-----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, EWOXfSEXqlGRHKp0HHIJnAWblr/X3FUIZPOG8NlrRPw6+GgME1+btAsbnYoh9Q+2 b6ZYea5cFtff7R8Z5IGw7w== 0000950134-97-007853.txt : 19971103 0000950134-97-007853.hdr.sgml : 19971103 ACCESSION NUMBER: 0000950134-97-007853 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971031 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: SEC FILE NUMBER: 001-07067 FILM NUMBER: 97705845 BUSINESS ADDRESS: STREET 1: 4041 ESSEN LN STREET 2: P O BOX 1591 CITY: BATON ROUGE STATE: LA ZIP: 70809 BUSINESS PHONE: 5049870000 10-Q 1 FORM 10-Q, FOR QUARTER ENDED 09/30/97 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 September 30, 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 October 24, 1997 was 28,717,752, excluding 1,159,682 treasury shares. ================================================================================ 2 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PAGE PART I - FINANCIAL INFORMATION Financial Statements: Consolidated Balance Sheets September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Income Three months and nine months ended September 30, 1997 and 1996 . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows Nine months ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 5-8 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-17 Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Independent Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . 19 PART II - OTHER INFORMATION Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, 1997 December 31, Assets (Unaudited) 1996 ----------- ----------- Cash and cash equivalents ............................................ $ 583 $ 14,064 Investment securities Trading .......................................................... -- 17,418 Available for sale ............................................... 17,434 17,510 Loans - net .......................................................... 174,713 118,750 Interest-only and residual certificates .............................. 834,034 604,474 Accrued interest receivable .......................................... 76,664 61,483 Property - net ....................................................... 60,627 46,323 Capitalized mortgage servicing rights ................................ 40,274 23,806 Other assets ......................................................... 30,485 21,445 ----------- ----------- Total assets .............................................. $ 1,234,814 $ 925,273 =========== =========== Liabilities and Stockholders' Equity Notes payable ........................................................ $ 595,886 $ 425,671 Deferred income taxes payable ........................................ 81,375 52,971 Managed cash overdraft ............................................... 17,897 -- Other liabilities .................................................... 57,955 26,354 ----------- ----------- Total liabilities ......................................... 753,113 504,996 ----------- ----------- 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 - 29,862,674 and 29,627,734 shares .................... 59,725 59,255 Additional paid-in capital ....................................... 186,211 184,397 Net unrealized gain on securities ................................ 85 48 Retained earnings ................................................ 250,459 190,579 Treasury stock and ESOP debt ..................................... (18,689) (17,912) ----------- ----------- Total stockholders' equity ................................... 481,701 420,277 ----------- ----------- Total liabilities and stockholders' equity ................ $ 1,234,814 $ 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 Nine months ended September 30, September 30, ----------------------- ----------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Revenues: Loan sale gains .................................. $ 79,636 $ 53,637 $ 190,556 $ 143,325 Finance income, fees earned and other loan income ................................. 43,814 35,270 126,613 92,747 Investment income ................................ 5,628 3,920 16,508 9,472 Other ............................................ 1,388 1,358 4,440 3,651 --------- --------- --------- --------- Total .................................... 130,466 94,185 338,117 249,195 --------- --------- --------- --------- Expenses: Personnel ........................................ 35,790 27,004 94,799 70,774 Interest ......................................... 16,906 10,767 43,373 27,586 Other operating .................................. 35,506 18,417 89,061 52,890 --------- --------- --------- --------- Total .................................... 88,202 56,188 227,233 151,250 --------- --------- --------- --------- Income from continuing operations before income taxes ..................................... 42,264 37,997 110,884 97,945 Provision for income taxes .......................... 15,215 13,869 39,918 35,761 --------- --------- --------- --------- Income from continuing operations ................... 27,049 24,128 70,966 62,184 Income (loss) from discontinued operations: Income from discontinued operations, net of income tax expense of $1,651 ........................ -- -- -- 3,199 Loss on disposal, net of income tax benefit of $868 .............................. -- -- -- (7,731) --------- --------- --------- --------- Total .................................... -- -- -- (4,532) --------- --------- --------- --------- Net income .......................................... $ 27,049 $ 24,128 70,966 $ 57,652 ========= ========= ========= ========= Per share data: Income from continuing operations ................ $ 0.83 $ 0.74 $ 2.17 $ 1.90 Loss from discontinued operations ................ -- -- -- (0.14) --------- --------- --------- --------- Net income ....................................... $ 0.83 $ 0.74 $ 2.17 $ 1.76 ========= ========= ========= =========
