$125 Million Pre-tax Charge Results in Second Quarter Net Loss of $93.9
Million or $2.41 Per Diluted Share
Company to Discontinue Retail Disposition of Repossessed Vehicles, Adjust Loan
Loss Recovery Estimates and Add to Loan Loss Reserves
MINNEAPOLIS, July 23 /PRNewswire/ -- Arcadia Financial Ltd. (NYSE: AAC)
today reported a net loss, after special charges, of $93,917,000, or $2.41 per
diluted share, for the second quarter ended June 30, 1998. The 1998 second
quarter charge reflects an after tax, non-cash charge of $99.9 million, or
$2.56 per share. In the comparable 1997 period, the company reported net
income of $5,743,000, or $.15 per diluted share, on total revenues of
$58,839,000.
For the six months ended June 30, 1998, Arcadia reported a net loss, after
special charges, of $89,720,000, or $2.30 per diluted share, compared to a net
loss of $69,596,000, or $1.80 per diluted share for the first six months of
1997. Results for the 1997 period include special charges of $79.7 million,
or $2.07 per share, taken in the first quarter of 1997.
The 1998 second quarter special charges total $125 million before taxes
($99.9 million after tax). The $125 million charges have two components. The
first is a $115 million charge to change accounting estimates to reflect lower
assumed recovery rates on defaulted loans, additional expected loan defaults
and slower than expected prepayments, as well as an increase in general
reserves. The second is a $10 million charge related to the elimination of
the retail remarketing program and other organizational changes designed to
improve operating efficiency.
Richard A. Greenawalt, Arcadia's president and chief executive officer,
said the second quarter special charges are partially the result of the
company's decision to discontinue retail remarketing a portion of its
repossession inventory and its related decision to lower estimated recovery
rates in light of recent experience. The company will begin disposing of its
repossessed vehicles exclusively through wholesale auctions. "The
risk-adjusted return has not been commensurate with the level of management
time and attention the retail program requires," said Greenawalt.
"Accordingly, we are phasing out this program and plan to be out of the retail
remarketing business entirely by the end of this year."
Costs associated with discontinuing the sale of repossessed vehicles
through consignment dealerships and certain one time costs during the
phase-out period account for the majority of the $10 million charge. The
charge also includes amounts for headcount reductions and facilities
consolidations in progress as part of the company's ongoing efforts to
streamline operations and improve operating effectiveness.
In addition, as a result of the further analysis of loan loss recovery
estimates, the company has revised its assumptions regarding recoveries on
repossessed vehicles in its inventory and on all future defaulted loans.
"Since 1997, our accounting estimates, including available reserves, have
assumed our loan loss recoveries would reach a rate between 50% and 55% of
loan value through a combination of wholesale and retail disposition of
repossessed vehicles," said Greenawalt. "Going forward, our accounting
estimates, reflecting the continuing softness in the used car market, assume
we will recover 45% of the remaining balances on defaulted loans through
disposition of repossessed vehicles at wholesale auctions."
In connection with a dedicated effort to improve our loan pricing
capabilities, the company has also recently completed an extensive review of
its loan default predictability. In doing so, the company was able to
re-evaluate every loan purchased since October 1994. This analysis
demonstrated consistent default patterns based on a combination of credit
bureau scores and Loan to Value (LTV) ratios. The ability to estimate
defaults based on this type of credit information allowed the company to
improve the precision of its accounting estimates, which caused an increase in
the company's estimates of future defaults. Since the first quarter of 1995,
the expected lifetime default rate, regardless of portfolio mix, trended
towards a range of approximately 15% to 17%, as can be seen in the company's
static pool default rates on Bloomberg or from the rating agencies.
"We continue to remain comfortable with the product mix of loans we are
currently purchasing and believe that as our pricing has improved over the
last six quarters, especially on Premier loans, we will be able to realize
more attractive returns," said Greenawalt.
The impact of the increases to estimated future defaults are partially
offset by a benefit resulting from a revision of the company's valuation of
finance income receivable to assume a slower overall prepayment speed. The
company's 1998-B gain on sale assumption will use a 1.5 ABS prepayment
assumption, down from a 1.9 ABS prepayment speed used in the past, which is
consistent with our historical trends and current industry experience.
