1
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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 June 30, 1994
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 office)
Registrant's telephone number, including area code (504) 924-6007
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 July 14, 1994 was 12,435,519, excluding 524,207 treasury
shares.
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2
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1994
PAGE
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months and six months ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Six months ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 5-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-21
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30,
1994 December 31
(Unaudited) 1993
----------- -----------
Assets
- - ------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 52,619 $ 45,530
Temporary investments - reserve accounts. . . . . . . . . . . . . . . . 56,192 27,672
Bonds and stocks - net
Available-for-sale (amortized cost at June 30, 1994, $939,747) 901,759
Held-to-maturity (fair value - $67,229 at June 30, 1994 and
$910,816 at December 31, 1993) . . . . . . . . . . . . . 67,010 879,301
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,498 26,698
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467,818 542,633
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . (19,165) (21,017)
Unearned loan charges . . . . . . . . . . . . . . . . . . . . (1,485) (1,982)
------------ -----------
Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . 447,168 519,634
Capitalized excess servicing income . . . . . . . . . . . . . . . . . . 149,052 113,192
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . 86,242 83,495
Due from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . 35,681 36,558
Accrued interest and accounts receivable . . . . . . . . . . . . . . . 32,496 30,266
Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,603 28,988
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,527 19,633
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . 10,215 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,383 6,577
------------ -----------
Total assets . . . . . . . . . . . . . . . . . . . . $ 1,923,445 $ 1,817,544
============ ===========
Liabilities and Stockholders' Equity
- - ------------------------------------
Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,363,382 $ 1,294,983
Notes payable:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,421 500
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000 155,000
Policy benefit reserves . . . . . . . . . . . . . . . . . . . . . . . . 122,089 125,340
Allowance for loss on loans serviced . . . . . . . . . . . . . . . . . 20,549 12,938
Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . . . 7,277 10,260
Repurchase agreement . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 30,000
Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . - 5,468
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,946 29,687
------------ -----------
Total liabilities . . . . . . . . . . . . . . . . . 1,763,664 1,664,176
------------ -----------
Stockholders' equity:
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 12,959,726 and 12,684,858 shares . . . . . . . . 25,919 25,370
Additional paid-in capital . . . . . . . . . . . . . . . . . . 81,373 76,312
Net unrealized loss on securities . . . . . . . . . . . . . . (24,691) -
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 85,919 59,988
Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . (8,739) (8,302)
------------ -----------
Total stockholders' equity . . . . . . . . . . . . . 159,781 153,368
------------ -----------
Total liabilities and stockholders' equity . . . . . $ 1,923,445 $ 1,817,544
============ ===========
See notes to consolidated financial statements.
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4
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
----------- ---------- ----------- ----------
Revenues:
Interest, charges and fees on loans . . . . . . . . $ 29,934 $ 24,456 $ 57,105 $ 44,534
Investment income . . . . . . . . . . . . . . . . . 20,750 19,195 39,192 37,021
Loan sale gains . . . . . . . . . . . . . . . . . . 20,792 12,963 43,346 22,845
Net insurance premiums . . . . . . . . . . . . . . . 13,171 8,508 25,152 18,695
Loan servicing income . . . . . . . . . . . . . . . 3,995 2,955 7,684 5,654
Investment gains (losses) . . . . . . . . . . . . . 159 (194) 99 68
----------- ---------- ----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . 88,801 67,883 172,578 128,817
----------- ---------- ----------- ----------
Expenses:
Interest on annuity policies . . . . . . . . . . . . 18,061 19,145 35,854 38,190
Personnel . . . . . . . . . . . . . . . . . . . . . 14,423 9,603 28,185 19,601
Insurance commissions . . . . . . . . . . . . . . . 12,519 7,089 23,704 14,374
Insurance benefits . . . . . . . . . . . . . . . . . 3,758 5,478 6,941 9,844
Loan loss provision . . . . . . . . . . . . . . . . 2,315 4,191 6,311 7,825
Interest . . . . . . . . . . . . . . . . . . . . . . 3,274 2,719 5,699 5,429
Other operating . . . . . . . . . . . . . . . . . . 12,061 9,957 22,302 22,977
