Union Acceptance Corporation Announces Results for the Quarter Ended September 30, 2001
INDIANAPOLIS--Oct. 31, 2001--Union Acceptance Corporation ("UAC") today announced financial and operational results for the quarter ended September 30, 2001, including further revaluation of its retained interest asset.During the past two quarters, management's objective has been to reposition UAC with the goal of enhancing future profitability and significantly reducing the volatility of net earnings. During the quarter ended September 30, 2001, management took the following actions to achieve these goals:
| -- | A comprehensive review of the significant accounting assumptions regarding the valuation of the retained interest asset and the calculation of the gain on sale, including an in-depth analysis of the impact of historical lows in short-term US Treasury yields and a steep yield curve environment, with the objective of better predicting cash flows; |
| -- | An in-depth review of the Company's exposure to future credit losses in light of increasing loss rates, recessionary economic trends and increasing consumer bankruptcies, especially in view of the sudden decline in economic activity after September 11, 2001; |
| -- | Further testing and refinement of the Company's risk-based pricing model to confirm that it was still tracking well against actual experience, which increased management's confidence in the model as a tool to improve the accuracy of management's loss projections; and |
| -- | Changes in servicing and collection policies and procedures which are expected to result in increased fee income, improved collection results, and improved operating efficiency. |
As a result of the foregoing, management determined that further revaluation of the retained interest asset is required. Results for the quarter ended September 30, 2001 include a $44.0 million pre-tax ($27.9 million or $0.89 per diluted share after-tax) charge for the revaluation of retained interest. The Company reported a net loss for the quarter of $23.8 million, or $0.76 per diluted share. Excluding the charge for the revaluation of retained interest this quarter, net earnings would have totaled $4.1 million or $0.13 per diluted share, compared with $4.6 million or $0.34 per diluted share for the quarter ended September 30, 2000 (before after-tax charges of $1.6 million for derivatives used to hedge the held for sale portfolio).
Earnings per share were affected by a 132% increase in shares outstanding resulting from the issuance of 17.6 million shares through an oversubscribed rights offering by the Company in June 2001. The rights offering raised $88.0 million (before offering costs) in new equity capital. Management and directors of the Company purchased approximately 39% of the offering. At its annual shareholder meeting in November 2001, the Company plans to propose amendments to its charter, which will include an elimination of voting preference for Class B common stock and the conversion of outstanding Class B and Class A common stock to a single class of common stock. This will result in all shares being of one class with uniform voting rights. Shares outstanding totaled 30.9 million at September 30, 2001.
"We have been working hard the last several quarters to improve the accuracy of our projection of cash flows and to take full advantage of our risk-based relational database. I am pleased with the intensity of our actions over the past six months to apply our risk-based pricing methodology to improve the loss curves we use to value retained interest. The product of this intensity further built our confidence in our new tools," commented Michael G. Stout, Chairman, President and CEO. "These efforts have required months of work and analysis. I am optimistic that we have better positioned Union Acceptance to achieve our profitability objective while reducing the volatility that has plagued our earnings for years. We regret that this has resulted in significant revaluations over two quarters, because of the uncertainty it may create in the minds of investors; however, we believe that this process was necessary to ensure that we could be thorough in our review and thoughtful in our response to the information we have learned."
Revaluation Components
Approximately 60% of the charge for the revaluation of retained interest relates to cash flow modeling enhancements related to components of the retained interest asset other than expected credit losses. Generally, the industry has struggled with modeling the expected cash flows of these components and has had difficulty factoring in the potential impact of a recession. Given the state of the economy, management enhanced its retained interest cash flow model during the quarter to allow for the following: lower interest collections due to higher delinquency and credit losses; higher discount rates for retained interest valuation, lower earnings on cash account balances; and adjustments to the prepayment curve. Overall, these refinements are more precise and allow the Company to better estimate cash flows by taking into consideration the current economic and interest rate environment which, for most pools, is significantly different than it was when the pool was securitized.
