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 March 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 of incorporation (I.R.S. Employer Identification
or organization) 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 May 14, 1997
Class A Common Stock, without par value 4,016,788 Shares
- --------------------------------------- ----------------
Class B Common Stock, without par value 9,200,000 Shares
- --------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q/A
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Condensed Balance Sheets as of
March 31, 1997 and June 30, 1996 3
Consolidated Condensed Statements of Earnings (Loss)
for the Three and Nine Months Ended March 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended March 31, 1997 and 1996 5
Consolidated Condensed Statement of Shareholders' Equity for
the Nine Months Ended March 31, 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 March 31, 1997 June 30, 1996
- ------
-------------- -------------
(Unaudited)
<S> <C> <C>
Cash $ 73,442 $ 13,459
Restricted cash 16,212 14,789
Loans, net 189,323 259,290
Accrued interest receivable 1,650 2,127
Property and equipment, net 2,114 2,026
Excess servicing 107,017 83,434
Spread accounts 71,498 63,590
Other assets 19,771 12,480
-------- --------
Total Assets $481,027 $451,195
======== ========
Liabilities
- -----------
Amounts due under warehouse facilities $127,218 $187,756
Long term debt 221,000 156,000
Accrued interest payable 2,212 5,820
Amounts due to trusts 14,626 7,931
Dealer premiums payable 1,182 3,381
Other payables and accrued expenses 3,308 3,326
Deferred income tax payable 18,278 8,357
-------- --------
Total Liabilities 387,824 372,571
-------- --------
Shareholders' Equity
- --------------------
Preferred Stock, without par value, authorized
10,000,000 shares; none issued and outstanding -- --
Class A Common Stock, without par value,
authorized 30,000,000 shares; 4,016,788 and 4,011,358 shares
issued and outstanding at March 31, 1997 and
June 30, 1996, respectively 58,270 58,180
Class B Common Stock, without par value,
authorized 20,000,000 shares; 9,200,000
shares issued and outstanding at March 31, 1997 and
June 30, 1996, respectively -- --
Net unrealized gain on excess servicing 4,776 --
Retained earnings 30,157 20,444
-------- --------
Total Shareholders' Equity 93,203 78,624
-------- --------
Total Liabilities and Shareholders' Equity $481,027 $451,195
======== ========
</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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest on loans $ 7,543 $ 6,732 $ 25,872 $ 20,910
Interest on spread accounts
and restricted cash 1,618 1,317 4,673 4,073
------------ ------------ ------------ ------------
Total interest income 9,161 8,049 30,545 24,983
Interest expense 6,118 5,359 18,793 16,204
------------ ------------ ------------ ------------
Net interest margin 3,043 2,690 11,752 8,779
Provisions for losses 1,180 600 3,028 2,050
------------ ------------ ------------ ------------
Net interest margin after provision 1,863 2,090 8,724 6,729
Gain (loss) on sales of loans (6,168) 7,760 8,497 22,967
Servicing fees, net 6,854 4,796 18,938 11,346
Other revenues 1,011 798 2,855 2,271
------------ ------------ ------------ ------------
Total revenues 3,560 15,444 39,014 43,313
------------ ------------ ------------ ------------
Salaries and benefits 4,065 3,232 11,597 8,611
Other expenses 3,480 3,426 10,926 8,368
------------ ------------ ------------ ------------
Total operating expenses 7,545 6,658 22,523 16,979
------------ ------------ ------------ ------------
Earnings (loss) before provision
for income taxes (3,985) 8,786 16,491 26,334
Provision (benefit) for income taxes (1,587) 3,473 6,778 10,659
------------ ------------ ------------ ------------
Net earnings (loss) $ (2,398) $ 5,313 $ 9,713 $ 15,675
============ ============ ============ ============
Net earnings (loss) per share $ (0.18) $ 0.40 $ 0.74 $ 1.19
============ ============ ============ ============
Weighted average number of
common shares outstanding 13,216,788 13,211,358 13,214,554 13,208,718
============ ============ ============ ============
</TABLE>
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>
Nine Months Ended
March 31,
------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 9,713 $ 15,675
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Loan acquisitions in excess of liquidations (854,758) (667,103)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (43,014) (35,156)
Securitization of loans held for sale 918,540 679,496
Gain on sales of loans (37,843) (31,882)
Proceeds on sale of interest-only strip 25,979 19,383
Return of excess and servicing asset cash
flows, net of present value effect 19,821 31,671
Impairment of Excess Servicing 19,601 --
Provision for estimated credit losses 3,028 2,050
Amortization and depreciation 2,861 3,308
Spread accounts (7,908) (3,323)
Restricted cash (1,423) (14,961)