----------- ---------- ----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . 66,411 58,182 128,996 118,240
----------- ---------- ----------- ----------
Income from continuing operations before income taxes . . 22,390 9,701 43,582 10,577
Provision for income taxes (benefit):
Current . . . . . . . . . . . . . . . . . . . . . . 8,955 5,782 17,601 5,219
Deferred . . . . . . . . . . . . . . . . . . . . . . (1,264) (2,458) (2,428) (1,588)
----------- ---------- ----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . 7,691 3,324 15,173 3,631
----------- ---------- ----------- ----------
Income from continuing operations . . . . . . . . . . . . 14,699 6,377 28,409 6,946
Loss from discontinued operations:
Loss from discontinued operations net of
applicable income tax (benefit) of $782 . . . . . - - - (1,519)
Loss on disposal of discontinued operations, including
estimated operating losses during phaseout (less
applicable income tax benefit of $8,326) . . . . . - - - (16,066)
----------- ---------- ----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . - - - (17,585)
----------- ---------- ----------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 14,699 $ 6,377 $ 28,409 $ (10,639)
=========== ========== =========== ==========
Per share data:
Income from continuing operations . . . . . . . . . . . . $ 1.12 $ .71 $ 2.16 $ .77
Income (loss) from discontinued operations . . . . . . . - - - (1.95)
----------- ---------- ----------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 1.12 $ .71 $ 2.16 $ (1.18)
=========== ========== =========== ==========
See notes to consolidated financial statements.
3
5
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended
June 30
1994 1993
----------- -----------
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . $ 28,409 $ 6,946
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operating activities:
Increase in deferred policy acquisition costs . . . . . . . . . . (2,746) (3,390)
Decrease in due from reinsurers . . . . . . . . . . . . . . . . . 877 490
Decrease in policy loans . . . . . . . . . . . . . . . . . . . . 107 867
Increase in accrued interest and accounts receivable . . . . . . (2,230) (1,431)
Increase in other assets . . . . . . . . . . . . . . . . . . . . (4,237) (1,457)
Decrease in policy benefit reserves . . . . . . . . . . . . . . . (2,078) (1,006)
Interest on annuity policies . . . . . . . . . . . . . . . . . . 35,854 38,190
Decrease in unearned premium reserves . . . . . . . . . . . . . . (2,983) (2,343)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (2,428) (1,587)
Increase (decrease) in other liabilities . . . . . . . . . . . . 3,218 5,865
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . 6,311 7,825
Amortization and depreciation . . . . . . . . . . . . . . . . . . 1,469 1,869
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . (43,346) (22,845)
Amortization of prior loan sale gains . . . . . . . . . . . . . . 17,358 7,753
Investment gains . . . . . . . . . . . . . . . . . . . . . . . . (99) (68)
----------- -----------
Net cash provided by continuing operating activities . . . . . 33,456 35,678
----------- -----------
Cash flows from discontinued operating activities . . . . . . . . . . . . . . . . . - (63)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . 460,359 168,185
Principal collected on loans . . . . . . . . . . . . . . . . . . . . . . 39,640 54,445
Loan originations and acquisitions . . . . . . . . . . . . . . . . . . . (436,103) (229,800)
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . . . . (28,520) (6,056)
Proceeds from sales of investments . . . . . . . . . . . . . . . . . . . 7,459 8,438
Proceeds from maturities of investments . . . . . . . . . . . . . . . . 52,061 36,101
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . (185,072) (137,647)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (2,158) (70)
----------- -----------
Net cash used by investing activities . . . . . . . . . . . . . (92,334) (106,404)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in revolving credit debt . . . . . . . . . . . . . . 30,000 (25,000)
Decrease (increase) in debt with maturities of three months or less . . . 1,300 (600)
Decrease in repurchase agreement . . . . . . . . . . . . . . . . . . . . (20,000)
Increase (decrease) in long-term debt . . . . . . . . . . . . . . . . . . 621 (187)
Deposits received from annuities and interest sensitive products . . . . 116,322 120,028
Increase in managed cash overdraft . . . . . . . . . . . . . . . . . . . 20,069
Payments on annuities and interest sensitive products . . . . . . . . . . (84,950) (57,880)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,478) (1,362)
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . . . 4,545 20,000
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . 538 14
----------- -----------
Net cash provided by financing activities . . . . . . . . . . . 65,967 55,013
----------- -----------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . 7,089 (15,776)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . 45,530 54,707
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $ 52,619 $ 38,931
=========== ===========
See notes to consolidated financial statements.
