-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KXM/nTV15VBLGBsaPcDisOwGnAySEhyYzx0wug65rGeJ+PNP1tK5buWxtUhh4oGa sCtW1xvk0wxZupSWZ87vOA== 0000950134-97-003914.txt : 19970520 0000950134-97-003914.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950134-97-003914 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED COMPANIES FINANCIAL CORP CENTRAL INDEX KEY: 0000217416 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 710430414 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07067 FILM NUMBER: 97605892 BUSINESS ADDRESS: STREET 1: 4041 ESSEN LN STREET 2: P O BOX 1591 CITY: BATON ROUGE STATE: LA ZIP: 70809 BUSINESS PHONE: 5049246007 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from ........................ to ........................ Commission file number 1-7067 UNITED COMPANIES FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Louisiana 71-0430414 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4041 Essen Lane 70809 Baton Rouge, Louisiana (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (504) 987-0000
Indicate by check mark whether the 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 such filing requirements for the past 90 days. Yes X No --- --- The number of shares of $2.00 par value common stock issued and outstanding as of May 1, 1997 was 28,495,326, excluding 1,159,682 treasury shares. 2 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
PAGE PART I - FINANCIAL INFORMATION Financial Statements: Consolidated Balance Sheets March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Income Three months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows Three months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 5-8 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-15 Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Independent Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 PART II - OTHER INFORMATION Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 31, 1997 December 31, Assets (Unaudited) 1996 - ------ ----------- ------------ Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 619 $ 14,064 Investment securities Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17,418 Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 17,100 17,510 Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,811 118,750 Interest-only and residual certificates . . . . . . . . . . . . . . . . . . 666,657 604,474 Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . 62,885 61,483 Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,066 46,323 Capitalized mortgage servicing rights . . . . . . . . . . . . . . . . . . . 27,742 23,806 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,446 21,445 ----------- ------------ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 991,326 $ 925,273 =========== ============ Liabilities and Stockholders' Equity - ------------------------------------ Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446,996 $ 425,671 Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 60,547 52,971 Managed cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . 16,075 - Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,709 26,354 ----------- ------------ Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 555,327 504,996 ----------- ------------ Stockholders' equity: Preferred stock, $2 par value; Authorized - 20,000,000 shares; Issued - 1,955,000 shares of 6 3/4% PRIDES(SM) ($44 per share liquidation preference) . . . . . . . . . . . . . . . . . . . . 3,910 3,910 Common stock, $2 par value; Authorized - 100,000,000 shares; Issued - 29,654,508 and 29,627,734 shares . . . . . . . . . . . . . 59,309 59,255 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 185,202 184,397 Net unrealized gain on securities . . . . . . . . . . . . . . . . . . . 38 48 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,044 190,579 Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . . . . . (19,504) (17,912) ----------- ------------ Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 435,999 420,277 ----------- ------------ Total liabilities and stockholders' equity . . . . . . . . . . . $ 991,326 $ 925,273 =========== ============
See notes to consolidated financial statements. 2 4 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31, ---------------------------- 1997 1996 ------------ ----------- Revenues: Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,196 $ 39,809 Finance income, fees earned and other loan income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,997 27,300 Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,748 2,881 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,481 1,182 ------------ ----------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,422 71,172 ------------ ----------- Expenses: Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,749 20,593 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,230 7,673 Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,946 16,014 ------------ ----------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,925 44,280 ------------ ----------- Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,497 26,892 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 11,339 9,663 ------------ ----------- Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . 20,158 17,229 Income from discontinued operations: Income from discontinued operations, net of income tax expense of $758 . . . . . . . . . . . . . . . . . . . . . . - 1,576 Loss on disposal, net of income tax benefit of $393 . . . . . . . . . . . . . . . . . . . . . . . . . . . - (966) ------------ ----------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 610 ------------ ----------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,158 $ 17,839 ============ =========== Per share data: Income from continuing operations . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.53 Income from discontinued operations . . . . . . . . . . . . . . . . . . . - 0.02 ------------ ----------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.55 ============ ===========
See notes to consolidated financial statements. 3 5 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Three Months Ended March 31, ---------------------------------- 1997 1996 ------------ -------------- Cash flows from continuing operating activities: Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . $ 20,158 $ 17,229 Adjustments to reconcile income from continuing operations to net cash used by continuing operating activities: Increase in accrued interest receivable . . . . . . . . . . . . . . . . . . (1,402) (2,165) Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . (24,001) (5,378) Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . 6,043 28,544 Increase in interest-only and residual certificates . . . . . . . . . . . . (62,183) (41,423) Increase in capitalized mortgage servicing rights . . . . . . . . . . . . . (5,610) (2,877) Amortization of capitalized mortgage servicing rights . . . . . . . . . . . 1,674 288 Loan loss provision on owned loans . . . . . . . . . . . . . . . . . . . . 874 438 Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . 1,070 907 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,581 8,375 Proceeds from sales and principal collections of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,716 674,196 Originations and purchases of loans held for sale . . . . . . . . . . . . . (626,651) (697,783) Decrease in trading securities . . . . . . . . . . . . . . . . . . . . . . 