Other assets and accrued interest receivable (12,502) (6,624)
Amounts due to trusts 6,695 12,328
Other payables and accrued expenses 7,969 11,861
--------- ---------
Net cash provided by operating activities 56,759 16,723
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (664) (1,136)
--------- ---------
Cash flows from financing activites:
Net change in Due to Union Federal, including
regulatory equity distribution -- (337,423)
Net change in warehouse credit facilities (60,538) 159,435
Proceeds from issuance of senior notes 65,000 110,000
Net proceeds from issuance of common stock -- 58,000
Payment of borrowing fees (574) (2,886)
--------- ---------
Net cash provided (used) by financing activities 3,888 (12,874)
Change in cash 59,983 2,713
Cash, beginning of period 13,459 9,483
--------- ---------
Cash, end of period $ 73,442 $ 12,196
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid $ 4,277 $ 5,540
========= =========
Interest paid $ 21,983 $ 13,862
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
For the Nine Months Ended March 31, 1997
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Number of Common
Shares Outstanding Net
Unrealized Total
Common Gain on Excess Retained Shareholders'
Class A Class B Stock Servicing Earnings Equity
------- ------- ----- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1996 4,011,358 9,200,000 $58,180 $ - $20,444 $78,624
Grants of Common Stock 5,430 - 90 - - 90
Net earnings - - - - 9,713 9,713
---------------------------------------------------------------------------------------------------------
4,016,788 9,200,000 58,270 - 30,157 88,427
Net unrealized gain on
excess servicing - - - 4,776 - 4,776
---------------------------------------------------------------------------------------------------------
Balance at
March 31, 1997 4,016,788 9,200,000 $58,270 $ 4,776 $30,157 $ 93,203
=========================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Nine Months Ended March 31, 1997 and March 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 Subsidiaries (formerly the "Union Division"). On
August 7, 1995, the Company ("UAC") issued 4 million shares of Class A Common
Stock at $16.00 per share with net proceeds of $58.0 million simultaneously with
a private placement of $110.0 million of Senior Notes with net proceeds of
$108.6 million. These proceeds and fundings under a $350.0 million Prime
Warehouse Facility and a $50.0 million Non-prime Warehouse Facility were used to
eliminate amounts due to its former parent, and to capitalize UAC's business and
fund ongoing operations. The Business Transfer was completed at this time. The
Company's business is conducted solely by UAC and its subsidiaries. A summary of
the Corporation's significant accounting policies is set forth in "Note 1" of
the "Notes to Consolidated Financial Statements" in the Corporation's Annual
Report on Form 10-K for the year ended June 30, 1996.
The consolidated condensed financial statements for the interim period have been
prepared in accordance with Form 10-Q specifications, and, therefore, do not
include all information and footnotes normally shown in full annual financial
statements.
Note 2 - Earnings Per Share
Earnings per share for the nine months ended March 31, 1997 and 1996 were
computed by dividing the net earnings by the average number of common shares
outstanding for the period. Earnings per share for the nine months ended March
31, 1996 were computed by dividing net earnings by the average number of common
shares outstanding during the period. Shares outstanding from August 7, 1995,
through September 30, 1995, were assumed to be outstanding for the entire three
months ended September 30, 1995. The effect of unexercised stock options on
earnings per share is less than three percent dilutive and has not been included
in the earnings per share computations.
Note 3 - Excess Servicing
Excess servicing is as follows (in thousands) at:
March 31, 1997 June 30, 1996
-------------- -------------
Estimated value of excess servicing cash
flows, net of estimated prepayments $ 138,754 $ 112,564
Allowance for estimated credit losses ( 64,545) (43,516)
Estimated dealer premium rebates 23,756 13,467
Discount to present value ( 11,318) (9,535)
--------------- ---------------
86,647 72,980
Accrued interest on securitized loans 12,343 10,454
Unrealized gain on excess servicing 8,027 -
=============== ===============
Excess servicing $ 107,017 $83,434
=============== ===============
Outstanding balance of loans serviced
through securitized trusts $ 1,727,322 $ 1,351,480
Allowance for estimated credit losses as
a percentage of securitized loans serviced 3.74% 3.22%
Union Acceptance Corporation and Subsidiaries
Notes to the Consolidated Condensed Financial Statements
For the Nine Months Ended March 31, 1997 and March 31, 1996
(Unaudited)
Note 4 - Reclassifications
Certain amounts in the fiscal 1996 Consolidated Condensed Financial Statements
have been reclassified to conform to fiscal 1997 presentation.