In July 2001, management utilized new predictive loss curves based on its risk management database for the purpose of analyzing the fair value of retained interest and better estimating credit losses. As of September 30, 2001, management determined that it was necessary to further adjust expected losses to more fully incorporate the data suggested by the new curves and the combined effects of historic low interest rates, the economic environment, and the surge in bankruptcy filings. Approximately 40% of the charge for the revaluation of retained interest for the quarter ended September 30, 2001 relates to these increased loss rate estimates and the effects of the economic environment. The new curves are based on an analysis of the Company's historic database which goes back to 1992 and incorporates over 640,000 consumers representing over $9.5 billion in acquired receivables. Management is aware, however, that the historical database may not fully take account of general recessionary economic trends and will continue to assess that risk.
Delinquency and Collections
In September 2001, the Company named Lee Ervin to the newly created position of Chief Operating Officer. Since September, Mr. Ervin has implemented new processes in collections aimed at more effective use of the Company's dialer technology. Additionally, on October 1, 2001, the Company began testing and validating a behavioral scorecard aimed at improving the efficiencies of the dialer technology.
Delinquency on the Tier I automobile portfolio was 3.67% at September 30, 2001, compared with 3.52% at June 30, 2001 and 3.13% at September 30, 2000. Annualized Tier I credit losses totaled 3.64% for the quarter ended September 30, 2001, compared with 2.85% for the quarter ended June 30, 2001 and 2.11% for the quarter ended September 30, 2000.
The Company's allowance for estimated credit losses on securitized receivables was 5.87% at September 30, 2001 due to the decision to increase the allowance to the level consistent with the losses indicated by the new predictive loss curves. This compares with 5.37% at June 30, 2001 and 4.36% at September 30, 2000.
Recovery rates on the Tier I automobile portfolio were 38.14%, compared with 41.01% for the quarter ended September 30, 2000. The used car market continued to show weakness as a result of the combination of economic factors and the glut of used cars coming off lease. This increased supply of good condition used cars is a positive sign for the Company on the receivable acquisition front.
2001-C Securitization and Gain on Sale
During the quarter, the Company securitized $330.0 million of receivables of which $270 million of the receivables were delivered in the quarter ended September 30, 2001, compared with $500.0 million securitized and delivered in the quarter ended September 30, 2000.
In connection with the $270 million of receivables delivered, the Company had a gain on sale of $5.4 million (net of a cost of $2.6 million for interest rate derivatives used to hedge securitized receivables) for the quarter ended September 30, 2001. The Company reported a net loss on sale of receivables of $36.0 million (net of a $44.0 million charge for revaluation of retained). This compares with a $500 million sale and a net gain on sale of receivables of $2.5 million (net of a cost of $5.4 million on interest rate derivatives used to hedge securitized receivables) in the quarter ended September 30, 2000.
During the quarter, management revised its policy for establishing the discount rate used in the gain on sale calculation, in an effort to protect the Company from overvaluing the gain on sale in a steep yield curve environment. The discount rate used is now determined to be the greater of the two-year US Treasury Rate plus 1000 basis points or the weighted average coupon rate of the securitized receivables plus 150 basis points. For the quarter ended September 30, 2001, the discount rate used in the gain on sale calculation was 13.50%. Prior to the change in policy for establishing discount rates, the discount rate for the most recent securitization would have been 11.88%. The 162 basis point increase in the discount rate resulted in a reduction in the gain on sale of $0.6 million. In addition, management increased the discount rate used to value retained interest 100 basis points across the entire portfolio. This action was undertaken to more appropriately value the retained interest asset.
For this quarter's securitization, the net spread (gross spread less servicing fees, upfront costs, ongoing credit enhancement and trustee fees, and hedging costs) was 5.97%, compared with 4.67% for the securitization in the quarter ended September 30, 2000. Hedging costs were down significantly due to a new hedging strategy that seeks the most effective hedge instrument which minimizes the outflow of cash. For the quarter ended September 30, 2001, the cost of interest rate derivatives used to hedge securitized receivables totaled $2.6 million compared with $5.4 million for the quarter ended September 30, 2000.