17,418 - ------------ -------------- Net cash used by continuing operating activities . . . . . . . . . . (40,313) (19,649) ------------ -------------- Cash flows provided by discontinued operations . . . . . . . . . . . . . . . . . . - 1,045 ------------ -------------- Cash flows from investing activities: Proceeds from sales of available-for-sale securities . . . . . . . . . . . 395 - Proceeds from disposition of title insurance subsidiary . . . . . . . . . . - 5,126 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,665) (1,398) ------------ -------------- Net cash (used) provided by investing activities . . . . . . . . . . (5,270) 3,728 ------------ -------------- Cash flows from financing activities: Proceeds from construction loan . . . . . . . . . . . . . . . . . . . . . . 1,833 - Increase in debt with maturities of three months or less . . . . . . . . . 23,450 78,150 Decrease in warehouse loan facility . . . . . . . . . . . . . . . . . . . . (4,429) (8,773) Proceeds from ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . . 850 2,000 Payments on ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (379) (249) Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,694) (3,397) Increase (decrease) in managed cash overdraft . . . . . . . . . . . . . . . 16,075 (27,052) Increase in unearned ESOP compensation . . . . . . . . . . . . . . . . . . (1,592) (1,751) Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 24 159 ------------ -------------- Net cash provided by financing activities . . . . . . . . . . . . . 32,138 39,087 ------------ -------------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . (13,445) 24,211 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 14,064 5,284 ------------ -------------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $ 619 $ 29,495 ============ ==============
See notes to consolidated financial statements. 4 6 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION. In the opinion of the Company's management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal accruals, except for discontinued operations, necessary to present fairly the financial position, the results of operations and the cash flows for the interim periods presented. These notes reflect only the major changes from those disclosures contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed with the United States Securities and Exchange Commission (the "Commission"). The consolidated results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year. Certain 1996 amounts have been reclassified to conform with the current year presentations. Such reclassifications had no effect on net income. 2. INTEREST-ONLY AND RESIDUAL CERTIFICATES. In June, 1996 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). SFAS No. 125 focuses on control of the financial asset and provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 provides certain conditions that must be met in order to determine that control of the financial asset has been surrendered. SFAS No. 125 requires that servicing assets and other retained interests in the transferred assets be measured by allocating the carrying amount prior to the transfer between the assets sold and the retained interests, if any, based on their relative fair values at the date of transfer. In addition, the retained interests are now classified as trading securities under the provisions of SFAS No. 115 and, as such, are recorded at fair value with the resultant unrealized gain or loss recorded in the results of operations, under the caption "Finance income, fees earned and other loan income", in the period of change in value. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application was not permitted. The Company implemented SFAS No. 125 during the quarter ended March 31, 1997. As a result of the implementation of SFAS No. 125, net income for the three months ended March 31, 1997 was increased by $4.5 million or $.14 per share on a fully diluted basis. In addition, the amounts previously reflected on the Company's balance sheets as "Capitalized excess servicing income" and "Temporary investments -- reserve accounts" have been reclassified as "Interest-only and residual certificates" and are net of the allowance for loan losses on serviced loans (recorded in connection with loan sale transactions), such allowance having been previously recorded as a liability. The allowance for loan losses on serviced loans is a component in determining the fair value of the interest-only and residual certificates. The fair value of the Company's interest-only and residual certificates is determined by computing the present value of the excess of the weighted average coupon on the loans sold over the sum of: (1) the rate paid to the buyer, (2) a normal servicing fee and (3) where applicable, a trustee fee and surety bond fee. For home equity loans, prepayment assumptions used in the present value computation are based on the actual prepayment experience of the Company's owned and serviced loan portfolio. Prepayment assumptions for manufactured housing contracts are based on comparable industry prepayment statistics. The cash flows expected to be received by the Company are discounted at an interest rate that the Company believes an unaffiliated third-party purchaser would require as a rate of return on 5 7 a financial instrument comprised of such cash flows. The following schedule sets forth the components of the Interest-only and residual certificates owned by the Company at March 31, 1997 and December 31, 1996.
March 31, December 31, 1997 1996 ------------- ------------ (IN THOUSANDS) Certificated interests . . . . . . . . . . . . . . . . $ 458,464 $ 426,393 Temporary investments - reserve accounts . . . . . . . 287,775 251,183 Allowance for losses on loans serviced . . . . . . . . (79,582) (73,102) ------------- ------------ Total . . . . . . . . . . . . . . . . . . . . $ 666,657 $ 604,474 ============= ============
3. LOANS Loans Owned. The following schedule sets forth the components of Loans owned by the Company at March 31, 1997 and December 31, 1996.
March 31, December 31, 1997 1996 ------------- ------------ (in thousands) Home equity . . . . . . . . . . . . . . . . . . . . . . $ 108,735 $ 99,849 Manufactured housing chattel contracts . . . . . . . . 3,728 7,397 Credit card receivables . . . . . . . . . . . . . . . . 2,347 1,543 Other . . . . . . . . . . . . . . . . . . . . . . . . . 810 600 ------------- ------------ Total . . . . . . . . . . . . . . . . . . . . 115,620 109,389 Real estate owned: Home equity . . . . . . . . . . . . . . . . . . . 5,125 6,647 Commercial and other . . . . . . . . . . . . . . . 7,674 9,446 Manufactured housing . . . . . . . . . . . . . . . 251 372 Nonrefundable loan fees . . . . . . . . . . . . . . . . (3,434) (2,945) Other . . . . . . . . . . . . . . . . . . . . . . . . . (1,190) (18) ------------- ------------ Total . . . . . . . . . . . . . . . . . . . . 124,046 122,891 ------------- ------------ Less: Allowance for loan losses . . . . . . . . . . . . (4,235) (4,141) ------------- ------------ $ 119,811 $ 118,750 ============= ============
Included in Loans owned at March 31, 1997 and December 31, 1996 were nonaccrual loans totaling $10.8 million and $6.6 million, respectively. Loans Serviced. The following table sets forth the loans serviced by the Company for third parties at March 31, 1997 and December 31, 1996, by type of loan. Substantially all of these loans were originated by the Company.