See notes to consolidated financial statements. 3 5 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine months ended September 30, ------------------------------- 1997 1996 ------------- ------------ Cash flows from continuing operating activities: Income from continuing operations .......................................... $ 70,966 $ 62,184 Adjustments to reconcile income from continuing operations to net cash used by continuing operating activities: Increase in accrued interest receivable ............................... (15,181) (14,752) Increase (decrease) in other assets ................................... (6,791) 4,096 Increase in other liabilities ......................................... 31,760 19,762 Increase in interest-only and residual certificates ................... (229,560) (130,618) Increase in capitalized mortgage servicing rights ..................... (22,773) (13,428) Amortization of capitalized mortgage servicing rights ................. 6,305 1,690 Loan loss provision on owned loans .................................... 2,957 (178) Amortization and depreciation ......................................... 5,360 3,017 Deferred income taxes ................................................. 28,384 4,648 Proceeds from sales and principal collections of loans held for sale ..................................................... 2,133,768 1,736,577 Originations and purchases of loans held for sale ..................... (2,192,688) (1,765,280) Decrease (increase) in trading securities ............................. 17,418 (15,603) ----------- ----------- Net cash used by continuing operating activities ............ (170,075) (107,885) ----------- ----------- Cash flows from investing activities: Proceeds from sales of available for sale securities .............. 1,375 -- Purchase of available for sale securities ......................... (1,242) (87) Proceeds from disposition of insurance subsidiaries ............... -- 106,870 Capital expenditures .............................................. (17,644) (7,253) ----------- ----------- Net cash (used) provided by investing activities ............ (17,511) 99,530 ----------- ----------- Cash flows from financing activities: Proceeds from issuance of subordinated notes ...................... 146,855 -- Proceeds from construction and mortgage loans ..................... 3,846 2,122 Payments on construction and mortgage loans ....................... (12,612) -- (Decrease) increase in debt with maturities of three months or less (47,100) 30,550 Increase in revolving credit facility ............................. 95,400 -- (Decrease) increase in warehouse loan facility .................... (18,136) 404 Proceeds from ESOP debt ........................................... 850 4,000 Payments on ESOP debt ............................................. (1,137) (822) Cash dividends paid ............................................... (11,086) (10,207) Increase (decrease) in managed cash overdraft ..................... 17,897 (20,221) Increase in unearned ESOP compensation ............................ (777) (3,178) Proceeds from exercise of stock options ........................... 105 1,247 ----------- ----------- Net cash provided by financing activities ................... 174,105 3,895 ----------- ----------- Decrease in cash and cash equivalents ...................................... (13,481) (4,460) Cash and cash equivalents at beginning of period ........................... 14,064 5,284 ----------- ----------- Cash and cash equivalents at end of period ................................. $ 583 $ 824 =========== ===========
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 and nine months ended September 30, 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. During the first quarter of 1997, the Company implemented, effective as of January 1, 1997, Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). As a result of the implementation of SFAS No. 125, net income for the nine months ended September 30, 1997 increased by $4.5 million, or $.14 per share on a fully diluted basis. The following summary reflects the changes in the Company's Interest-only and residual certificates during the first nine months of 1997.
(In thousands) Balance, beginning of year . . . . . . . . . . . . . . . . .$ 604,474 Interest-only and residual certificates on loans sold . . . . 247,891 Net increase in allowance for losses on loans sold . . . . . (20,313) Net increase in reserve accounts . . . . . . . . . . . . . . 117,046 Amortization of interest-only and residual certificates . . . (115,064) ----------- Balance, September 30, 1997 . . . . . . . . . . . . . . . . .$ 834,034 ===========
The following schedule sets forth the components of the Interest-only and residual certificates owned by the Company, which are recorded at fair value.
SEPTEMBER 30, DECEMBER 31, 1997 1996 ----------- ----------- (IN THOUSANDS) Certificated interests . . . . . . . . . . . . . . . . $ 559,220 $ 426,393 Temporary investments - reserve accounts . . . . . . . 368,229 251,183 Allowance for losses on loans serviced . . . . . . . . (93,415) (73,102) ----------- ----------- Total . . . . . . . . . . . . . . . . . . . . $ 834,034 $ 604,474 =========== ===========
5 7 3. LOANS Loans Owned. The following schedule sets forth the components of Loans-net as of the dates indicated.