Note 5 - Current Accounting Pronouncements
During June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125"). SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. The financial components approach focuses
on the assets and liabilities that exist after the transfer.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. The
Company adopted SFAS 125 on January 1, 1997. This pronouncement prescribes
methodology for recognition of gain on sales of loans, as well as the valuation
of the retained interests (or "excess servicing" ). Adjustments to market value
based upon the valuation in accordance with SFAS 125 will be recorded, net of
tax, as a separate component of shareholders' equity until realized. As a result
of the adoption of SFAS 125, the Company recognized an unrealized gain on the
valuation of its excess servicing which is defined as an "available for sale
security" under the provisions of SFAS 125.
In February 1997, the FASB issued SFAS 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 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 are
less than three percent dilutive, and have 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.
Note 6 - Restatement of Consolidated Condensed Financial Statements
The Company determined in August 1998 that it should measure other than
temporary impairment of Excess Servicing on a disaggregate basis (the pool by
pool method). The adjustments resulting from the measurement of other than
temporary impairment on a disaggregate basis 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 $8.9 million (net of income taxes of $6.1 million), or $0.67 per
share, for the quarter and nine months ended March 31,1997. This restatement
reduced shareholders' equity at March 31, 1997 by $229,000. In conjunction with
the restatement, the Company made other adjustments, which were not individually
significant, that increased net earnings for the quarter ended March 31, 1997 by
$189,000 (net of income taxes of $128,000), or $0.01 per share and increased
shareholders' equity at March 31, 1997 by $188,000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
As more fully described in Note 6 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
primarily 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 the 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 acquires loans on automobiles made to
borrowers who exhibit a favorable credit profile. The Company currently acquires
loans in 27 states from over 3,000 manufacturer-franchised auto dealerships
("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"). Nearly 900 of the Company's dealerships
participate in the Non-prime program, PAC. The Company continues to expand its
operations by entering new cities, and by signing new dealers in existing
markets. Total loan acquisitions for the three months ended March 31, 1997,
increased 9.1% to $279.8 million over the same quarter of last year, and
increased 25.9% to $883.9 million for the nine months ended March 31, 1997, over
the same period of last year. The Company tightened its credit standards during
the third quarter of fiscal 1997 (described below). These underwriting changes
will most likely have the effect of decreasing loan acquisition growth on a
short-term basis. Third quarter loan acquisitions were lower than the second
quarter of fiscal 1997, and fourth quarter acquisitions are expected to be lower
than the fourth quarter of fiscal 1996.
Underwriting changes implemented prior to the beginning of fiscal 1997
included an increase in cut-off scores in several markets where losses were
running at 2.50% or greater over the life of the pools. Additionally, the
Company made significant policy changes during the third quarter of fiscal 1997
including the implementation of a new Risk Scorecard, and an increase in
required discretionary income and total income thresholds. These strategies were
employed in order to improve the overall average quality of the contracts being
purchased. Management continues to focus on controlled growth, recognizing that
the underlying credit quality of the portfolio is one of the most important
factors associated with long-term profitability. Company management will
carefully evaluate the impact of these underwriting changes on the performance
of the portfolio, and continue to make improvements to both the underwriting and
collection policies in an effort to achieve an acceptable level of credit
losses, and hence, the desired level of profitability. See "Discussion of
Forward-Looking Statements" below.
Non-prime loans represented approximately 3.1% and 3.8% of total loans
acquired for the three and nine months ended March 31, 1997, respectively. The
Company's marine lending program generated approximately $1.8 million and $3.4
million of loan acquisitions for the three and nine months ended March 31, 1997.
The Company has historically focused its efforts and resources towards the prime
auto segment, and will continue to do so in the future despite expanding its
operations to include other products and programs. Management believes that
there is substantial growth potential in the prime auto segment.
Gross and Net Spreads. The gross and net spreads on the third quarter
securitization of fiscal 1997 were 6.96% and 5.43%, respectively. 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 on securitization transactions experienced steady
compressions beginning in the first quarter of fiscal 1996 as a result of the
lag between changes in market interest rates and loan rates. Net spreads began
to rebound in the second quarter securitization of fiscal 1997 (27 basis points
over the first quarter securitization), and increased again slightly during the
third quarter transaction. Net spread is slightly lower compared to the same
quarter of last year, but continues to be significantly higher than those
spreads realized in fiscal 1995 and prior years. Net spreads are expected to
experience some compression in the fourth quarter securitization due to changes
in market interest rates relative to loan rates.