March 31, December 31, 1997 1996 -------------- ------------- (IN THOUSANDS) Home equity . . . . . . . . . . . . . . . . . . . . . . $ 4,192,973 $ 3,940,289 Manufactured housing chattel contracts . . . . . . . . 150,831 107,741 Other . . . . . . . . . . . . . . . . . . . . . . . . . 41,775 44,649 -------------- ------------- Total . . . . . . . . . . . . . . . . . . . . $ 4,385,579 $ 4,092,679 ============== =============
6 8 4. NOTES PAYABLE Notes payable consisted of the following:
MARCH 31, DECEMBER 31, 1997 1996 --------------- -------------- (IN THOUSANDS) 9.35% Senior unsecured notes due November, 1999 . . . . . . . . $ 125,000 $ 125,000 7% Senior unsecured notes due July, 1998 . . . . . . . . . . . 100,000 100,000 7.7% Senior unsecured notes due January, 2004 . . . . . . . . 100,000 100,000 Short-term borrowings . . . . . . . . . . . . . . . . . . . . . 70,550 47,100 Warehouse facilities . . . . . . . . . . . . . . . . . . . . . 19,243 23,672 ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,604 11,133 Subordinated debentures . . . . . . . . . . . . . . . . . . . . 10,000 10,000 Mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . 5,473 5,473 Construction loan . . . . . . . . . . . . . . . . . . . . . . . 5,126 3,293 --------------- -------------- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 446,996 $ 425,671 =============== ==============
In April, 1997, the Company entered into a $800 million senior unsecured revolving credit facility syndicated with a total of 22 participating lenders. The Company plans to use proceeds from this three-year credit facility to refinance existing debt and for general corporate purposes, including warehouse financing. 5. CASH PAID FOR INTEREST AND INCOME TAXES. During the three months ended March 31, 1997 and 1996, the Company paid interest on notes payable in the amount of $8.8 million and $6.0 million, respectively. During the three months ended March 31, 1997 and 1996, the Company paid income taxes in the amount of $3.0 million and $5,000, respectively. 6. DISCONTINUED OPERATIONS; COMMITMENTS AND CONTINGENCIES. As discussed in Notes 11 and 12 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996, the Company has certain contingencies in connection with the sale, during 1996, of its investments in United General Title Insurance Company and United Companies Life Insurance Company and the divestiture, during 1993, of Foster Mortgage Company. There were no material changes in these contingencies in the first quarter of 1997. The operations of each of these companies have been classified as discontinued operations. The Company used a prefunding feature in connection with its securitization transactions during the first quarter of 1997. At March 31, 1997, approximately $53.5 million was held in a prefunding account for the purchase of the Company's home equity loans during the second quarter of 1997. In addition, at March 31, 1997, approximately $5.2 million was held in a prefunding account for purchase of the Company's manufactured housing contracts during the second quarter of 1997. In considering a pretrial motion of the plaintiffs in a class action lawsuit pending in Alabama state district court involving 910 home equity loans alleged to be subject to the Alabama Mini Code, Autrey v. United Companies Lending Corporation, the trial judge advised counsel for the parties by letter dated May 5, 1997, that he had determined retroactive application of the 1996 amendments to the Alabama Mini Code would be unconstitutional as applied to the plaintiffs' class. The 1996 amendments, which in general limited the remedy for finance charges in excess of the maximum permitted by the Alabama Mini Code, were expressly made retroactive by the Alabama legislature. The trial judge requested a proposed order relating to the plaintiffs' pretrial motion on the applicability of the remedy for finance charges exceeding the maximum permitted by the Alabama Mini Code and has apparently determined he will grant the plaintiffs' motion. The Company strenuously disagrees with the trial judge's determinations and believes that the liability, if any, should be limited to $495,000, being the aggregate finance charges allegedly exceeding the maximum permitted by the Alabama Mini Code, plus interest thereon. If upheld after a trial on the merits and related appeals, the trial judge's determinations could result in a liability for the Company's subsidiary presently estimated by the Company to be approximately $21 million. Trial on the merits is currently set for July 1997. The Company does not believe the Alabama Mini Code provision alleged to have been violated is applicable to the loans in this class and its motion for summary judgment to dismiss all claims asserted under this provision to the Alabama Mini Code, based on a recent decision of an Alabama state appeals court that this provision is not applicable to loans in excess of $2,000, is currently pending before the trial court. The Company further believes that it has other valid defenses to the claims asserted in this suit and intends to continue its vigorous defense of this matter. 7. ACCOUNTING STANDARDS. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This Statement establishes new standards for computing and presenting earnings per share ("EPS") information and requires dual presentation of "basic" and "diluted" EPS on the face of the income statement. SFAS No. 128 replaces the presentation of "primary" and "fully diluted" required by APB Opinion No. 15 and its related interpretations and is effective for financial statements issued for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute EPS and to restate all prior periods. Earlier implementation of the provisions of SFAS No. 128 is not permitted. Basic EPS excludes common stock equivalents from the EPS calculation, while calculation of diluted EPS is generally consistent with the Company's current method of 7 9 determining fully diluted EPS. Basic and diluted earnings per share, as computed under SFAS No. 128, would have been $.65 and $.62, respectively, for the first quarter of 1997. 8. OTHER. On February 19, 1997, the Company filed a shelf registration statement on Form S-3 with the Commission for up to $500 million in corporate debt and equity securities. The registration statement was declared effective on February 28, 1997. 