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ (in thousands) Receivables held for sale . . . . . . . . . . . . . . . $ 115,804 $ 69,558 Other receivables . . . . . . . . . . . . . . . . . . . 57,875 39,831 ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . 173,679 109,389 Real estate owned: Home equity . . . . . . . . . . . . . . . . . . . 6,650 6,647 Commercial and other. . . . . . . . . . . . . . . . 4,009 9,446 Manufactured housing chattel contracts. . . . . . . 84 372 Nonrefundable loan fees . . . . . . . . . . . . . . . . (2,813) (2,945) Other . . . . . . . . . . . . . . . . . . . . . . . . . (2,393) (18) ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . 179,216 122,891 ------------ ------------ Less: Allowance for loan losses . . . . . . . . . . . . (4,503) (4,141) ------------ ------------ $ 174,713 $ 118,750 ============ ============
Included in Loans-net at September 30, 1997 and December 31, 1996 were nonaccrual loans totaling $10.7 million and $6.6 million, respectively. Loans Serviced. The following table sets forth the loans serviced by the Company for third parties at September 30, 1997 and December 31, 1996, by type of loan. Substantially all of these loans were originated by the Company.
September 30, December 31, 1997 1996 --------------- -------------- (IN THOUSANDS) Home equity . . . . . . . . . . . . . . . . . . . $ 4,851,311 $ 3,940,289 Manufactured housing chattel contracts . . . . . 247,596 107,741 Other . . . . . . . . . . . . . . . . . . . . . . 36,071 44,649 --------------- -------------- Total . . . . . . . . . . . . . . . . . $ 5,134,978 $ 4,092,679 =============== ==============
4. NOTES PAYABLE Notes payable consisted of the following:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS) Senior debt: ------------ 7% Senior unsecured notes due July, 1998 . . . . . . . . . $ 100,000 $ 100,000 9.35% Senior unsecured notes due November, 1999 . . . . . 125,000 125,000 7.7% Senior unsecured notes due January, 2004 . . . . . . 100,000 100,000 Short-term borrowings . . . . . . . . . . . . . . . . . . -- 47,100 Revolving credit facility . . . . . . . . . . . . . . . . 95,400 -- Warehouse facilities . . . . . . . . . . . . . . . . . . . 5,536 23,672 ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . 10,846 11,133 Mortgage loan . . . . . . . . . . . . . . . . . . . . . . -- 5,473 Construction loan . . . . . . . . . . . . . . . . . . . . -- 3,293 ----------- ---------- Total senior debt . . . . . . . . . . . . . . . . . . 436,782 415,671 ----------- ---------- Subordinated debt: ------------------ 8.375% Subordinated unsecured notes due July, 2005 . . . . 149,104 -- Subordinated debentures . . . . . . . . . . . . . . . . . 10,000 10,000 ----------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 595,886 $ 425,671 =========== ==========
6 8 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 used a portion of the proceeds from this three-year credit facility to refinance existing debt and is using the remaining proceeds for general corporate purposes, including interim funding of loan originations. In June 1997, the Company publicly sold $150 million of its subordinated unsecured notes (the "Notes"). The Notes provide for interest payable semi-annually and are not redeemable prior to their maturity on July 1, 2005. The Notes bear interest at 8 3/8% per annum and were issued at a discount from par. Such discount is being amortized using the effective interest method as an adjustment to yield over the life of the Notes resulting in an effective interest rate on the Notes of 8.48% per annum. The Notes rank subordinate and junior in right of payment to the prior payment of all existing and future senior indebtedness of the Company. 5. CASH PAID FOR INTEREST AND INCOME TAXES. During the nine months ended September 30, 1997 and 1996, the Company paid interest on notes payable in the amount of $34.1 million and $25.2 million, respectively. During the nine months ended September 30, 1997 and 1996, the Company paid income taxes in the amount of $9.5 million and $18.3 million, 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 ("UGTIC") and United Companies Life Insurance Company ("UCLIC") and the divestiture, during 1993, of Foster Mortgage Company ("FMC"). There have been no material changes in these contingencies in the nine months ended September 30, 1997. The Company did, however, record a charge of $1.6 million in the third quarter of 1997 for policy claims paid by UGTIC over the level specified in the definitive stock sale agreement for which the Company remained liable. Further, certain claims of the institutional lenders against the Company in the bankruptcy proceedings of FMC have been set for trial before the bankruptcy court on November 18, 1997. The operations of UGTIC, UCLIC and FMC have been classified as discontinued operations. The Company used a prefunding feature in connection with its home equity securitization transaction during the third quarter of 1997. At September 30, 1997, approximately $60.7 million was held in a prefunding account for the purchase of the Company's home equity loans during the fourth quarter of 1997. In ruling on 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 court entered an order on May 28, 1997, holding that 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 Company strenuously disagrees with the trial court's holding 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 court's holding could result in a liability for the Company's subsidiary presently estimated by the Company to be approximately $15 million. The Company's motion to vacate the May 28, 1997 order was denied by the trial court. 