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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, as amended, to the United
States Securities and Exchange Commission (Form 10-K) for the year
ended December 31, 1993.
The consolidated results of operations for the six months ended June
30, 1994 and 1993 are not necessarily indicative of the results to be
expected for the full year. Certain 1993 amounts have been
reclassified to conform with the current year presentations. Such
reclassifications had no effect on net income.
2. DISCONTINUED OPERATIONS.
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As a result of this decision, the
operations of FMC have been classified as discontinued operations,
and, accordingly, the consolidated financial statements and the
related notes of the Company segregate continuing and discontinued
operations. In connection with the decision to dispose of FMC, the
Company recorded a $17.6 million after tax loss in its financial
statements as of and for the quarter ended March 31, 1993, reflecting
the operating loss of FMC for the quarter ended March 31, 1993 of
$1.5 million, net of tax benefit and the estimated loss from disposal
of FMC of $16.1 million, net of tax benefit. The Company has not
reflected operating losses incurred by FMC subsequent to that date in
the Company's financial statements.
As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December
21, 1993, the institutional lenders under FMC's primary credit
facility (the "FMC Institutional Lenders") filed a petition in the
U.S. bankruptcy court. FMC, as debtor in possession in the
bankruptcy proceeding, filed a plan of liquidation providing for the
disposal of FMC's remaining assets and distributions to FMC's
creditors. In addition, FMC and the Company have executed, subject
to the approval of the bankruptcy court after a hearing thereon, a
settlement agreement relating to payments between FMC and the Company
in connection with Federal income tax benefits resulting from FMC's
losses and to certain prior intercompany transactions between FMC and
the Company. Under the terms of the proposed settlement agreement,
the Company would make a net cash payment of $1.1 million to FMC,
which amount has been previously recorded by the Company in prior
periods in its financial statements, and the Company and FMC would
mutually release each other from all claims between them. The FMC
Institutional Lenders have also filed a plan of liquidation for FMC
and allege therein potential claims of FMC against the Company,
including the alleged failure by the Company to remit all sums due
FMC with regard to Federal income taxes estimated by them to range
from $2.1 million to $29 million. Management of the Company believes
that its computation related to Federal income taxes is proper and
that no additional amount is owed by the Company to FMC in this
regard or in connection with prior intercompany transactions.
FMC is in payment default under its primary credit facility with the
FMC Institutional Lenders and the outstanding principal balance as of
June 30, 1994 of approximately $43.7 million is due. The Company has
not guaranteed any debt of FMC and believes, based upon advice of its
counsel, that it has no responsibility for the obligations of FMC
under such credit facility or (excluding potential consequences of
the bankruptcy filing on certain prior intercompany transactions or
potential additional payment for tax benefits as discussed above) for
any other liabilities to FMC's lenders.
5
7
3. CASH PAID FOR INTEREST AND INCOME TAXES.
During the six months ended June 30, 1994 and 1993, the Company paid
interest on notes payable in the amount of $5.7 million and $5.4
million and income taxes in the amount of $22.3 million and $1.9
million, respectively.