Other Income and Expense
Origination and funding fees received on receivable acquisitions for the quarter ended September 30, 2001 totaled $0.9 million compared with $0.3 million for the quarter ended September 30, 2000. This combined level of origination and funding fees is the highest in the Company's history.
Operating expenses totaled $14.2 million or 1.80% of the average servicing portfolio for the quarter ended September 30, 2001. This compares with $13.4 million or 1.75% for the quarter ended September 30, 2000. This increase is primarily due to slower receivable acquisition growth resulting in a smaller portfolio.
Capital Resources
At September 30, 2001, $34.1 million of warehouse capacity was utilized, and an additional $0.3 million was available to borrow based on the outstanding principal balance of eligible receivables. The Company maintained cash on hand of $82.2 at September 30, 2001. In general, cash balances were higher at September 30, 2001 due to the securitization being completed only a few days earlier. Total available cash was $35.7 million at September 30, 2000.
In August 2001, the Company made a principal payment on its Senior Debt of $22.0 million. In August 2001, the Company renewed its $350 million warehouse facility and replaced a $200 million facility. Credit facilities for short-term financing of receivable acquisitions provide a total of $750 million in available funding.
Receivable Acquisitions
For the quarter ended September 30, 2001, receivable acquisitions were $258.4 million. This was lower than management's expectations primarily due to a significant decline in the number of applications received in the days and weeks immediately following September 11, 2001. Acquisitions for the quarter ended September 30, 2000 totaled $576.4 million. The Company's total servicing portfolio was $3.1 billion at September 30, 2001, compared with $3.2 billion at September 30, 2000. During the quarter, management continued to refine the risk-based pricing model to take account of additional factors indicative of receivable performance and implemented the fifth version of the pricing model in September 2001. The Company continued to achieve pricing on new receivable acquisitions in excess of the new risk based pricing guidelines which include an after-tax return on asset target of 1.5% or more.
The weighted average credit bureau score on receivable acquisitions was 692 for the quarter ended September 30, 2001, compared with 693, 685, and 678 for the past three respective quarters. For receivables acquired this quarter, the weighted average loan to value ratio was near an all time low for the Company, and the weighted average term was in line with the past several quarters. For purposes of calculating loan to value, the Company uses average black book wholesale for used vehicles as the Company believes that this value is closest to auction values. For new cars, the Company uses invoice price.
"As we look to the future and evaluate the progress we have made in repositioning the Company, it is clear that a number of positive things happened during the quarter," commented Mike Stout. "We took great strides in realizing the potential of our database and the impact this information can have on several facets of our operations. We also took significant steps in operational areas which are likely to be the first of many that will drive us toward our objective of operational excellence. Our management team has a clear vision of where we want to go and we will continue to focus on enhancing profitability and reducing the volatility of net earnings."