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 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 9 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 determining fully diluted EPS. Basic and diluted EPS, as computed under SFAS No. 128, would have been $.87 and $.83 and $2.27 and $2.17, respectively, for the three months and nine months ended September 30, 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 ("UGTIC") as discontinued operations. Discussed below are results of continuing operations for the periods presented. NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Income from continuing operations for the first nine months of 1997 was $71.0 million ($2.17 per share based on 32.7 million weighted average shares outstanding) compared to $62.2 million ($1.90 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 the 1997 period was primarily the result of an increase of approximately $265 million and $122 million, respectively, in the amount of home equity loans and manufactured housing contracts sold as well as the recognition of loan sale gains and loan fees in connection with such sales. Revenues. The following table sets forth information regarding the components of the Company's revenues:
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1997 1996 --------------- -------------- (IN THOUSANDS) Loan sale gains . . . . . . . . . . . . . . . . . . . . $ 190,556 $ 143,325 Finance income, fees earned and other loan income . . . 126,613 92,747 Investment income . . . . . . . . . . . . . . . . . . . 16,508 9,472 Other . . . . . . . . . . . . . . . . . . . . . . . . . 4,440 3,651 --------------- -------------- Total . . . . . . . . . . . . . . . . . . . . $ 338,117 $ 249,195 =============== ==============
Loan sale gains increased $47.2 million during the first nine months 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 home equity loans and manufactured housing contracts sold and a change in the mix of fixed, ARM and hybrid home equity loan products sold. Loan sale gains for the nine months ended September 30, 1997 also include the capitalization of mortgage servicing rights in the amount of $22.8 million compared to $13.4 million for same period of 1996. The positive effect of these factors was partially offset by costs totaling $7.4 million incurred on a series of interest rate hedge mechanisms implemented in connection with the Company's 1997 second and third quarter securitization transactions. There were no open hedge positions at December 31, 1996 or September 30, 1997. The following table presents information regarding loan sale transactions for the periods indicated:
HOME EQUITY LOANS MANUFACTURED HOUSING CONTRACTS NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- -------------------------------------- 1997 1996 1997 1996 ------------ --------------- ----------- -------------- (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) Loans sold......................... $ 1,827,357 $ 1,562,205 $ 225,974 $ 103,556 Average coupon..................... 11.11% 11.25% 10.82% 11.00% Interest spread retained........... 4.78% 4.71% 3.63% 3.25% Loan sale gains.................... $ 175,113 $ 137,060 $ 15,443 $ 6,265
9 11 Approximately $136 million and $422 million of the home equity loans sold in securitizations during 1997 have a fixed interest rate per annum for two and three years, respectively, then convert into an adjustable rate for the remaining life of the loan. The pass-through rate on the certificates backed by these loans is based on a floating interest rate and is calculated by reference to the London interbank offered rate for one-month U.S. dollar deposits ("1-month LIBOR"). Additionally, during 1996 and the first nine months of 1997, approximately $320 million and $303 million, respectively, of the fixed rate home equity loans were sold in securitizations at a pass-through rate based on the 1 month LIBOR. The foregoing securitizations were structured so that the maturity of these floating interest rate pass-through certificates is anticipated to be approximately one year. The remaining principal balance of these loans at September 30, 1997 was approximately $372 million. Fluctuations in and the level of market interest rates 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. The Company has taken actions during rising interest rate environments 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, however, will generally lag the impact of market rate fluctuations. The Company has also utilized interest rate hedge mechanisms to mitigate the impact on earnings of market rate fluctuations. The Company incurred costs in the amount of $7.4 million for such mechanisms implemented in connection with its 1997 second and third quarter securitization transactions. 