4. BONDS AND STOCKS - NET.
During the first quarter of 1994, the Company implemented the
provisions of Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 115 ("SFAS 115"), which revised
the method of accounting for certain of the Company's investments.
Prior to adoption of SFAS 115, the Company reported its investments
in fixed income investments at amortized cost, adjusted for declines
in value considered to be other than temporary. SFAS 115 requires
the classification of securities in one of three categories:
"available-for-sale", "held-to-maturity" or "trading securities".
Securities classified as held-to-maturity are carried at amortized
cost, whereas securities classified as trading securities or
available-for-sale are recorded at market value. Effective with the
adoption of SFAS 115, the Company determined the appropriate
classification of its investments and, if necessary, adjusted the
carrying value of such securities accordingly as if the unrealized
gains or losses had been realized. The adjustment, net of applicable
income taxes, for investments classified as available-for-sale is
recorded in "Net unrealized loss on securities" and is included in
stockholders' equity.
At June 30, 1994, the Company's portfolio of bonds and stocks
consisted of the following (in thousands):
Amortized Unrealized Unrealized
Cost Gains Losses Market
------------------------------------------------------------------------------------------------
Available-for-sale
Debt securities
Corporate . . . . . . . . . . . $ 246,383 $ 2,068 $ 7,221 $ 241,230
U.S.Treasury . . . . . . . . . . 10,719 153 91 10,781
Mortgage-backed . . . . . . . . 663,010 560 33,418 630,152
Foreign governments . . . . . . 18,477 612 376 18,713
Other . . . . . . . . . . . . . 425 28 - 453
---------- --------- --------- ----------
Total . . . . . . . . . . . 939,014 3,421 41,106 901,329
---------- --------- --------- ----------
Equity securities . . . . . . . . 733 48 351 430
---------- --------- --------- ----------
Total . . . . . . . . . . . $ 939,747 $ 3,469 $ 41,457 $ 901,759
========== ========= ========= ==========
Held-to-maturity
Debt securities
Corporate . . . . . . . . . . . $ 11,686 $ 586 $ 12,272
U.S.Treasury . . . . . . . . . . 4,748 40 $ 146 4,642
Mortgage-backed . . . . . . . . 50,426 - 266 50,160
Other . . . . . . . . . . . . . 150 5 - 155
---------- --------- ---------- ----------
Total . . . . . . . . . . . $ 67,010 $ 631 $ 412 $ 67,229
========== ========= ========== ==========
Other
Investment in limited
partnership . . . . . . . . . $ 25,498 $ 25,498
========== ==========
6
8
Net unrealized losses on securities included in stockholders' equity
at June 30, 1994 is as follows (in thousands):
Gross unrealized gains . . . . . $ 3,469
Gross unrealized losses . . . . (41,457)
Deferred income taxes . . . . . 13,297
---------
Total . . . . . . . . . . . $ (24,691)
=========
During the first six months of 1994, net realized investment gains of
approximately $.1 million resulted from investment gains of $.4
million offset by investment losses of $.3 million.
5. OTHER LIABILITIES.
At June 30, 1994, other liabilities included approximately $13.7
million representing a managed cash overdraft in the book balances of
the Company's primary disbursement accounts.
6. SHAREHOLDER RIGHTS PLAN.
On July 27, 1994, the Board of Directors authorized the redemption of
the rights under the rights plan of the Company adopted in 1989 (the
"1989 Rights Plan") and approved a new rights plan (the "1994 Rights
Plan"). In connection with the redemption, the rights under the 1989
Rights Plan (the "1989 Rights") will be redeemed at a price of
$.0039526 per 1989 Right with the aggregate redemption price payable
to each holder of the l989 Rights to be rounded up to the nearest
$.01. In approving the 1994 Rights Plan, the Board of Directors
declared a dividend distribution of one preferred share purchase
right for each outstanding share of the Company's Common Stock. The
rights under the 1994 Rights Plan will become exercisable only upon
the occurrence of certain events as specified therein.