Delinquency and Credit Loss Data
The following tables set forth delinquency and credit loss experience related to the Tier I (prime) automobile portfolio:
Delinquency Experience
----------------------
At September 30, At June 30, At September 30,
2001 2001 2000
------------------ ------------------ ------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
Servicing
portfolio 250,354 $3,112,205 256,252 $3,192,472 252,293 $3,133,025
Delinquencies
30-59 days 5,647 64,150 5,247 61,316 5,120 56,184
60-89 days 2,901 36,122 2,841 36,194 2,482 29,062
90 days
or more 1,199 13,917 1,219 14,805 1,158 12,918
------- ---------- ------- ---------- ------- ----------
Total
delinquencies 9,747 $ 114,189 9,307 $ 112,315 8,760 $ 98,164
======= ========== ======= ========== ======= ==========
Delinquency as a
percentage of
servicing
portfolio 3.89% 3.67% 3.63% 3.52% 3.47% 3.13%
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Credit Loss Experience
----------------------
Three Months Ended
-----------------------------------------
(Dollars in thousands)
September 30, June 30, September 30,
2001 2001 2000
---------- ---------- ----------
Average servicing
portfolio $3,135,301 $3,232,911 $3,031,640
Gross charge-offs 46,119 36,147 27,099
Recoveries 17,590 13,096 11,112
---------- ---------- ----------
Net charge-offs $ 28,529 $ 23,051 $ 15,987
========== ========== ==========
Gross charge-offs as
a percentage of average
servicing portfolio(1) 5.88% 4.47% 3.58%
Recoveries as a
percentage of
gross charge-offs 38.14% 36.23% 41.01%
Net charge-offs as
a percentage of average
servicing portfolio(1) 3.64% 2.85% 2.11%
--------------------------------------------------------------
(1) Annualized
Earnings Before the Impact of Derivative Instruments
In accordance with generally accepted accounting principles, ("GAAP"), the Company marks to market derivative instruments. These instruments are only used to hedge receivable acquisitions prior to securitization. The Company is required to record adjustments to earnings every accounting period favorably or unfavorably, depending on changes in market interest rates, regardless of the offsetting effect that would normally only be recognized at the time the Company securitizes. Therefore, each quarter, in addition to GAAP earnings, the Company presents results of operations before giving effect to the earnings impact of the derivative instruments used to hedge held for sale receivables. Because the Company utilized a prefund in connection with the most recent securitization, there were no derivative instruments used to hedge held for sale receivables as of September 30, 2001; therefore, there is no adjustment for earnings impact of derivative instruments.
Pro Forma Portfolio-Based Financial Statements
In addition, the Company has elected to present, below, pro forma portfolio-based statements of earnings which account for securitization transactions as secured financings rather than sales of receivables. In its consolidated financial statements prepared in accordance with GAAP, the Company records a gain on the sale of receivables in securitization transactions primarily representing the discounted estimated future servicing cash flows to be received by the Company related to the receivables sold. Future servicing cash flows are the projected cash flows resulting from the difference between the weighted average coupon rate of the receivables sold and the weighted average note rate paid to investors in the securitized trusts, less an allowance for estimated credit losses, the Company's contractual servicing fee of 1.00% and ongoing trust and credit enhancement fees.
The pro forma portfolio-based statements of earnings set forth below (following the presentation of the Company's historical selected financial data), present the Company's operating results under the assumption that securitization transactions are secured financings and no gain on sale, retained interest income, or servicing fee income is recognized. Instead, interest income, fee income, interest expense and other costs related to the asset-backed securities are recognized over the life of the securitized receivables. There is no provision or allowance for credit losses. Credit losses are recorded as incurred. The pro forma portfolio-based statements of earnings and related data do not present the Company's operating results in accordance with GAAP. The pro forma portfolio-based data is presented solely for illustrative purposes to assist readers in their understanding of the Company's business and its financial performance. Such data is not intended to be an indication of any future results of operations of the Company and such data does not provide all information that would be provided with financial statements prepared in accordance with GAAP if the Company had accounted for its securitizations as secured financings.
Conference Call
Union Acceptance Corporation will host a conference call on Thursday, November 1, 2001 at 12:00 p.m. Eastern Time. The dial-in number for participation in this conference call is 800-273-2385. For a replay of the conference call, please go the Company's web site, www.unionacceptance.com.
Corporate Description
UAC is one of the nation's largest independent, indirect automobile finance companies. The Company's primary business is purchasing and servicing prime automobile retail installment sales contracts. These contracts are originated by dealerships affiliated with major domestic and foreign manufacturers, nationally recognized rental car outlets, and used car superstores. UAC focuses on acquiring receivables related to late model used and, to a lesser extent, new automobiles purchased by customers who exhibit favorable credit profiles. Union Acceptance Corporation commenced business in 1986 and currently acquires receivables from over 5,600 manufacturer-franchised dealerships in 40 states. By using state-of-the-art technology in a highly centralized underwriting and servicing environment, Union Acceptance Corporation enjoys one of the lowest cost operating structures in the independent prime automobile finance industry.