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 third quarter of 1997, approximately $60.7 million was held in prefunding accounts for purchase of the Company's home equity loans during the fourth quarter of 1997. Finance income, fees earned and other loan income increased $34 million for the first nine months of 1997 compared to the same period of 1996 as the result of the following factors: (i) growth in the portfolio of loans held pending loan sales; (ii) a $1.5 billion increase in the average portfolio of 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 in loans sold. The following table presents the composition of Finance income, fees earned and other loan income for the periods indicated:
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1997 1996 ----------- ------------- (IN THOUSANDS) Servicing fees and excess interest collected . . . . . $ 141,165 $ 96,279 Loan origination fees . . . . . . . . . . . . . . . . . 82,032 63,411 Loan interest . . . . . . . . . . . . . . . . . . . . . 17,966 14,822 Other loan income . . . . . . . . . . . . . . . . . . . 10,011 6,323 Amortization of interest-only and residual certificates . . . . . . . . . . . . . . (115,064) (89,373) Amortization of mortgage servicing rights . . . . . . . (6,305) (1,690) Other . . . . . . . . . . . . . . . . . . . . . . . . . (3,192) 2,975 ---------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . $ 126,613 $ 92,747 ========== ============
The increase in servicing fees earned reflects the growth in the portfolio of loans serviced for third parties. The average portfolio of loans serviced for third party investors was $4.6 billion and $3.1 billion for the nine months ended September 30, 1997 and 1996, respectively. The increase in amortization of interest-only and residual 10 12 certificates as well as mortgage servicing rights is likewise related to the increase in the amount of loans serviced for third parties. During the nine months ended September 30, 1997 and 1996, the Company sold approximately $1.8 billion and $1.6 billion, respectively, in home equity loans and recognized approximately $71.6 million and $63.3 million, respectively, in loan origination fees in connection with these sales. The Company estimates that non-accrual loans reduced loan interest for the first nine months of 1997 and 1996 by approximately $27.9 million and $14.9 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 nine months ended September 30, 1997, the average amount of non-accrual loans owned and/or serviced by the Company was $282 million compared to approximately $153 million during the same period of 1996. Investment income totaled $16.5 million for the first nine months of 1997 compared to investment income of $9.5 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. Other income includes income earned by the Company's property management and telecommunication services operations with respect to its office park. In the first nine months of 1996, Other income also included overhead reimbursement from discontinued operations prior to their disposition. Expenses. The following table presents the components of the Company's expenses for the periods indicated:
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1997 1996 ----------- ------------- (IN THOUSANDS) Personnel . . . . . . . . $ 94,799 $ 70,774 Interest . . . . . . . . 43,373 27,586 Other operating . . . . . 89,061 52,890 ----------- ------------- Total . . . . . . . $ 227,233 $ 151,250 =========== =============
Personnel expenses for the nine months ended September 30, 1997, increased approximately $24.0 million compared to the same period of 1996 primarily because of costs associated with the expansion of the Company's lending operations. Approximately $3.5 million 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 paid as a result of the increase in home equity loan production. Interest expense for the first nine months of 1997 increased $15.8 million from the same period of 1996 primarily as the result of an increase in the average amount of debt outstanding. See "Liquidity and Capital Resources." Other operating expenses for the nine months ended September 30, 1997 increased approximately $36.2 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 $15.2 million increase in advertising and a $5.5 million increase in occupancy and general office expenses. In addition, Other operating expenses during the third quarter of 1997 includes a $1.6 million charge for claims related to the Company's sale of UGTIC in February of 1996. Under the stock sale agreement with the purchaser of UGTIC, the Company is liable for policy claims paid by UGTIC over certain specified levels for a 10 year period after the sale. The Company's liability for such policy claims is limited to the remaining balance of approximately $2.5 million of the notes received by the Company in connection with the sale. 11 13 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 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 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 September 30, 1997, the carrying value of the Company's interest-only and residual certificates was reduced by $93.4 million to provide for estimated credit losses on loans sold. At September 30, 1997 the allowance for loan losses on owned loans totaled $4.5 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 $1.0 billion at September 30, 1997. 