Looking ahead, management is currently targeting net spreads of 5.00%
to 5.50% on prime securitizations (assuming a pricing spread for asset-backed
certificates over the two-year treasury note of 50 basis points) for the fourth
quarter of fiscal 1997. Management believes that by targeting a spread of 7.00%
to 7.50% between loan rates and the two-year treasury rate, these net spreads
can be achieved. Although management believes these spreads can be achieved,
material factors affecting the net spreads are difficult to predict and could
cause management's projections to be materially inaccurate. These include
current market conditions with respect to market interest rates and demand for
asset-backed securities generally, and for Certificates representing interests
in securitizations sponsored by the Company. See - "Discussion of
Forward-Looking Statements ," below.
Gain on sales of loans continues to be a significant element of the
Company's net earnings. The gain on sales of loans is affected by several
factors but is primarily affected by the amount of loans securitized and the net
spread. The Company adjusts its pricing frequently and employs a hedging
strategy to help ensure an adequate net spread in the ensuing securitization,
while mitigating the risks of increasing interest rates and the volatility in
net spreads.
Portfolio Performance. Set forth below is certain information
concerning the Company's experience pertaining to delinquencies and net
charge-offs on the Prime fixed rate retail automobile, light truck and van
receivables serviced by the Company. There can be no assurance that future
delinquency and net loss experience on receivables will be comparable to that
set forth below.
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996 March 31, 1996
---------------------- --------------------- ----------------------
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
------- ---------- ------- ---------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 171,234 $1,836,305 147,722 $1,548,538 137,346 $1,403,369
Delinquencies
30-59 days 2,484 27,527 1,602 17,030 1,574 17,421
60-89 days 1,561 18,894 694 7,629 785 9,354
90 days or more 705 8,414 333 3,811 530 6,130
------- ---------- ------- ---------- ------- ----------
Total delinquencies 4,750 54,835 2,629 28,470 2,889 32,905
Delinquency as a percentage of
servicing portfolio 2.77% 2.99% 1.78% 1.84% 2.10% 2.34%
</TABLE>
As indicated by the above table, delinquency rates at March 31, 1997,
were higher as compared to the same quarter of last year. Delinquency rates
based upon outstanding loan balances of accounts 30 days past due and over were
2.99% at March 31, 1997, compared to 2.34% at March 31, 1996, for the prime
servicing portfolio. Management believes the increased delinquency is primarily
due to a tightening of the criteria for the deferment of an account which became
effective in February 1997. Bankrupt accounts which are included in delinquency
statistics pending resolution continue to be a significant portion of the
overall delinquency amount. Bankrupt accounts represented 42 basis points of
delinquency at March 31, 1997.
Non-prime portfolio delinquency was 4.18% based upon outstanding loan
balances of accounts 30 days past due and over at March 31, 1997, compared to
3.35% at June 30, 1996, and 2.57% at March 31, 1996. The Company began acquiring
non-prime loans in October 1994. Management expects fluctuations in delinquency
rates on the non-prime portfolio as it continues to season. The increase in
delinquency is due, in part, to a more strict application of the Company's
deferral policy primarily through the reduction of discretionary deferrals under
such policy. To date, the portfolio is performing within the ranges anticipated
by the Company. The non-prime portfolio makes up only approximately 3.6% of the
Company's total servicing portfolio. The Company has historically focused on the
prime end of the credit spectrum and will continue to do so.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1997 June 30, 1996 June 30, 1995
--------------------- -------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 162,120 1,727,725 132,363 1,343,770 104,455 982,875
Gross charge-offs 4,393 48,923 3,663 40,815 3,493 28,628
Recoveries 19,089 19,543 15,258
--------- --------- -------
Net charge-offs 29,834 21,272 13,370
Gross charge-offs as a percentage
of average servicing portfolio 3.61%* 3.78%* 2.77% 3.04% 3.34% 2.91%
Recoveries as a percentage
of gross charge-offs 39.02% 47.88% 53.30%
Net charge-offs as a percentage
of average servicing portfolio 2.30%* 1.58% 1.36%
</TABLE>
* Annualized
Annualized net charge-offs as a percentage of the average servicing
portfolio were 2.30% for the nine months ended March 31, 1997, compared to 1.58%
for the year ended June 30, 1996, and 1.39% for the nine months ended March 31,
1996. Tightening of the Company's deferral policy, as discussed above,
accelerated losses during the third quarter causing quarterly statistics to be
unusually high. Management believes that the short-term effect of this change
will be to increase delinquency and accelerate net charge-offs; however,
management does not expect overall credit losses in the long-term to increase
materially as a result of the change. Management's expectations with respect to
delinquency and credit loss trends constitute forward-looking statements and are
subject to important factors that could cause actual results to differ
materially from those projected by the Company. Certain such factors are
discussed under "Discussion of Forward-looking Information" in the Management's
Discussion and Analysis section of the Company's Annual Report on Form 10-K.