7. CONTINGENCIES.
A recent federal appeals court decision held, in part, that a lender
improperly disclosed the collection of the Florida state intangible
tax from the borrower, thereby subjecting the loan to rescission
under the Federal Truth-in-Lending Act (the "TILA") by the borrower
for three years after it was made. Subsequent to the court's initial
decision and prior to its refusal to reconsider its decision, the
Florida legislature amended the language of the intangible tax to
clarify the legislature's previous intention that the intangible tax
be disclosed for purposes of the TILA in the manner that had been
followed by most lenders in Florida, including the Company. Although
the Florida legislature intended this legislation to apply
retroactively, no judicial determination has yet been made as to the
retroactive effect of this legislation on loans originated prior to
its effective date. This court decision may also apply to a similar
intangible tax imposed by other states. To its knowledge, no claims
have been filed against the Company under this recent court decision
and no notice of a breach of a representation has been received under
the Company's loan sale agreements requesting it to repurchase, cure
or substitute other loans for the loans sold. If a substantial number
of loans are rescinded or required to be repurchased, the Company's
financial statements and operations will be materially adversely
affected. As the financial impact, if any, of this contingency
cannot presently be reasonably estimated, the Company has made no
accrual therefor.
8. ACCOUNTING STANDARDS.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114 ("SFAS 114") which addresses the accounting by
creditors for impairment of loans and specifies how allowances for
credit losses related to certain loans should be determined. SFAS
114 also addresses the accounting by creditors for all loans that are
restructured in a troubled debt restructuring involving modification
of terms of a receivable. SFAS 114 is effective for financial
statements for fiscal years beginning after December 15, 1994. The
Company is reviewing the provisions of this pronouncement but has not
yet determined the effect of its implementation on the Company's
financial condition or results of operations.
7
9
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.
OVERVIEW
The table below sets forth income from continuing operations before
income taxes for each of the Company's business segments and certain home
equity loan data for the indicated periods:
Six Months Ended June 30,
------------------------------
1994 1993
--------- -----------
(dollars in thousands)
Mortgage operations
UC Lending . . . . . . . . . . . . . . . . . . $ 41,777 $ 13,613
Insurance operations
UC Life . . . . . . . . . . . . . . . . . . . . 4,504 (1,370)
UG Title . . . . . . . . . . . . . . . . . . . (3) 579
Other operations . . . . . . . . . . . . . . . . (62) (5)
Corporate and eliminations . . . . . . . . . . . (2,634) (2,240)
--------- -----------
Total . . . . . . . . . . . . . . . . . . . . $ 43,582 $ 10,577
========= ===========
Home equity loan originations . . . . . . . . . . $ 425,446 $ 209,758
Home equity loans sold . . . . . . . . . . . . . 460,359 167,889
Interest spread retained on home equity
loans sold . . . . . . . . . . . . . . . . . . 4.88% 6.26%
MORTGAGE OPERATIONS.
In 1993, the Company began selling its home equity loans in public
securitization transactions through its own shelf registration statement.
During the second quarter of 1994, an increase in the size of this shelf
registration statement to $3 billion was declared effective by the U.S.
Securities and Exchange Commission. The Company believes loan securitizations
improve its access to funding and thereby provides a distribution outlet
sufficient to meet the Company's expanding home equity loan production.
Mortgage operations are conducted through United Companies Lending Corporation
("UC Lending"). Home equity loan production for the first six months of 1994
increased to $425 million compared to $210 million for the same period of 1993.
The Company's strategy for increasing home equity loan production includes
continued geographic expansion, introduction of new loan products and wholesale
loan originations. During the first six months of 1994, the Company opened
offices in ten additional states thereby expanding its retail operations to 33
states. In addition, brokers and correspondents were added to the Company's
wholesale loan network, which currently has over 650 representatives in 18
states.