8 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis should be read in conjunction with the Company's Consolidated Financial Statements and accompanying Notes presented elsewhere herein and identifies the major factors which influenced the results of operations of the Company during the indicated periods. RESULTS OF OPERATIONS The Company's Consolidated Financial Statements present United Companies Life Insurance Company ("UCLIC") and United General Title Insurance Company as discontinued operations. Discussed below are results of continuing operations for the periods presented. THREE MONTHS ENDED MARCH 31, 1997 AND 1996 Income from continuing operations for the first quarter of 1997 was $20.2 million ($.62 per share based on 32.6 million weighted average shares outstanding) compared to $17.2 million ($.53 per share based on 32.7 million weighted average shares outstanding) for the same period of 1996. In comparison to the 1996 period, the increase in income in 1997 was primarily the result of an increase of approximately $110 million in the amount of home equity loans sold and the sale of approximately $71 million in manufactured housing contracts and the recognition of loan sale gains and loan fees in connection with such sales. In addition, the implementation of a new accounting pronouncement, as discussed below, increased net income by $4.5 million ($.14 per share) in the first quarter of 1997. The positive effect on earnings of the above factors was partially offset by increased personnel and operating expenses relating to an enlargement of infrastructure designed to handle a higher level of loan production than that which occurred during the first quarter of 1997. As discussed in Note 2 of the Notes to Consolidated Financial Statements, during the first quarter of 1997, the Company implemented Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125") which required the Company to change the method it previously utilized in calculating the gain on its sale of loans and required the reclassification of the assets and liabilities retained by the Company (the "retained interests") in connection with such sales. Previously, the retained interests were classified as "Capitalized excess servicing income", "Temporary investments-reserve accounts" and the "Allowance for loan losses on serviced loans". Such amounts are now classified as "Interest-only and residual certificates". Effective with the implementation of SFAS No. 125, the fair value of the interest-only and residual certificates was estimated using the expected dates that the retained interests are to be released from the related reserve accounts. In addition, the Interest- only and residual certificates are classified as trading securities under the provisions of SFAS No. 115 and, as such, recorded at fair value with the resultant change in unrealized gain or loss recorded in the results of operations in the period of change in value. Loan sale gains increased $7.4 million during the first quarter of 1997 over the same period in 1996. The increase in the amount of loan sale gains was due primarily to the increase in the amount of loans sold, as discussed above, partially offset by a decrease in the interest spread retained by the Company, higher purchase premiums paid in connection with an increase of approximately $62 million in loans acquired by the Company's bulk purchase program and a negative adjustment of approximately $1.9 million related to the implementation of SFAS No. 125 (compared to the prior method of calculating loan sale gains). In addition, loan sale gains for the three months ended March 31, 1997 includes the capitalization of mortgage servicing rights in the amount of $5.6 million compared to $2.9 million for same period of 1996. 9 11 The following table presents information regarding loan sale transactions for the periods indicated:
Home Equity Loans Manufactured Housing Contracts ---------------------------------- ---------------------------------- Three months ended March 31, Three months ended March 31 ---------------------------------- ---------------------------------- 1997 1996 1997 1996 ------------ ------------- ----------- ---------- (dollars in thousands) (dollars in thousands) Loans sold . . . . . . . . . . $ 517,391 $ 407,700 $ 70,803 - Average coupon . . . . . . . . 11.20% 11.18% 10.97% - Interest spread retained . . . 4.65% 4.86% 3.54% - Loan sale gains . . . . . . . . $ 40,765 $ 39,809 $ 6,431 -
Fluctuations in and the level of market interest rates will impact the interest spread retained by the Company on loans sold (which include for purposes hereof manufactured housing contracts), and, potentially, the amount of its loan sale gains. An increase in the level of market interest rates will generally adversely affect the interest spread on loans sold, whereas such interest spread generally widens during a declining interest rate environment. Although actions have been taken by the Company during a rising interest rate environment to mitigate the impact on earnings of fluctuations in market rates, such as increasing the coupon rate charged on its loan products, the effect of such actions will generally lag the impact of market rate fluctuations. In addition, as discussed above, SFAS No. 125 requires that the retained interests be classified as trading securities and fluctuations in the interest rate environment can also affect the carrying value of these assets, with the changes in unrealized gain or loss recorded in the results of operations in the period of change in value. In connection with its securitization transactions, the Company has used a prefunding feature which "locks in" the pass-through rate that the Company will pay to the investors on a prefunded amount which will be used to acquire loans at a future date. The Company is obligated for the difference between the earnings on such prefunded amount and the pass-through interest paid to the investors during the period from the date of the closing of the securitization transaction until the date of delivery of the loans. In connection with the securitization transactions which closed in the first quarter of 1997, approximately $53.5 million and $5.2 million were held in prefunding accounts for purchase of the Company's home equity loans and manufactured housing contracts, respectively, during the second quarter of 1997. Finance income, fees earned and other loan income increased $11.7 million for the first quarter of 1997 compared to the same period of 1996 as the result of the following factors: (i) growth in the portfolio of loans warehoused pending loan sales; (ii) a $1.4 billion increase in the average portfolio of home equity loans serviced; (iii) the recognition of loan fees at the time of sale of the loans and the impact of finance income earned from the manufactured housing unit; and (iv) the positive effect of implementation of SFAS No. 125 which increased finance income by $8.9 million as the result of changes required in the method of valuing the Company's retained interests at period end. The following table presents the composition of Finance income, fees earned and other loan income for the periods indicated:
Three months ended March 31, -------------------------------- 1997 1996 ---------- ----------- (in thousands) Servicing fees earned . . . . . . . . . . . . . . . . . $ 45,346 $ 29,988 Loan origination fees . . . . . . . . . . . . . . . . . 21,488 19,128 Loan interest . . . . . . . . . . . . . . . . . . . . . 4,358 3,029 Other loan income . . . . . . . . . . . . . . . . . . . 2,350 1,904 Valuation adjustment on interest-only and residual certificates . . . . . . . . . . . . . . . (34,545) (26,749) ---------- ----------- Total . . . . . . . . . . . . . . . . . . . . . . $ 38,997 $ 27,300 ========== ===========
10 12 The Company estimates that non-accrual loans reduced loan interest for the first three months of 1997 and 1996 by approximately $8.2 million and $4.3 million, respectively. The Company is generally obligated to advance interest on delinquent loans serviced for third party investors until satisfaction of the note, liquidation of the collateral or charge off of the delinquent loan. During the three months ended March 31, 1997 the average amount of non-accrual loans owned and/or serviced by the Company was $249.0 million compared to approximately $132.7 million during the same period of 1996. Loan origination fees in excess of direct origination costs on loans held by the Company are recognized over the lives of the loans and are recognized at the time of sale on loans sold to third parties. During the three months ended March 31, 1997 and 1996, the Company sold approximately $517 million and $408 million, respectively, in home equity loans and recognized approximately $9.7 million and $10.5 million, respectively, in net loan origination fees in connection with these sales. The amount of loan fees earned as a percent of the amount of loans sold in the first quarter of 1997 declined when compared to the same period of 1996 as the result of an increase in the amount of loans originated by the wholesale and bulk purchase units that were included in loan securitization transactions. Investment income totaled $4.7 million for the first quarter of 1997 compared to investment income of $2.9 million during the same period of 1996. Investment income is primarily related to interest earned on funds in reserve accounts established in connection with loan sales in securitization transactions. Investment income during the first quarter of 1997 also includes approximately $.5 million in realized gains on common stock classified as trading securities sold during the quarter. Other assets at March 31, 1997 includes a $17.7 million receivable in connection with such sale. Other income includes income earned by the Company's property management and telecommunication services operations with respect to its office park. In the first quarter of 1996, Other income also included overhead reimbursement from discontinued operations prior to their disposition. Personnel expenses increased approximately $6.2 million primarily because of costs associated with the expansion of the Company's lending operations. Approximately 23% of the increase in personnel costs is related to the Company's manufactured housing lending operations. The remaining increase is primarily related to expansion of the Company's lending distribution network and incentive compensation related to an increase in home equity loan production. Interest expense for the first quarter of 1997 increased $4.6 million from the same period of 1996 primarily as the result of an increase in the average amount of debt outstanding. Other operating expenses for the three months ended March 31, 1997 increased approximately $5.9 million when compared to the same period of 1996 primarily as the result of expansion of the Company's lending operations. The increase in Other operating expenses included a $2.1 million increase in occupancy and general office expenses. ASSET QUALITY AND RESERVES The quality of the loans owned and those serviced for third parties significantly affects the profitability of the Company. The values of and markets for these assets are dependent on a number of factors, including general economic conditions, interest rates and governmental regulations. Adverse changes in such factors, which become more pronounced in periods of economic decline, may affect the quality of these assets and the Company's resulting ability to sell these assets for acceptable prices. General economic deterioration can result in increased delinquencies on existing loans and reductions in collateral values. Substantially all of the home equity loans and manufactured housing contracts produced by the Company are sold in securitization transactions in which securities backed by these loans and contracts ("pass-through certificates") are publicly offered and sold, with servicing rights retained. The purchasers of the pass-through certificates receive a credit enhanced security which is provided in part in home equity loan securitizations through a guaranty provided by a third party insurer or, in connection with certain manufactured housing contract securitization transactions, through a senior/subordinated structure. Credit enhancement for the pass-through 11 13 certificates is also provided by subordinating a cash deposit and the excess interest spread retained by the Company to the payment of scheduled principal and interest on the certificates. The subordination of the cash deposit and the excess interest spread retained by the Company relates to credit losses which may occur after the sale of the loans and contracts and generally continues until the earlier of the payment in full of the loans and contracts or termination of the agreement pursuant to which the loans and contracts were sold. If cumulative payment defaults exceed the amount subordinated, a third party insurer, except in certain manufactured housing securitization transactions, is obligated to pay any further losses experienced by the owners of the pass-through certificates. Such losses are borne first by the subordinated pass-through certificates in certain of the Company's manufactured housing contract securitization transactions. The Company is also obligated to cure, repurchase or replace loans and contracts which may be determined after the sale to violate representations and warranties relating to them and which are made by the Company at the time of the sale. The Company regularly evaluates the quality of the loan portfolio and estimates its risk of loss based upon historical loss experience, prevailing economic conditions, estimated