Portfolio performance continues to be within the parameters of
management's expectations despite the recent increases in delinquency and net
charge-offs. The level of credit loss risk is gauged against the potential for
profit in the underwriting process. Management has implemented various
collections and underwriting changes throughout the year in order to improve
portfolio performance, and continues to monitor closely the performance of the
portfolio, and its response to policy changes.
The increase in net charge-offs for the nine months ended March 31,
1997 compared to the nine months ended March 31, 1996 is a result of both the
increase in gross charge-offs as discussed above, as well as a decline in
recovery rates. Recovery rates with respect to the prime servicing portfolio
have declined from 53.30% for fiscal 1995 to 47.88% for fiscal 1996 and are at
39.02% for fiscal 1997 to date. Management attributes the decline to a softening
in current used car prices. Management is working to improve the recovery
percentage by refocusing on its recovery efforts.
Non-prime net charge-offs totaled approximately $797,000 for the
quarter. Annualized net charge-offs were 3.95% of the average Non-prime
servicing portfolio for the nine months ended March 31, 1997, compared to 2.37%
for the fiscal year ended June 30, 1996, and 2.19% for the nine months ended
March 31, 1996. Management is closely monitoring the performance of the
Non-prime portfolio as it matures, and is comfortable with the level of risk in
relation to its earning potential.
Overall, the Company has made strategic changes with respect to pricing
and underwriting, including an increase in cut-off scores in several of its
markets during the third quarter of fiscal 1996, and the implementation of a new
Risk Scorecard in March 1997. Adjustments with respect to cut-off scores were
made in markets whose implied loss statistics indicated losses at 2.50% or above
on a static pool basis. The new scorecard is a composite credit bureau score.
These changes were made with the intent of improving the overall quality of the
contracts being acquired. Management continues to focus on controlled growth
with an emphasis on credit quality. These strategies appear to be providing the
Company with the desired results as the implied loss statistics as of March 31,
1997, indicated that the 1996 loan pools were improved over the 1995 loan pools.
See "Discussion of Forward-Looking Statements" below.
Provisions are made for estimated credit losses in conjunction with
each loan sale. The allowance for estimated credit losses is inherent in the
excess servicing asset recorded upon sale. Although management believes that the
allowance for estimated credit losses on securitized loans represents an
appropriate estimate of potential credit losses at the time of securitization,
the adequacy of such provisions cannot be determined with certainty as many
factors exist which could result in credit losses materially different from
management's original estimates. The allowance for estimated undiscounted credit
losses as a percentage of outstanding securitized loans was 3.74% at March 31,
1997, compared to 3.22% at June 30, 1996, and 3.19% at March 31, 1996.
Previously, excess servicing was marked to market on an aggregate basis and
adjustments, net of tax, were recorded as a component of shareholders' equity.
The Company determined in August 1998 that it should measure impairment of
Excess Servicing on a disaggregate basis (the pool by pool method) and charge
other than temporary pool by pool impairments to earnings and record unrealized
gains as a separate component of shareholders' equity.
Results of Operations
Net earnings for the three and nine months ended March 31, 1997, were
down 145.1% and 38.0% respectively, compared to the three and nine months ended
March 31, 1996. The decrease in net earnings for the quarter is primarily
attributable to charges taken for pool by pool impairments of $16.0 million
pre-tax ($9.5 million net of tax) offset by increased servicing fees. Reduced
net earnings for the nine month period are primarily a result of charges taken
for pool by pool impairments offset by improved net interest margins and
increased servicing fees. The Company's total loan acquisitions for the quarter
increased by 9.1% compared to the same quarter of last year. Year to date loan
acquisitions are up 25.9% over the comparable periods of fiscal 1996. The
servicing portfolio reached over $1.9 billion, a 32.2% increase over a year ago.
Net interest margin after provision declined for the three months ended
March 31, 1997, as compared to the three months ended March 31, 1996, but
increased 29.6% to $8.7 million for the nine months ended March 31, 1997,
compared to $6.7 million for the nine months ended March 31, 1996. The increase
in interest income resulted from an increase in the average monthly balance of
prime loans held for sale to $224.4 million for the nine months ended March 31,
1997, from $176.9 million for the corresponding period ended March 31, 1996,
which was a result of increased loan acquisitions in the nine months ended March
31, 1997, relative to the nine months ended March 31, 1996. Total interest
expense for the three and nine months ended March 31, 1997, was greater than in
the corresponding periods of the prior fiscal year as a result of increased
average outstanding borrowings (due to increased loan acquisitions and the
issuance of $65 million 7.80% Senior Debt in March 1997). However, interest
expense as a percentage of the average outstanding borrowings has decreased. The
relative decrease in interest expense is a result of the complete amortization
of upfront fees paid in connection with the warehouse facilities in fiscal 1996;
because the warehouse facility agreements initially provided for a term of one
year subject to renewal, the Company amortized all upfront costs over the first
year. The warehouse facilities have subsequently been renewed. The ongoing
interest costs related to the warehouse facilities (through which loan
acquisitions are funded ) are variable and are based on commercial paper rates.