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 September 30, 1997, the contractual balance of home equity loans serviced was approximately $5.0 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 September 30, 1997 a substantial portion of the home equity loans serviced were originated in California (10.2%), Louisiana (7.9%), Florida (7.5%), and Ohio (6.6%), respectively, and no other state accounted for more than 5.8% of the serviced portfolio. In addition, at September 30, 1997, the Company serviced approximately $260 million of manufactured housing contracts, 30.7% of which were originated in Texas, 15.2% in South Carolina, 13.5% in North Carolina and 9.3% 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. 12 14 The following table provides certain contractual delinquency and default information for home equity loans serviced as of the dates indicated:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ---------------------------- -------------------------- % OF % OF CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL BALANCE BALANCE BALANCE BALANCE -------------- ----------- ------------ ----------- (DOLLARS IN THOUSANDS) Home equity loans serviced....................... $ 5,001,501 $ 4,040,138 ============== ============= Delinquency 30-59 days..................... $ 185,426 3.71% $ 136,976 3.39% 60-89 days..................... 47,602 0.95 53,124 1.31 90+ days....................... 24,911 0.50 28,663 0.71 -------------- --------- ------------- --------- 257,939 5.16 218,763 5.41 -------------- --------- ------------- --------- Defaults Foreclosures in process........ 190,743 3.81 135,779 3.36 Bankruptcy..................... 113,673 2.27 73,887 1.83 -------------- --------- ------------- --------- 304,416 6.08 209,666 5.19 -------------- --------- ------------- --------- Total delinquency and defaults................. $ 562,355 11.24% $ 428,429 10.60% ============== ========= ============= =========
The contractual balances exclude home equity real estate owned and/or serviced which totaled $84.9 million and $52.6 million at September 30, 1997 and December 31, 1996, respectively. The charge-off rate on the average home equity loan portfolio for the first nine months of 1997 was .64% (annualized) and was .51% for 1996. The following table provides certain contractual delinquency information for manufactured housing contracts serviced as of the dates indicated:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ----------- (DOLLARS IN THOUSANDS) Number of manufactured housing contracts ..... 12,097 5,412 Delinquency(1) -------------- 30-59 days ................................. 2.43% 1.88% 60-89 days ................................. .78 .57 90+ days ................................. 1.00 .16 ------------ ------------ 4.21% 2.61% ============ ============ Manufactured housing contracts in $ 2,617 $ 725 repossession ................................ ============ ============
(1) As a percentage of the number of manufactured housing contracts as of the date indicated and excluding contracts already in repossession. 13 15 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:
SEPTEMBER 30, 1997 ----------------------------------------------------------------------------------------------- DEFAULTS DELINQUENCY ---------------------------- ------------------------------------- FORECLOSURES TOTAL CONTRACTUAL IN BANK- DELINQUENCY YEAR OF PRODUCTION BALANCE 30-59 60-89 90+ TOTAL PROCESS RUPTCY TOTAL & DEFAULTS - ------------------ ------------ ------ -------- ------- --------- --------- -------- ------- ----------- (DOLLARS IN THOUSANDS) 1991 & prior . . . $ 83,278 5.06% 1.05% 0.99% 7.10% 5.19% 6.22% 11.41% 18.51% 1992 . . . . . . . 48,250 5.11% 0.82% 1.41% 7.34% 5.96% 5.82% 11.78% 19.12% 1993 . . . . . . . 149,616 5.32% 1.31% 0.75% 7.38% 4.92% 5.37% 10.29% 17.67% 1994 . . . . . . . 332,598 5.92% 1.52% 0.70% 8.14% 5.89% 7.16% 13.05% 21.19% 1995 . . . . . . . 788,921 5.70% 1.31% 0.81% 7.82% 8.64% 5.22% 13.86% 21.68% 1996 . . . . . . . 1,716,079 4.66% 1.32% 0.65% 6.63% 4.55% 1.77% 6.32% 12.95% 1997 . . . . . . . 1,882,759 1.39% 0.33% 0.13% 1.85% 0.55% 0.12% 0.67% 2.52% ------------ Total . . . . . $ 5,001,501 3.71% 0.95% 0.50% 5.16% 3.81% 2.27% 6.08% 11.24% ============
DECEMBER 31, 1996 ----------------------------------------------------------------------------------------------- DEFAULTS DELINQUENCY ----------------------------- ------------------------------------ FORECLOSURES TOTAL CONTRACTUAL IN BANK- DELINQUENCY YEAR OF PRODUCTION 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 increase in the total percentage of 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, aging of the portfolio and an industry wide trend in increased bankruptcy filings. 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.