collateral value and such other factors which, in management's judgment, are relevant in estimating the credit risk in owned and/or serviced loans. For loans and contracts sold, the Company estimates the amount of credit losses at the time of sale and, because such amount is a component of and is considered in determining the fair value of Interest-only and residual certificates, records such amount on its balance sheet as a reduction of this asset. Estimated losses on the owned portfolio are provided for by an increase in the allowance for loan losses through a charge to current operating income. At March 31, 1997, the carrying value of the Company's interest-only and residual certificates was reduced by $79.6 million to provide for estimated credit losses on loans sold. At March 31, 1997 the allowance for loan losses on owned loans totaled $4.2 million. (See also the analysis of the allowance for loan losses below). The maximum recourse associated with sales of home equity loans and manufactured housing contracts according to terms of the sale agreements totaled approximately $948 million at March 31, 1997, of which amount approximately $924 million relates to the subordinated cash and excess interest spread. Should credit losses on loans and contracts sold materially exceed the Company's estimates for such losses, such consequence will have a material adverse impact on the Company's operations. At March 31, 1997, the contractual balance of home equity loans serviced was approximately $4.3 billion, substantially all of which are owned by and serviced for third party investors. The portfolio is geographically diversified. Although the Company services loans in 50 states, at March 31, 1997 a substantial portion of the home equity loans serviced were originated in California (10.1%), Louisiana (7.8%), Ohio (7.4%), and Florida (7.4%), respectively, and no other state accounted for more than 7% of the serviced portfolio. In addition, at March 31, 1997, the Company serviced approximately $155 million of manufactured housing contracts, 40.0% of which were originated in Texas, 14.7% in South Carolina, 12.8% in North Carolina and 11% in Georgia. The risk inherent in geographic concentrations is dependent not only upon regional and general economic stability which affects property values, but also the financial well-being and creditworthiness of the borrower. The following table provides certain contractual delinquency and default information for home equity loans serviced as of the dates indicated:
March 31, 1997 December 31, 1996 --------------------------- ---------------------------- % of % of Contractual Contractual Contractual Contractual Balance Balance Balance Balance ----------- ----------- ------------- ----------- (DOLLARS IN THOUSANDS) Home equity loans serviced . . . . . . . . . . $ 4,301,708 $ 4,040,138 =========== ============= Delinquency - ----------- 30-59 days . . . . . . . . . $ 137,616 3.20% $ 136,976 3.39% 60-89 days . . . . . . . . . 35,604 0.83 53,124 1.31 90+ days . . . . . . . . . . 19,500 0.45 28,663 0.71 ----------- -------- ------------- --------- 192,720 4.48 218,763 5.41 ----------- -------- ------------- --------- Defaults - -------- Foreclosures in process . . . 166,638 3.87 135,779 3.36 Bankruptcy . . . . . . . . . 85,948 2.00 73,887 1.83 ----------- -------- ------------- --------- 252,586 5.87 209,666 5.19 ----------- -------- ------------- --------- Total delinquency and defaults . . . . . . . $ 445,306 10.35% $ 428,429 10.60% =========== ======== ============= =========
12 14 The contractual balances exclude home equity real estate owned and/or serviced which totaled $61.4 million and $52.6 million at March 31, 1997 and December 31, 1996, respectively. The charge-off rate on the average home equity loan portfolio for the first quarter of 1997 was .67% (annualized) and was .51% for 1996. The following table provides certain contractual delinquency and default data with respect to the Company's home equity loans serviced, by year of loan origination, as of the dates indicated:
March 31, 1997 ---------------------------------------------------------------------------------------------- Defaults Delinquency ------------------------------ ---------------------------------- Foreclosures Total Contractual in Bank- Delinquency Balance 30-59 60-89 90+ Total Process ruptcy Total & Defaults ------------ ----- ----- ---- ----- ------- ------ ----- ---------- (DOLLARS IN THOUSANDS) 1991 & prior . . . $ 102,823 3.56% 0.96% 0.81% 5.33% 5.79% 5.87% 11.66% 16.99% 1992 . . . . . . . 58,083 3.42% 0.83% 1.50% 5.75% 5.79% 5.86% 11.65% 17.40% 1993 . . . . . . . 181,471 4.41% 0.85% 0.60% 5.86% 5.43% 5.34% 10.77% 16.63% 1994 . . . . . . . 410,873 4.98% 0.86% 0.56% 6.40% 6.94% 5.07% 12.01% 18.41% 1995 . . . . . . . 971,949 4.41% 1.37% 0.62% 6.40% 7.51% 3.67% 11.18% 17.58% 1996 . . . . . . . 2,030,000 2.97% 0.78% 0.41% 4.16% 2.26% 0.51% 2.77% 6.93% 1997 . . . . . . . 546,509 0.08% - - 0.08% 0.01% - 0.01% 0.09% ------------ Total . . . . . $ 4,301,708 3.20% 0.83% 0.45% 4.48% 3.87% 2.00% 5.87% 10.35% ============
DECEMBER 31, 1996 ---------------------------------------------------------------------------------------------- Defaults Delinquency ------------------------------ ---------------------------------- Foreclosures Total Contractual in Bank- Delinquency Balance 30-59 60-89 90+ Total Process ruptcy Total & Defaults ------------ ----- ----- ---- ----- ------- ------ ----- ---------- (DOLLARS IN THOUSANDS) 1990 & prior . . . $ 75,252 5.12% 1.20% 1.22% 7.54% 5.97% 4.85% 10.82% 18.36% 1991 . . . . . . . 38,114 5.26% 0.97% 0.83% 7.06% 5.45% 6.59% 12.04% 19.10% 1992 . . . . . . . 63,842 4.74% 1.74% 1.97% 8.45% 5.87% 5.40% 11.27% 19.72% 1993 . . . . . . . 199,037 4.39% 1.28% 1.07% 6.74% 4.94% 5.05% 9.99% 16.73% 1994 . . . . . . . 451,224 5.15% 1.58% 0.92% 7.65% 4.70% 6.37% 11.07% 18.72% 1995 . . . . . . . 1,069,818 4.75% 2.12% 1.17% 8.04% 2.64% 6.26% 8.90% 16.94% 1996 . . . . . . . 2,142,851 2.11% 0.86% 0.35% 3.32% 0.20% 0.95% 1.15% 4.47% ------------ Total . . . . . $ 4,040,138 3.39% 1.31% 0.71% 5.41% 3.36% 1.83% 5.19% 10.60% ============
The Company's management believes that the decrease in delinquencies and defaults is not attributable to any single factor but rather reflects a combination of factors, such as the seasonal nature of delinquencies inherent in the portfolio and changes made in internal collection procedures. The following table reflects, as of the periods indicated, the allowance for loan losses for loans owned by the Company and loans serviced for third parties. These allowance accounts are deducted in the Company's balance sheet from the asset to which they apply.