Income from operations before income taxes of the mortgage division
for the six months ended June 30, 1994 increased approximately $28.2 million
compared to the same period of 1993, primarily as the result of a $292 million
increase in the amount of loans sold and an increase in gains and fees
recognized at the time of sale. As the result primarily of increases in the
level of market interest rates, the interest spread retained on home equity
loans sold declined to 4.88% in the first six months of 1994 from 6.26% during
the same period of 1993.
8
10
INSURANCE OPERATIONS.
Life and annuity products. Income from operations before income
taxes of United Companies Life Insurance Company ("UC Life") for the first six
months of 1994 increased approximately $5.9 million compared to the same period
of 1993 primarily as the result of the positive effect of an increase in the
interest margin on the Company's annuity products, which rose from 2.04% for
the first six months of 1993 to 2.68% for the same period of 1994. In
addition, an improvement in the market for commercial real estate resulted in a
$.4 million reduction in the provision for losses on commercial real estate
mortgage loans in the first six months of 1994 compared to the same period of
1993. Income from operations before income taxes in the first six months of
1993 were reduced by approximately $1.4 million as the result of an estimated
loss in connection with the termination of an agreement with a third-party
administrator of credit life insurance underwritten by UC Life.
Title insurance products. The Company's title insurance unit,
United General Title Insurance Company ("UG Title"), increased its premium
volume approximately $11.2 million compared to the first six months of 1993.
Income from operations before income taxes of UG Title during the first six
months of 1994 was adversely impacted by approximately $.9 million due to
losses associated with a loan broker in California. UG Title underwrites title
insurance in 29 states, operating through a network of approximately 785
independent agents.
RESULTS OF OPERATIONS
The Company's financial statements present Foster Mortgage Corporation
as discontinued operations (see note 2 to consolidated financial statements).
Discussed below are results of continuing operations for the periods presented
and certain financial data by business segment for such periods.
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
The following table sets forth certain financial data for the periods
indicated.
Six Months Ended June 30,
------------------------------
1994 1993
---------- -----------
(in thousands)
Total revenues . . . . . . . . . . . . . . . . . $ 172,578 $ 128,817
Total expenses . . . . . . . . . . . . . . . . . 128,996 118,240
Income from continuing operations
before income taxes . . . . . . . . . . . . . 43,582 10,577
Income from continuing operations . . . . . . . . 28,409 6,946
9
11
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the six months ended June 30, 1994 and
1993.
Six Months Ended June 30,
----------------------------
1994 1993
--------- ---------
(in thousands)
Interest, charges and fees on loans . . . . . . . $ 57,105 $ 44,534
Investment income . . . . . . . . . . . . . . . . 39,192 37,021
Loan sale gains . . . . . . . . . . . . . . . . . 43,346 22,845
Net insurance premiums . . . . . . . . . . . . . . 25,152 18,695
Loan servicing income . . . . . . . . . . . . . . 7,684 5,654
Investment gains . . . . . . . . . . . . . . . . . 99 68
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ 172,578 $ 128,817
========= =========
Interest, charges and fees on loans increased $12.6 million for the
first six months of 1994. This line item includes interest on mortgage loans
owned by the mortgage and insurance divisions and loan origination fees earned
by the mortgage division. Loan origination fees in excess of direct
origination costs on loans held by the Company are recognized over the life of
the loan or earlier at the time of sale on loans sold to third parties. During
the six months ended June 30, 1994 and 1993, the Company sold approximately
$460 million and $168 million, respectively, in home equity loans and
recognized approximately $15.6 million and $7.2 million, respectively, in net
loan origination fees in connection with these sales. Other loan income
includes primarily prepayment fees, late charges and insurance commissions.
The following table presents the composition of interest, charges and
fees on loans for the periods indicated.