Forward Looking Information
This news release contains forward-looking statements regarding matters such as profitability, delinquency and credit loss trends and estimates, recoveries of repossessed vehicles, receivable acquisitions and other issues. Readers are cautioned that actual results may differ materially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, the difficulty inherent in predicting changes in delinquency and credit loss rates, changes in acquisition volume, general economic conditions that affect consumer loan performance and consumer borrowing practices and other important factors detailed in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2001 which was filed with the Securities and Exchange Commission.
Union Acceptance Corporation
Selected Financial Data
(Unaudited)
(Dollars in thousands, except per share data)
Balance Sheet Data at: September 30, 2001 June 30, 2001
--------------------------------------------------------------------
Cash and cash equivalents $ 82,185 $ 70,939
Restricted cash 5,204 4,331
Receivables held for sale, net 38,267 42,770
Retained interest in
securitized assets 199,400 245,876
Accrued interest receivable 322 375
Property, equipment, and
leasehold improvements, net 8,711 9,047
Other assets 32,968 23,697
----------------------
Total assets $367,057 $397,035
======================
Notes payable $ 34,142 $ 5,215
Term debt 133,000 155,000
Accrued interest payable 2,222 4,544
Amounts due to trusts 18,220 19,822
Dealer premiums payable 665 533
Current and deferred income taxes payable -- 5,856
Other payables and accrued expenses 5,163 6,197
----------------------
Total liabilities 193,412 197,167
----------------------
Common stock $145,318 $145,208
Accumulated other comprehensive
earnings, net of taxes 95 2,632
Retained earnings 28,232 52,028
----------------------
Total shareholders' equity 173,645 199,868
----------------------
Total liabilities and
shareholders' equity $367,057 $397,035
======================
--------------------------------------------------------------------
30+ Delinquency at: September 30, June 30, September 30,
2001 2001 2000
--------------------------------------
Tier I 3.67% 3.52% 3.13%
Other 16.37% 13.50% 13.72%
--------------------------------------
Total 3.73% 3.57% 3.23%
======================================
--------------------------------------------------------------------
Allowance Data at:
Allowance for estimated
credit losses
on securitized receivables $ 181,362 $ 170,151 $ 126,250
Securitized receivables
serviced $ 3,088,051 $ 3,166,542 $ 2,895,305
Allowance as a percentage
of securitized
receivables serviced 5.87% 5.37% 4.36%
--------------------------------------------------------------------
Managed Receivable Data at:
Receivables held for sale
-------------------------
Tier I $ 38,696 $ 43,168 $ 261,546
Other 496 705 4,492
Securitized
-----------
Tier I 3,073,509 3,149,304 2,871,479
Other 14,543 17,238 23,826
Receivables serviced
for others 301 340 490
-----------------------------------------
Total Servicing
Portfolio $ 3,127,545 $ 3,210,755 $ 3,161,833
=========================================
Union Acceptance Corporation
Selected Financial Data
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
September 30,
-------------------------
Income Statement Data for the Period: 2001 2000
---------------------------------------------------------------------
Interest on receivables held for sale $ 5,457 $ 14,371
Retained interest and other 5,948 7,300
-------------------------
Total interest income 11,405 21,671
Interest expense 4,685 11,041
-------------------------
Net interest margin 6,720 10,630
Provision for estimated credit losses 650 975
-------------------------
Net interest margin after provision
for estimated credit losses 6,070 9,655
Gain (loss) on sales of receivables, net (36,038) 7,867
Gain (loss) on interest rate
derivatives on securitized receivables (2,584) (5,350)
Gain (loss) on interest rate
derivatives on held for sale receivables -- (2,440)
Servicing fee income 7,610 6,719
Late charges and other fees 1,722 1,755
-------------------------
Other revenues (29,290) 8,551
-------------------------
Salaries and benefits 8,305 7,918
Other general and administrative fees 5,913 5,512