NINE MONTHS ENDED SEPTEMBER 30, 1997 ----------------------------------------- OWNED SERVICED TOTAL ------------ ---------- ---------- (DOLLARS IN THOUSANDS) Allowance for loan losses, beginning of period . . . . . . . $ 4,141 $ 73,102 $ 77,243 Provision for loan losses . . . . . . . . . . . . . . . . . . 2,956 40,785 43,741 Net loans charged off . . . . . . . . . . . . . . . . . . . . (3,379) (20,472) (23,851) Reserve reclassification . . . . . . . . . . . . . . . . . . 785 -- 785 ------------ ---------- ---------- Allowance for loan losses, end of period . . . . . . . . . . $ 4,503 $ 93,415 $ 97,918 ============ ========== ==========
14 16
NINE MONTHS ENDED SEPTEMBER 30, 1996 ---------------------------------------- OWNED SERVICED TOTAL ----------- --------- --------- (DOLLARS IN THOUSANDS) Allowance for loan losses, beginning of period . . . . . . . $ 6,484 $ 44,970 $ 51,454 Provision for loan losses . . . . . . . . . . . . . . . . . . (178) 30,362 30,184 Net loans charged off . . . . . . . . . . . . . . . . . . . . (3,482) (9,750) (13,232) Reserve reclassification . . . . . . . . . . . . . . . . . . 2,241 -- 2,241 ----------- --------- --------- Allowance for loan losses, end of period . . . . . . . . . . $ 5,065 $ 65,582 $ 70,647 =========== ========= =========
The following table provides pool factors and cumulative net losses, as a percentage of production, with respect to the Company's home-equity loans by year of production for the indicated years:
CUMULATIVE YEAR HOME-EQUITY NET LOSSES AS OF LOAN POOL % OF PRODUCTION PRODUCTION FACTOR (1) PRODUCTION ------------- --------------- ---------- -------------- (DOLLARS IN THOUSANDS) FIXED ----- 1993 $ 500,900 0.2806 1.77% 1994 $ 837,901 0.3808 1.74% 1995 $ 1,130,715 0.5204 0.79% 1996 $ 1,383,714 0.7813 0.05% 1997 $ 1,001,853 0.9639 0.00% ARM --- 1993 $ 38,968 0.2326 1.28% 1994 $ 70,920 0.1912 0.38% 1995 $ 410,822 0.4878 0.33% 1996 $ 860,744 0.7377 0.01% 1997 $ 943,967 0.9715 0.00%
(1) The Pool Factor is the percentage of the related year's production by type (fixed or ARM), expressed as a decimal, remaining outstanding at September 30, 1997. The above delinquency, default and loss experience represents the Company's experience for the periods reported. However, the delinquency, default and loss percentages may be affected by the increase in the size and aging 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, defaults and losses on the home equity loans and manufactured housing contracts could be higher than those theretofore experienced in the residential mortgage and manufactured housing lending industry in general. Adverse economic conditions (which may or may not affect real property or manufactured housing 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, defaults and losses. 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, defaults and losses in the future and no assurance can be given that the delinquency, default and loss experience presented in the tables will be indicative of such experience. LIQUIDITY AND CAPITAL RESOURCES The Company's principal cash requirements arise from loan originations, deposits to reserve accounts, repayments of debt borrowed under the Company's senior and subordinated notes and credit facilities, payments of operating and interest expenses, and income taxes related to loan sale transactions. The Company uses the 15 17 proceeds of its $800 million revolving credit facility (the "Credit Facility") as the primary source of funding of loan production pending sales in securitizations. The Company's borrowings are in turn repaid with proceeds received from selling such loans through securitizations. The Credit Facility is provided by a group of 22 banks, matures in April, 2000, and provides for revolving loans and letters of credit. Proceeds of the Credit Facility may be used for general corporate purposes, including the interim funding of loan originations, and to refinance existing debt. During the third quarter of 1997, the Credit Facility was primarily used to fund the origination of home equity loans and manufactured housing contracts. These borrowings were repaid upon the delivery of loans into the securitization transaction. Also during this quarter, a letter of credit in the maximum amount of $47 million was issued under the Credit Facility for the Company's account and was deposited in lieu of cash into the reserve account established in connection with the Company's third quarter home equity loan securitization transaction. In addition to the Credit Facility, the Company maintains two additional sources of financing for its home equity loan originations: a warehouse facility provided by the investment banker which acted as lead underwriter for the Company's third quarter home equity loan securitization (the "Investment Bank Warehouse"), and a warehouse facility provided by UCLIC (the "UCLIC Warehouse"). The Investment Bank Warehouse was directly related to the third 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 September 30, 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, initially provided for the purchase of up to $300 million in first mortgage residential loans and has a maturity of July, 1999. During the second quarter of 1997, the Company reduced the commitment under this facility to $150 million. The Company has the right for a limited time to repurchase certain loans which are eligible for securitization and as of September 30, 1997, $5.5 million in loans eligible for securitization were funded under this facility. The Company has issued senior unsecured notes of $100 million, $125 million and $100 million which mature in 1998, 1999 and 2004, respectively and in June, 1997 sold $150 million of unsecured subordinated notes maturing in 2005. 