Gain (loss) on sales of loans was $(6.2) million and $8.5 million for
the three and nine months ended March 31, 1997, respectively, compared to $7.8
million and $23.0 million for the corresponding periods ended March 31, 1996,
respectively. The loss for the three months ended March 31, 1997 consisted of a
$9.8 million gain on sale from the current quarter securitization and a $16.0
million charge for other than temporary impairments of Excess Servicing. The
gain for the nine months ended March 31, 1997 consisted of $24.5 million of
gains on sales from quarterly securitizations and a $16.0 million charge for
other than temporary impairments of Excess Servicing. The Company securitized
over $293.3 million in loans during the third quarter of fiscal 1997 compared to
$237.5 million in the third quarter of fiscal 1996. Although the volume of loans
securitized during the third quarter of fiscal 1997 was increased over prior
periods, the net spreads were less favorable than in the same period of fiscal
1996. Net spreads rebounded somewhat in the second and third quarter
securitizations to 5.37% and 5.43%, respectively from 5.11% in the first
quarter. Net spreads suffered compressions throughout fiscal 1996 due to upward
moving market interest rates. There tends to be a lag between changes in market
rates of interest (i.e. treasury rates) and automobile lending rates. There was
compression in gross spreads for the third quarter securitization, but net
spread improved because of favorable pricing terms obtained with respect to the
third quarter transaction.
Servicing fees, net increased 43.0% to $6.9 million for the three
months ended March 31, 1997, compared to $4.8 million for the corresponding
period ended March 31, 1996. Servicing fees consist of contractual servicing
fees (1% on prime securitizations), the accretion of discount on excess
servicing cash flows, and excess rebates. Increased servicing fees were
primarily a result of the increase in the average securitized loans for the
three months ended March 31, 1997, as compared to the same period of the
previous year.
Other revenues increased to $1.0 million for the three months ended
March 31, 1997, from $798,000 for the three months ended March 31, 1996. Other
revenue consists primarily of late charge income and origination fee income. The
increase resulted primarily from increases in late charge fee income. The
increase is mainly due to the increased size of the servicing portfolio, but
also due to increased delinquent accounts. Late charge income is not accrued,
but is recorded as income when received.
Salaries and benefits increased 25.8% to $4.1 million for the three
months ended March 31, 1997, from $3.2 million the corresponding period ended
March 31, 1996. These increases resulted primarily from increased full-time
equivalent ("FTE") employees. Average FTE's for the three months ended March 31,
1997 were 371, compared to 283 for the comparable period ended March 31, 1996.
The Company has experienced growth in collections, credit, sales, operations,
and support personnel. These increases are in response to, and in anticipation
of, continued expansion and loan acquisition growth, as well as a growing
servicing portfolio. Additional levels of management and support staff have been
added to ensure efficiency in operations as the Company's acquisition volume and
servicing portfolio continues to grow.
Other expenses increased only slightly to $3.5 million for the three
months ended March 31, 1997, from $3.4 million for the three months ended March
31, 1996. Other operating expenses include occupancy and equipment costs,
outside and professional services, loan expenses, promotional expenses, travel,
office supplies and other.
Financial Condition
Loans, net includes the principal balance of loans held for sale, net
of unearned discount, allowance for estimated credit losses, loans in process,
and prepaid dealer premiums. The Company's portfolio of loans, net decreased to
$189.3 million at March 31, 1997, from $259.3 million at June 30, 1996. Loan
acquisition volume was higher in the quarter ended June 30, 1996, than in the
quarter ended March 31, 1997, as a result of seasonal fluctuations and the
tightening of credit standards. The Company effected a $293.3 million prime
securitization in the quarter ended March 31, 1997, and a $245.1 million prime
securitization for the quarter ended June 30, 1996.