"As a result of these adjustments, our reserves for loan losses increased
to $429.2 million, or 8.44% of our loan portfolio at June 30, 1998, up from
4.70% at March 31, 1998 and 4.64% at June 30, 1997," said Greenawalt.
The underwriter of Arcadia's financial guarantee insurance, Financial
Security Assurance Inc. and the company's principal sources of warehouse
funding have been apprised of the accounting estimate changes and their
effects on the company's operations and financial condition. "Our
relationships with our financial guarantee insurer and warehouse banks remain
in place," said Greenawalt. "Moreover, at June 30, 1998, our cash and cash
equivalents were more than $103 million and our debt-to-equity and managed-
assets-to-equity ratios remain in line with those of other specialty financial
services companies," said Greenawalt.
Outlook
Greenawalt said the company's decision to discontinue retail remarketing
and adjust recovery rate estimates combined with more precise predictions of
future default rates, should improve Arcadia's ability to deliver predictable,
sustainable results. Arcadia's current loan purchases are benefiting from the
use of improved analytics, incorporation of additional credit scoring
information and tighter alignment of underwriting standards with the company's
tiered, risk-based pricing.
"We believe that our loan purchases are producing predictable results
that, with current interest rate spreads, can consistently deliver an improved
return on assets," said Greenawalt. "Combined with our continuing
improvements in operating efficiency, the strategies and accounting estimates
we are employing today are expected to further reduce risk and volatility in
our business by helping us take on profitable business, while ensuring we are
well-reserved against loan losses."
Greenawalt said Arcadia's cash flows are expected to benefit from the
improved predictability of its results and noted that a lower recovery rate,
if realized, will slow cash flows to the company. If recovery rates continue
at their current pace, the company's cash flows should break even by the end
of 1999.
"Our core operating earnings are expected to benefit from the changes we
are making and the benefits should become evident immediately in the third
quarter. We believe that we can achieve a minimum of 15% return on equity in
the future. Also, higher quality earnings are consistent with what
shareholders should expect in future quarters," Greenawalt said.
Second Quarter Highlights
-- Arcadia purchased $572.9 million in automobile loans during the second
quarter compared to $584.0 million in the 1998 first quarter and
$738.5 million in the 1997 second quarter.
-- The net interest rate spread on the $571.8 million of loans securitized
in the 1998 second quarter was 9.85% compared to 9.45% on the $588.2 million
of loans securitized in the 1998 first quarter and 8.04% on the $747.4 million
of loans securitized in the 1997 second quarter.
-- Operating expenses as a percentage of the average servicing portfolio
were 3.50%, after excluding the $10 million special charge, in the 1998 second
quarter compared to 3.67% in the 1998 first quarter and 3.59% in the 1997
second quarter.
-- The company's servicing portfolio at June 30, 1998 totaled $5.1 billion
compared to $5.0 billion at March 31, 1998 and $4.5 billion at June 30, 1997.
-- Loans delinquent more than 30 days were 3.79% of the loan servicing
portfolio at June 30, 1998, compared to 3.53% at March 31, 1998 and 2.66% at
June 30, 1997.
-- Annualized net losses as a percentage of the average servicing
portfolio were 5.92% for the quarter ended June 30, 1998 compared to 3.91% for
the quarter ended March 31, 1998 and 2.83% for the quarter ended June 30,
1997. The 5.92% loss rate for the second quarter included 4.20% of normal
portfolio losses and $21.7 million, or 1.72%, of one time charges that are
comprised of the following:, 0.96% of losses attributed to the write down of
current inventory, 0.76% of losses for the write off of the remaining loans
originated in 1995 related to the Federated dealerships in Texas.
-- The reserves for loan losses totaled $429.2 million, or 8.44% of the
servicing portfolio at June 30, 1998, compared to $236.3 million, or 4.70% of
the servicing portfolio at March 31, 1998 and $209.6 million, or 4.64% of the
servicing portfolio, at June 30, 1997.