Six Months Ended June 30,
---------------------------
1994 1993
-------- --------
(in thousands)
Mortgage loan interest . . . . . . . . . . . . . . $ 25,085 $ 26,070
Loan origination fees . . . . . . . . . . . . . . 27,210 14,523
Other loan income . . . . . . . . . . . . . . . . 4,810 3,941
-------- --------
Total interest, charges and fees on loans . . . $ 57,105 $ 44,534
======== ========
The Company estimates that non-accrual loans reduced mortgage loan
interest for the first six months of 1994 and 1993 by approximately $5.1
million and $4.7 million, respectively. During the six months ended June 30,
1994 the average amount of non- accrual loans owned by the Company was $28.2
million compared to approximately $33.5 million during the same period of 1993.
In addition, the average balance of loans serviced for third parties which were
on a non-accrual basis or in foreclosure was $52.4 million and $41.2 million
during the first six months of 1994 and 1993, respectively, representing 4.4%
and 4.5%, respectively, of the average amount of loans serviced for third
parties. The Company is generally obligated to advance interest on delinquent
loans to the investor or holder of the mortgage-backed security, as the case
may be, at the pass-through rate until satisfaction of the note, liquidation of
the collateral or charge off of the delinquent loan. At June 30, 1994, the
Company owned approximately $9.8 million of commercial loans which were on an
accrual status, but which the Company considers as potential problem loans,
compared to $11.6 million at June 30, 1993. The Company evaluates each of
these commercial loans to estimate its risk of loss in the investment and
provides for such loss through a charge to earnings.
Investment income totaled $39.2 million on average investments of
approximately $1.0 billion for the first six months of 1994 compared to
investment income of $37.0 million on average investments of approximately $833
million during the same period of 1993. The impact on revenue of the increased
asset base in 1994 was offset by lower weighted average investment yields than
experienced during the first six months of 1993. At June 30, 1994
10
12
the amortized cost of the fixed income portfolio totaled $1.0 billion and was
comprised principally of $713 million in investment grade mortgage-backed
securities and $284 million in investment grade bonds. At June 30, 1994, the
weighted average rating of the publicly traded bond portfolio according to
nationally recognized rating agencies was "AA".
Net insurance premiums increased $6.5 million for the first six months
of 1994 compared with the same period of 1993. Net insurance premiums reflect
revenues associated primarily with sales of title insurance policies
underwritten by UG Title and credit insurance underwritten by UC Life. The
increase in premium income is primarily the result of an increase of $11.2
million in title insurance premiums offset by a reduction in premiums earned on
credit insurance products reflecting the impact of UC Life's decision to
discontinue sales of credit insurance products.
Loan sale gains recognized by the Company's mortgage unit increased
$20.7 million during the first six months of 1994 over the same period in 1993.
Loan sale gains approximate the present value over the estimated lives of the
loans of the excess of the contractual rates on the loans sold, over the sum of
the pass through rate paid to the buyer, a normal servicing fee, a trustee fee,
a surety bond fee, if any, in mortgage-backed securitization transactions, and
an estimate of future credit losses. The increase in the amount of loan sale
gains was due primarily to a $292 million increase in the amount of loans sold
which offset a decrease in excess servicing income retained by the Company
(i.e., the stated interest rate on the loan less the pass through rate and the
normal servicing fee and other applicable recurring fees). Interest spread
retained by the Company on loans sold includes the normal servicing fee. The
following table presents information regarding home equity loan sale
transactions for the periods indicated.