Excess Servicing increased to $107.0 million as of March 31, 1997, from
$83.4 million as of June 30, 1996. This balance increased by the amount
capitalized upon consummation of the UACSC 1996-C, 1996-D, and 1997-A Auto
Trusts related to excess servicing and estimated dealer premium rebates, and
excess servicing related to the non-prime securitization effected in December
1996. Structuring of the prime securitizations included the sale of "interest
only strips" which generated more cash from the sale, but served to reduce the
initial excess servicing asset recorded. Total amounts capitalized for the nine
months ended March 31, 1997 were $53.1 million. The Excess Servicing balance
also increased by a pre-tax unrealized gain on excess servicing of $8.0 million
in accordance with the provisions of SFAS 125. Excess Servicing also increased
by the change in accrued interest of $1.9 million. The increases to Excess
Servicing were offset by the return of excess cash flows of $19.8 million as
received over the nine months ended March 31, 1997, related to all outstanding
securitizations and by the effect of the $16.0 million other than temporary
impairment of Excess Servicing. Also, additional provisions were made to the
allowance for estimated credit losses on securitized loans during the first two
quarters of fiscal 1997 of $3.6 million. The provisions were charged to gain
(loss) on sales of loans. Allowance for estimated credit losses on securitized
loans is included as a component of the excess servicing asset. At March 31,
1997, the undiscounted allowances, related to both prime and non-prime
securitized loans, totaled $64.5 million or 3.74% of the total securitized loan
portfolio.
Spread Accounts increased to $71.5 million at March 31, 1997, from
$63.6 million at June 30, 1996. These balances were 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 are in excess of the requirements
stipulated in the servicing agreement. No initial spread account deposit was
made in connection with the last several prime transactions as a result of the
structuring which utilized alternative credit enhancements (i.e. surety bonds)
in lieu of initial spread account deposits.
The Warehouse Facilities, Senior Notes, and Senior Subordinated Notes
constitute the Company's primary funding facilities. The Company issued $110.0
million in 8.53% Senior Notes (Due 2002) in August 1995, in conjunction with the
spin-off from its former parent. In April 1996, the Company issued $46 million
in 9.99% Senior Subordinated Notes (Due 2003) in a private placement. In March
1997, the Company issued $65 million of Senior Notes (Due 2002) in a private
placement with an effective coupon of 7.80%. The balance of the Warehouse
Facilities was $127.2 million at March 31, 1997, compared to $187.8 million at
June 30, 1996. The decrease in total borrowings is due to the relative decrease
in third quarter fiscal 1997 loan acquisitions as compared to the quarter ended
June 30, 1996. Additionally, the Company has realized additional liquidity
through its debt placement, by utilizing alternative credit enhancement features
in its securitizations as discussed above, and by deferring a portion of the
gain on sales of loans for income tax purposes.
The net deferred income taxes payable totaled $18.3 million at March
31, 1997, compared to $8.4 million at June 30, 1996. 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 three quarters of fiscal 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) acquisitions and financing of loans, (ii) payment of Dealer
Premiums, (iii) securitization costs including cash held in Spread Accounts and
similar cash collateral accounts under Warehouse Facilities, (iv) servicer
advances of payments on securitized loans pursuant to securitization trusts, (v)
losses on hedging transactions realized in connection with the closing of
securitization transactions where interest rates have declined during the period
covered by the hedge, (vi) operating expenses, (vii) interest expense, and
(viii) payment of income taxes. The Company's sources of cash from operations
include (i) standard servicing fees, generally 1.0% per annum of the prime
securitized portfolio, (ii) Excess Servicing Cash Flows, (iii) Dealer Premium
rebates, (iv) gains on hedging transactions realized in connection with the
closing of securitization transactions where interest rates have increased
during the periods covered by the hedge, (v) interest income, (vi) sales of
loans in securitization transactions, and (vii) sales of interest-only strips.
Net cash provided by operating activities increased to $56.8 million for the
nine months ended March 31, 1997, from $16.7 million for the nine months ended
March 31, 1996.
Hedging transactions may represent a source or a use of cash during a
given period depending on the change in interest rates. In the nine months ended
March 31, 1997, hedging transactions have required a use of cash of $5.8
million.
Financing Activities and Credit Facilities. The Company has substantial
capital requirements to support its ongoing operations and anticipated growth.
The Company's sources of liquidity are currently funds from operations,
securitizations and external financings including long-term debt and revolving
warehouse credit facilities. Historically, the Company has used the
securitization of loan pools as its primary source of long-term funding, and
intends to continue to do so. Securitization transactions enable the Company to
improve its liquidity, to recognize gains from the sales of the loan pools while
maintaining the servicing rights to the loans, and to control interest rate risk
by matching the repayment of amounts due to investors in the securitizations
with the actual cash flows from the securitized assets.