Three Months Ended March 31, 1997 ---------------------------------------- Owned Serviced Total ---------- --------- ---------- (dollars in thousands) Allowance for loan losses, beginning of period . . . . . . . . $ 4,141 $ 73,102 $ 77,243 Provision for loan losses . . . . . . . . . . . . . . . . . . . 874 12,914 13,788 Net loans charged off . . . . . . . . . . . . . . . . . . . . . (967) (6,434) (7,401) Reserve reclassification . . . . . . . . . . . . . . . . . . . 187 - 187 ---------- --------- ---------- Allowance for loan losses, end of period . . . . . . . . . . . $ 4,235 $ 79,582 $ 83,817 ========== ========= ==========
13 15
Three Months Ended March 31, 1996 ---------------------------------------- Owned Serviced Total ---------- --------- ---------- (dollars in thousands) Allowance for loan losses, beginning of period . . . . . . . . $ 6,484 $ 44,970 $ 51,454 Provision for loan losses . . . . . . . . . . . . . . . . . . . 438 5,638 6,076 Net loans charged off . . . . . . . . . . . . . . . . . . . . . (856) (2,118) (2,974) Reserve reclassification . . . . . . . . . . . . . . . . . . . (10) - (10) ---------- --------- ---------- Allowance for loan losses, end of period . . . . . . . . . . . $ 6,056 $ 48,490 $ 54,546 ========== ========= ==========
The above delinquency and default experience represents the Company's recent experience. However, the delinquency and default percentages may be affected by the increase in the size and relative lack of seasoning of a substantial portion of the portfolio. In addition, the Company can neither quantify the impact of property value declines, if any, on the home equity loans and manufactured housing contracts nor predict whether or to what extent or how long such declines may exist. In a period of such declines, the rates of delinquencies and defaults on the home equity loans and manufactured housing contracts could be higher than those theretofore experienced in the residential mortgage lending industry in general. Adverse economic conditions (which may or may not affect real property values) may affect the timely payment by borrowers of scheduled payments of principal and interest on the home equity loans and manufactured housing contracts and, accordingly, the actual rates of delinquencies and defaults. As a result, the information in the above tables should not be considered as the only basis for assessing the likelihood, amount or severity of delinquencies and defaults in the future and no assurance can be given that the delinquency and default experience presented in the tables will be indicative of such experience. LIQUIDITY AND CAPITAL RESOURCES The principal cash requirements of the Company's lending operations arise from loan originations, deposits to reserve accounts, repayments of inter-company debt borrowed under the Company's senior notes and short-term borrowings, payments of operating and interest expenses, and income taxes related to loan sale transactions. Loan production is funded principally through proceeds of warehouse facilities pending loan sales. At March 31, 1997, the Company had three secured warehouse facilities available for its home equity loan product: (i) a warehouse facility provided by a syndicate of commercial banks (the "Commercial Bank Warehouse"), (ii) a warehouse facility provided by the investment banker which acted as lead underwriter for the Company's first quarter home equity loan securitization (the "Investment Bank Warehouse"), and (iii) a warehouse facility provided by UCLIC (the "UCLIC Warehouse"). The Commercial Bank Warehouse was a $350 million facility committed until May, 1998. As of March 31, 1997, $11.8 million was outstanding under the Commercial Bank Warehouse. In April, 1997, the Company entered into a $800 million senior unsecured revolving credit facility syndicated with a total of 22 participating lenders. This facility replaced the Commercial Bank Warehouse and certain lines of credit totaling $107 million. The Investment Bank Warehouse was directly related to the first quarter home equity loan securitization, initially provided for funding up to $300 million of eligible home equity loans for such securitization and terminated upon the closing of the last delivery of loans under the prefunding accounts relative to this securitization. As of March 31, 1997, $150 million was available and no amounts were outstanding under the Investment Bank Warehouse. The UCLIC Warehouse, which was established upon the sale of UCLIC, provides for the purchase of up to $300 million in first mortgage residential loans and has a maturity of July, 1999. The Company has the right for a limited time to repurchase certain loans which are eligible for securitization and as of March 31, 1997, $7.5 million in loans eligible for securitization were funded under this facility. In addition, the Company had a manufactured housing contract warehouse which was directly related to the first quarter manufactured housing securitization and was provided by the investment bank which acted as lead underwriter for such securitization (the "Manufactured Housing Warehouse"). The Manufactured Housing Warehouse initially provided for funding up to $75 million of eligible manufactured housing contracts and terminated upon the closing 14 16 of the last delivery of contracts under the prefunding accounts relative to this securitization. As of March 31, 1997, $25 million was available and no amounts were outstanding under the Manufactured Housing Warehouse. Substantially all of the home equity loans and manufactured housing contracts originated or acquired by the Company are sold. Net cash from operating activities of the Company in the first quarter of 1997 and 1996 reflects approximately $.6 billion and $.7 billion, respectively, in cash used for loan originations and acquisitions of home equity loans and manufactured housing contracts. The primary source of funding for loan originations is derived from the reinvestment of proceeds from the ultimate sale of these products in the secondary market which totaled approximately $.6 billion and $.7 billion in the first quarter of 1997 and 1996, respectively. In connection with the sale transactions in the secondary market, third-party surety bonds (except in the case of two manufactured housing contract securitizations) and cash deposits by the Company as credit enhancements have been provided. The loan sale transactions have required the subordination of certain cash flows payable to the Company to the payment of principal and interest due to certificate holders. In connection with these transactions, the Company has been required, in some instances, to fund an initial deposit, and thereafter, in each transaction, a portion of the amounts receivable by the Company from the excess interest spread has been required to be placed and maintained in a reserve account to the extent of the subordination requirements. The subordination requirements generally provide that the excess interest spread is payable to a reserve account until a specified level of cash, which is less than the maximum subordination amount, is accumulated therein. The interest-only and residual certificates of the Company are subject to being utilized first to replenish cash paid from the reserve account to fund shortfalls in collections from borrowers who default on the payment of principal or interest on the loans and contracts underlying the pass-through certificates issued until the total of the Company's deposits into the reserve account equal the maximum subordination amount. After the Company's deposits into the reserve account equal the maximum subordination amount for a transaction, the subordination of the related excess interest spread (including the guarantee fee payable therefrom) for these purposes is terminated. The excess interest spread required to be deposited and maintained in the respective reserve accounts will not be available to support the cash flow requirements of the Company until such amount exceeds the maximum subordinated amount (other than amounts, if any, in excess of the specified levels required to be maintained in the reserve accounts, which may be distributed periodically to the Company). At March 31, 1997, the amounts on deposit in such reserve accounts totaled $288 million. In April, 1996, a subsidiary of the Company entered into a letter of credit and reimbursement agreement with the domestic branch of an international bank pursuant to which the bank issued letters of credit to replace a substantial portion of the cash previously required to be maintained in the reserve accounts for five loan securitization transactions consummated in 1993 and 1994. As a consequence, $40 million was released from the related reserve accounts to the Company, and these proceeds, net of transaction costs, were used to pay down outstanding debt of the Company in April, 1996. In April, 1997, the Company terminated this letter of credit and reimbursement agreement and caused the letters of credit to be replaced by cash in the required amounts in the related reserve accounts. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following non- exclusive factors could cause actual results to differ materially from historical results or those anticipated: (1) changes in the performance of the financial markets, in the demand for and market acceptance of the Company's products, and in general economic conditions, including interest rates; (2) the presence of competitors with greater financial resources and the impact of competitive products and pricing; (3) the effect of the Company's policies; and (4) the continued availability to the Company of adequate funding sources. 15 17 REVIEW BY INDEPENDENT ACCOUNTANTS The Company's independent accountants, Deloitte & Touche LLP, have performed a review of the accompanying unaudited consolidated balance sheet as of March 31, 1997 and the related consolidated statements of income and cash flows for the three months ended March 31, 1997 and 1996, and previously audited and expressed an unqualified opinion dated February 28, 1997 on the consolidated financial statements of the Company and its subsidiaries as of December 31, 1996, from which the consolidated balance sheet as of this date is derived. 16 18 INDEPENDENT ACCOUNTANTS' REVIEW REPORT United Companies Financial Corporation: We have reviewed the accompanying consolidated balance sheet of United Companies Financial Corporation and subsidiaries as of March 31, 1997 and the related consolidated statements of income and cash flows for the three months ended March 31, 1997 and 1996. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. As discussed in Note 2 of the Notes to the Consolidated Financial Statements, in 1997, the Company changed its method of accounting for loan sale gains and related retained interests to conform with Statement of Financial Accounting Standards No. 125. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of United Companies Financial Corporation and subsidiaries as of December 31, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1996 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ DELOITTE & TOUCHE LLP Baton Rouge, Louisiana May 9, 1997 17 19 PART II OTHER INFORMATION Items 1 through 5. Inapplicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - (11) Statement re computation of earnings per share - (15) Letter of Deloitte & Touche LLP - (27) Financial Data Schedule (b) Reports on Form 8-K None. 18 20 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. UNITED COMPANIES FINANCIAL CORPORATION Date: May 12, 1997 By: /s/ J. Terrell Brown ------------- ----------------------------------------- J. Terrell Brown Chairman and Chief Executive Officer Date: May 12, 1997 By: /s/ Dale E. Redman ------------- ------------------------------------------ Dale E. Redman Executive Vice President and Chief Financial Officer
19 21 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS
EXHIBIT NO. 11 Statement re computation of earnings per share 15 Letter of Deloitte & Touche LLP 27 Financial Data Schedule
20 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Three Months Ended March 31, --------------------------------- 1997 1996 ----------- ------------ (in thousands, except per share amounts) Primary Earnings Per Share - -------------------------- Income available to common shareholders: ---------------------------------------- Income from continuing operations . . . . . . . . . . . . . $ 20,158 $ 17,229 Income from discontinued operations . . . . . . . . . . . . - 610 ----------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,158 $ 17,839 =========== ============ Weighted average number of common and common equivalent shares: -------------------------------------------- Average common shares outstanding . . . . . . . . . . . . . 28,004 27,850 Add: Dilutive effect of stock options after application of treasury stock method . . . . . . . 639 868 Dilutive effect of preferred stock after application of "if converted" method . . . . 3,230 3,230 ----------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,873 31,948 =========== ============ Earnings per share: ------------------- Income from continuing operations . . . . . . . . . . . . . $ .63 $ .54 Income from discontinued operations . . . . . . . . . . . . - .02 ----------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .63 $ .56 =========== ============ Fully Diluted Earnings Per Share - -------------------------------- Income available to common shareholders: ---------------------------------------- Income from continuing operations . . . . . . . . . . . . . $ 20,158 $ 17,229 Income from discontinued operations . . . . . . . . . . . . - 610 ----------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,158 $ 17,839 =========== ============ Weighted average number of common and all dilutive contingent shares: ----------------------------------------------- Average common shares outstanding . . . . . . . . . . . . . 28,004 27,850 Add: Dilutive effect of stock options after application of treasury stock method . . . . . . . 639 965 Dilutive effect of preferred stock after application of "if converted" method . . . . 3,910 3,910 ----------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,553 32,725 =========== ============ Earnings per share: ------------------- Income from continuing operations . . . . . . . . . . . . . $ .62 $ .53 Income from discontinued operations . . . . . . . . . . . . - .02 ----------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .62 $ .55 =========== ============
21 EX-15 3 LETTER OF DELOITTE & TOUCHE LLP 1 EXHIBIT 15 United Companies Financial Corporation: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim consolidated financial information of United Companies Financial Corporation and subsidiaries for the periods ended March 31, 1997 and 1996, as indicated in our report dated May 9, 1997; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is being incorporated by reference in the following: Registration Statement No. 33-17366 on Form S-8 pertaining to the United Companies Financial Corporation Employees' Savings Plan and Trust, Registration Statement No. 33-29994 on Form S-8 pertaining to the 1989 Stock Incentive Plan and the 1989 Non-Employee Director Stock Option Plan, Registration Statement No. 33-54955 on Form S-8 pertaining to the 1993 Stock Incentive Plan and the 1993 Non- Employee Director Stock Option Plan, Registration Statement No. 33-68626 on Form S-3 pertaining to the registration of 1,951,204 shares of United Companies Financial Corporation Common Stock, Registration Statement No. 33-60367 on Form S-3 pertaining to the registration of $200 million of United Companies Financial Corporation Debt Securities and Preferred Stock, Registration Statement No. 33-52739 on Form S-3 pertaining to the registration of 200,000 shares of United Companies Financial Corporation Common Stock, Registration Statement No. 33-63069 on Form S-8 pertaining to the United Companies Financial Corporation Management Incentive Plan and Registration Statement No. 333-21985 on Form S-3 pertaining to the registration of $500 million of United Companies Financial Corporation Debt Securities, Preferred Stock and Common Stock. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. /s/ DELOITTE & TOUCHE LLP Baton Rouge, Louisiana May 12, 1997 22 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 619 17,100 119,811 0 0 0 51,066 0 991,326 0 446,996 0 3,910 59,309 372,780 991,326 0 92,422 0 0 48,695 0 12,230 31,497 11,339 20,158 0 0 0 20,158 .63 .62
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