-------------------------
Total operating expenses 14,218 13,430
-------------------------
Earnings (loss) before
provision for income taxes (37,438) 4,776
Provision for income taxes (13,641) 1,767
-------------------------
Net earnings (loss) $ (23,797) $ 3,009
=========================
---------------------------------------------------------------------
Per Common Share Data:
Earnings (loss) (diluted and basic) $ (0.76) $ 0.23
Book value $ 5.62 $ 8.55
Weighted average shares outstanding 31,135,848 13,315,888
---------------------------------------------------------------------
Receivable Acquisitions: $ 258,424 $ 576,414
Receivables Sold: $ 270,001 $ 500,000
---------------------------------------------------------------------
Ratios:
Return on average managed assets -2.75% 0.36%
Return on average shareholders' equity -50.39% 11.20%
Operating expenses as a percentage of
average servicing portfolio 1.80% 1.75%
---------------------------------------------------------------------
Portfolio Performance:
Net credit loss (annualized for the period ended)
------------------------------------------------
Tier I 3.64% 2.11%
Other 10.55% 6.27%
-------------------------
Total 3.67% 2.15%
=========================
---------------------------------------------------------------------
Pro forma information for
the earnings impact of derivative
instruments on held for sale
receivables related to FAS 133:
Total revenues $ (17,885) $ 30,222
Pro forma adjustment -- 2,440
-------------------------
Pro forma total revenues $ (17,885) $ 32,662
=========================
Pro forma net earnings (loss) $ (23,797) $ 4,558
Pro forma earnings (loss) per
common share (diluted and basic) $ (0.76) $ 0.34
Pro forma return on
average managed assets -2.75% 0.54%
Pro forma return on
average shareholders' equity -50.39% 16.76%
---------------------------------------------------------------------
Union Acceptance Corporation
Pro Forma Portfolio-Based Financial Data(1)
(Dollars in thousands)
(Unaudited)
The pro forma portfolio-based statements of earnings were as follows:
Three Months Ended
September 30
--------------------------
2001 2000
--------------------------
Interest income, fee and other income $ 100,564 $ 98,478
Funding costs (58,031) (57,437)
------------ -----------
Net margin 42,533 41,041
Operating expenses (14,218) (13,430)
Credit losses (28,948) (16,444)
------------ -----------
Pre-tax portfolio-based earnings (loss) (633) 11,167
Income taxes(2) 234 (4,121)
------------ -----------
Net portfolio-based earnings (loss) $ (399) $ 7,046
============ ===========
Portfolio-based earnings per share $ (0.01) $ 0.53
============ ===========
The pro forma return on average managed receivables were as follows:
Three Months Ended
September 30
--------------------------
2001 2000
--------------------------
Interest income, fee and other income 12.76% 12.87%
Funding costs -7.37% -7.51%
------------ -----------
Net margin 5.39% 5.36%
Operating expenses -1.80% -1.75%
Credit losses -3.67% -2.15%
------------ -----------
Pre-tax portfolio-based earnings (loss) -0.08% 1.46%
Income taxes 0.03% -0.54%
------------ -----------
Net portfolio-based earnings (loss) -0.05% 0.92%
============ ===========
Average Managed Receivables $3,151,256 $3,061,193
The following is a reconciliation of the pro forma portfolio-based net
earnings to GAAP net earnings:
Three Months Ended
September 30
--------------------------
2001 2000
--------------------------
GAAP Net Earnings (Loss) $ (23,797) $ 3,009
Gain on sales of receivables, net 36,093 (7,867)
Retained interest and other income (4,378) (5,189)
Servicing fee income (7,610) (6,719)
Net margin 38,414 33,845
Credit losses (28,948) (16,444)
Provision for estimated credit losses 650 975
Loss on interest rate derivatives 2,584 7,790
------------ -----------
Net adjustments 36,805 6,391
Tax effect of adjustments (13,407) (2,354)
------------ -----------
Net portfolio-based earnings (loss) $ (399) $ 7,046
============ ===========
(1) These portfolio-based financial statements do not present the
Company's results of operations in accordance with GAAP and are
provided for illustrative purposes only.
(2) Tax effect is based upon the Company's effective tax rate for the
respective period.