification of appointment of auditors. KPMG Peat Marwick LLP was retained as
the Company's auditors for the fiscal year 1998. The votes were as follows:
12,656,904 Affirmative Votes; 15,350 Negative Votes; and 7,645 Votes Abstained.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
<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
February 13, 1998 By: /s/ John M. Stainbrook
-------------------------
John M. Stainbrook
President
February 13, 1998 By: /s/ Rick A. Brown
-------------------
Rick A. Brown
Vice President, Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED DECEMBER 31, 1997 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 141,318
<SECURITIES> 0
<RECEIVABLES> 176,733
<ALLOWANCES> (814)
<INVENTORY> 0
<CURRENT-ASSETS> 317,237
<PP&E> 7,967
<DEPRECIATION> (2,988)
<TOTAL-ASSETS> 449,192
<CURRENT-LIABILITIES> 22,777
<BONDS> 339,510
<COMMON> 58,360
0
0
<OTHER-SE> 28,545
<TOTAL-LIABILITY-AND-EQUITY> 449,192
<SALES> 0
<TOTAL-REVENUES> 35,702
<CGS> 0
<TOTAL-COSTS> 17,659
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,275
<INTEREST-EXPENSE> 12,220
<INCOME-PRETAX> 2,548
<INCOME-TAX> 98
<INCOME-CONTINUING> 2,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,450
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