Arcadia Financial Ltd. is a Minneapolis-based consumer financial services
company specializing in purchasing, selling and servicing retail installment
contracts for new and used automobiles originated in 45 states. The company,
founded in 1990, is the nation's largest independent provider of automobile
financing. Its 18 Regional Buying Centers are located in Arizona; northern
and southern California; Colorado; Florida; Georgia; Maryland; Massachusetts;
Minnesota; Missouri; New York; North Carolina; Ohio; Tennessee; north, south
and west Texas; and Washington.
This news release contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The most significant among these risks and
uncertainties are (1) the level of delinquencies, gross charge-offs and net
losses, (2) the company's ability to achieve adequate interest rate spreads
and (3) the level of operating expenses. Earnings may also be affected by the
effects of economic factors on consumer debt and by competitive pressures.
Additional risks which may affect the company's future performance are
detailed under the caption "Cautionary Statements" in Exhibit 99.1 to the
company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(Selected financial information follows.)
Arcadia Financial LTD
Selected Financial and Other Operating Data
June 30, 1998
Three months ended Six months ended
Dollars in thousands,
except per share June 30, June 30, June 30, June 30,
data 1998 1997 1998 1997
REVENUES:
Net interest margin $14,380 $16,995 $29,049 $33,721
Gain on sale of loans,
net of special
charges (82,301) 26,459 (51,247) (51,428)
Servicing fee income 20,184 15,385 39,850 28,683
(47,737) 58,839 17,652 10,976
EXPENSES:
Operating expenses 54,691 38,925 100,525 79,568
Long term debt and
other interest
expense 12,908 10,651 25,693 18,242
Total expenses 67,599 49,576 126,218 97,810
Operating income (loss)
before income taxes
and extraordinary
item (115,336) 9,263 (108,566) (86,834)
Income tax expense
(benefit) (21,419) 3,520 (18,846) (33,066)
Net income (loss)
before extraordinary
item (93,917) 5,743 (89,720) (53,768)
Extraordinary item -- -- -- (15,828)
Net income (loss) $(93,917) $5,743 $(89,720) $(69,596)
Basic Earnings per Share:
Income (loss) per
common share before
extraordinary item $(2.41) $0.15 $(2.30) $(1.39)
Extraordinary item per
common share -- -- -- (0.41)
Net income (loss)
per common share $(2.41) $0.15 $(2.30) $(1.80)
Diluted Earnings per Share:
Income (loss) per share
before extraordinary
item $(2.41) $0.15 $ (2.30) $(1.39)
Extraordinary item per
share -- -- -- (0.41)
Net Income (loss)
per share $(2.41) $0.15 $(2.30) $(1.80)
Weighted average shares
outstanding
Basic 38,966,697 38,702,011 38,965,549 38,558,754
Diluted 38,966,697 39,182,748 38,965,549 38,558,754
Number of buying centers 18 18
Servicing portfolio
(in millions) $5,085.6 $4,514.0
Delinquencies as a
percentage of servicing
portfolio 3.79% 2.66%
Book value per common
share $6.65 $8.81
Automobile loan purchases
(in millions) $572.9 $738.5 $1,156.9 $1,520.4
Annualized net losses
as a percentage of
average servicing
portfolio 5.92% 2.83% 4.92% 3.63%
June 30, December 31,
Dollars in thousands 1998 1997
ASSETS
Cash and cash equivalents $8,160 $17,274
Due from securitization
trust 133,551 107,207
Auto loans held for sale 15,480 49,133
Finance income receivable 326,852 371,985
Restricted cash in spread
accounts 266,682 250,297
Other assets 46,981 49,854
Total assets $797,706 $845,750
LIABILITIES AND SHAREHOLDERS'
EQUITY
Amounts due under warehouse
facilities $53,962 $30,880
Other secured borrowings 25,000 --
Senior term notes 366,149 365,640
Subordinated notes 49,681 50,772
Capital lease obligations 4,366 5,368
Deferred income taxes -- 18,846
Accounts payable and
accrued liabilities 39,368 26,302
Total liabilities 538,526 497,808
Shareholders' equity 259,180 347,942
Total liabilities and
shareholders' equity $797,706 $845,750
SOURCE Arcadia Financial Ltd.
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Company News On-Call: http://www.prnewswire.com or
fax, 800-758-5804, ext. 652638
CONTACT:
Scott R. Fjellman, Investor Relations of
Arcadia Financial Ltd., 612-944-4582
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