The Company has borrowing arrangements with an independent financial
institution for the Prime Warehouse Facility of up to $350.0 million and a
similar Non-prime Facility of up to $50.0 million. The Prime Warehouse Facility
provides funding for loan acquisitions at a purchase price of up to 100.0% of
the outstanding principal balance of eligible loans at the time of purchase to
the extent allocable to loans which, upon origination, provided for 72 monthly
payments or less. Additional funding is provided for eligible loans with greater
than 72 monthly payments at a purchase price of up to 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 80.0% (increased to up to 87% in the fourth quarter of fiscal 1997) of the
outstanding principal balance of eligible loans at the time of purchase. The
Company also issued $110.0 million in Senior Notes in connection with the
spin-off of the Company by Union Federal and the Company's initial public
offering, completed a private placement of $46.0 million in Senior Subordinated
Notes in April 1996 and $65 million in Senior Notes in March 1997. Between
securitization transactions, the Company relies primarily on the Warehouse
Facilities to fund ongoing loan acquisitions (not including Dealer Premiums). In
addition to loan acquisition funding, the Company also requires substantial
capital on an ongoing basis to fund the advances of Dealer Premiums,
securitization costs, servicing obligations and other cash requirements
described above. The Company's ability to borrow under the Warehouse Facilities
is dependent upon its compliance with the terms and conditions thereof. The
Company's ability to obtain successor facilities or similar financing will
depend on, among other things, the willingness of financial institutions to
participate in funding automobile financing businesses and the Company's
financial condition and results of operations. Moreover, the Company's growth
may be inhibited, at least temporarily, if the Company is not able to obtain
additional funding through these or other facilities or if it is unable to
satisfy the conditions to borrowing under the Warehouse Facilities.
Management believes that the proceeds from the Company's initial public
offering, the Senior Notes, the Senior Subordinated Notes, the Warehouse
Facilities described above, future earnings, and periodic securitization of
loans should provide the necessary capital and liquidity for its operations
during the next twelve months; however, it is management's intent to take full
advantage of favorable market conditions to raise additional working capital as
they occur.
The period during which its existing capital resources will continue to
be sufficient will, however, be affected by the factors described above
affecting the Company's cash requirements. A number of these factors are
difficult to predict, including particularly the cash-effect of hedging
transactions, the availability of outside credit enhancement in securitizations
or other financing transactions and other factors affecting the net cash
provided by securitizations. Depending on the Company's ongoing cash and
liquidity requirements, market conditions and investor interest, the Company may
seek to raise additional capital including equity securities or additional debt
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
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 auto 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. The Company has expanded its
dealer base to include nationally-recognized used rental car outlets and "Used
Car Superstores" which are not manufacturer-franchised dealerships. The Company
currently has 8 dealers signed in three states, and is cashing deals with these
dealers.
On April 3, 1997, the Company closed a $50 million Marine Warehouse
Facility to provide funding for the Company's marine portfolio. There are
provisions for an increase in the Facility to $75 million in March 1998. The
Facility provides funding for loan acquisitions at advance rates of 85% for
boats and 80% for personal watercraft with terms less than 49 months, and 65%
for personal watercraft with terms of 49-60 months. The advance rates may adjust
upward to a maximum of 90% for boats and 85% for personal watercraft with terms
less than 49 months beginning in September 1997 if certain loss and delinquency
triggers are in compliance at that time.
In April 1997, approval for renewal of the Prime and Non-Prime
Warehouse Facilities was obtained for a term of one year. The Prime and
Non-Prime Warehouse Facilities were renewed through June 1998 and July 1998,
respectively. The Company also received a reduction in Program Fees related to
both the Prime and Non-Prime Warehouse Facilities beginning in of May 1997. The
Program Fee on the Prime Facility will be reduced by 14.3%, and the Program Fee
on the Non-Prime Facility will be reduced to 40%. Significant improvement in the
terms of the Non-Prime Facility were also negotiated increasing the advance rate
from 80% to 87% for non-prime loans.
Discussion of Forward-Looking Information
The above discussions contain forward-looking statements made by the
Company regarding its results of operations, cash flow needs and liquidity, loan
acquisition volume, target spreads, potential credit losses, servicing income,
and other aspects of its business. Similar forward-looking statements may be
made by the Company from time to time. Such forward-looking statements are
subject to a number of important factors that cannot be predicted with certainty
and which could cause such forward-looking statements to be materially
inaccurate. See the "Discussion of Forward-Looking Information" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for fiscal 1996 which is
incorporated herein by this reference.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits- The following Exhibits are filed as a part of this
report:
Exhibit 10.1 - Note Purchase Agreement, dated March 24, 1997,
among Union Acceptance Corporation and certain purchasers
of Senior Notes, due 2002*
Exhibit 27 - Restated Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
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 NINE MONTHS
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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