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 nine months of 1997 and 1996 reflects approximately $2.2 billion and $1.8 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 $2.1 billion and $1.7 billion in the first nine months of 1997 and 1996, respectively. In connection with the sale transactions in the secondary market, third-party surety bonds (except in the case of four 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). In the home equity loan securitization completed in the second quarter of 1997, the excess interest spread on the fixed rate loans included therein is utilized initially to cover current losses, and then to pay down the principal of the related pass-through certificates until a specified level of overcollateralization is 16 18 reached, and thus is unavailable to the Company until such time. At September 30, 1997, the amounts on deposit in such reserve accounts totaled $368.2 million, exclusive of the letter of credit issued under the Credit Facility in the amount of $47 million discussed above. 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. 17 19 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 September 30, 1997 and the related consolidated statements of income for the three months and nine months ended September 30, 1997 and 1996 and statements of cash flows for the nine months ended September 30, 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. 18 20 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 September 30, 1997 and the related consolidated statements of income for the three months and nine months ended September 30, 1997 and 1996 and statements of cash flows for the nine months ended September 30, 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 Corporation 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 October 30, 1997 19 21 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 20 22 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: October 31, 1997 By: /s/ J. TERRELL BROWN -------------------------------------- J. Terrell Brown Chairman and Chief Executive Officer Date: October 31, 1997 By: /s/ DALE E. REDMAN -------------------------------------- Dale E. Redman Executive Vice President and Chief Financial Officer 21 23 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
22 EX-11 2 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine months Ended September 30, September 30, --------------------------- -------------------------- 1997 1996 1997 1996 ------------ ---------- ------------ ---------- (in thousands, except per share amounts) Primary Earnings Per Share Income available to common shareholders: Income from continuing operations . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 62,184 Less: Loss from discontinued operations . . . . . . . . . -- -- -- (4,532) ------------ ---------- ------------ ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 57,652 ============ ========== ============ ========== Weighted average number of common and common equivalent shares: Average common shares outstanding . . . . . . . . . . . . . 27,979 27,955 27,985 27,890 Add: Dilutive effect of stock options after application of treasury stock method . . . . . . . 730 866 634 879 Dilutive effect of preferred stock after application of "if converted" method . . . . 3,230 3,230 3,230 3,230 ------------ ---------- ------------ ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,939 32,051 31,849 31,999 ============ ========== ============ ========== Earnings (loss) per share: Income from continuing operations . . . . . . . . . . . . . $ .85 $ .75 $ 2.23 $ 1.94 Loss from discontinued operations . . . . . . . . . . . . . -- -- -- (.14) ------------ ---------- ------------ ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .85 $ .75 $ 2.23 $ 1.80 ============ ========== ============ ========== Fully Diluted Earnings Per Share Income available to common shareholders: Income from continuing operations . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 62,184 Less: Loss from discontinued operations . . . . . . . . . -- -- -- (4,532) ------------ ---------- ------------ ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 57,652 ============ ========== ============ ========== Weighted average number of common and all dilutive contingent shares: Average common shares outstanding . . . . . . . . . . . . . 27,979 27,955 27,985 27,890 Add: Dilutive effect of stock options after application of treasury stock method . . . . . . . 797 867 792 912 Dilutive effect of preferred stock after application of "if converted" method . . . . 3,910 3,910 3,910 3,910 ------------ ---------- ------------ ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,686 32,732 32,687 32,712 ============ ========== ============ ========== Earnings (loss) per share: Income from continuing operations . . . . . . . . . . . . . $ .83 $ .74 $ 2.17 $ 1.90 Loss from discontinued operations . . . . . . . . . . . . . -- -- -- (.14) ------------ ---------- ------------ ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .83 $ .74 $ 2.17 $ 1.76 ============ ========== ============ ==========
23 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 September 30, 1997 and 1996, as indicated in our report dated October 30, 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 September 30, 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, 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 and Registration Statement No. 333-33347 on Form S-8 pertaining to the 1996 Long-Term Incentive Compensation Plan and the 1996 Non-Employee Director Stock Plan. 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 October 30, 1997 24 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 583 17,434 174,713 0 0 0 60,627 0 1,234,814 0 595,886 0 3,910 59,725 418,066 1,234,814 0 338,117 0 0 183,860 0 43,373 110,884 39,918 70,966 0 0 0 70,966 2.23 2.17
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