Six Months Ended June 30,
-----------------------------
1994 1993
---------- ----------
(dollars in thousands)
Home equity loans sold . . . . . . . . . . . . . . $ 460,359 $ 167,889
Average coupon on home equity loans sold . . . . . 11.51% 12.59%
Interest spread retained on home equity loans sold 4.88% 6.26%
Home equity loan sale gains . . . . . . . . . . . 43,346 22,625
Historically, the Company originated and sold portfolios of home equity
loans on a whole loan basis (or participation therein) to institutional
investors or government-sponsored mortgage agencies or conduits and, during
1992, with the participation of one of these investors, securitized and
publicly sold home equity loan pass-through certificates. In the second
quarter of 1993, the Company began selling its loans in public securitization
transactions through its own shelf registration statement. In comparison to
the first six months of 1993, market interest rates were higher during the
first half of 1994, and, as a result the Company experienced a decrease in the
interest spread retained on home equity loans sold from 6.26% in the six months
ended June 30, 1993, to 4.88% in the six months ended June 30, 1994.
Fluctuations in and the level of market interest rates will impact the interest
spread retained by the Company on loans sold, 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 strategic actions can be 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 action will generally lag behind the impact of market rate
fluctuations. As the result of recent increases in the level of interest
rates, the interest spread retained by the Company on loan sales during the
second quarter of 1994 declined to 4.33% from 5.61% retained on loan sales
during the first quarter of 1994. If the current level of market interest
rates is sustained or if such rates continue to increase during the third
quarter of 1994, the interest spread retained on home equity loans sold during
the third quarter of 1994 may be narrower than that received on sales during
the three months ended June 30, 1994.
Loan servicing income increased $2.0 million for the six months ending
June 30, 1994 compared to the same period of 1993, reflecting the impact of an
increased amount of home equity loans serviced for third parties offset
11
13
by an increase in the amortization of prior loan sale gains. The following
table reflects the components of loan servicing income for the periods
indicated.
Six Months Ended June 30,
----------------------------
1994 1993
--------- ---------
(in thousands)
Servicing fees earned . . . . . . . . . . . . . . $ 25,042 $ 13,407
Amortization of loan sale gains . . . . . . . . . (17,358) (7,753)
-------- --------
Loan servicing income . . . . . . . . . . . . . . $ 7,684 $ 5,654
======== ========
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
Six Months Ended June 30,
----------------------------
1994 1993
--------- ---------
(in thousands)
Interest on annuity policies . . . . . . . . . . . $ 35,854 $ 38,190
Personnel . . . . . . . . . . . . . . . . . . . . 28,185 19,601
Insurance commissions . . . . . . . . . . . . . . 23,704 14,374
Insurance benefits . . . . . . . . . . . . . . . . 6,941 9,844
Loan loss provision . . . . . . . . . . . . . . . 6,311 7,825
Interest . . . . . . . . . . . . . . . . . . . . . 5,699 5,429
Other operating . . . . . . . . . . . . . . . . . 22,302 22,977
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ 128,996 $ 118,240
========= =========
Interest on annuity policies declined $2.3 million for the first six
months of 1994 when compared to the same period of 1993 as the result of a
reduction in the average interest crediting rate on the Company's annuity
policies offset by the impact of an increase in annuity reserves. Average
annuity reserves were $1.3 billion during the first six months of 1994, an
increase of approximately $112 million from the same period of 1993.
Personnel expenses increased approximately $8.6 million primarily
because of costs associated with the geographic expansion of the Company's
mortgage subsidiary and an increase in the cost of the Company's employee
benefit and incentive plans.
Insurance commissions for the first six months of 1994 increased by
approximately $9.3 million over commissions for the same period of 1993
primarily as the result of commissions associated with the increase in title
policies written. Commissions paid on issuance of the Company's single premium
deferred annuity products are generally capitalized as deferred policy
acquisition costs ("DPAC") and amortized over the estimated life of the policy.
During the six months ended June 30, 1994, the Company capitalized
approximately $9.4 million in commissions paid on sales of annuities compared
to $7.9 million during the same period of 1993. Amortization of commission
expense on annuities capitalized in prior periods was $4.4 million during the
six months ended June 30, 1994, compared to $2.8 million during the same period
of 1993.
The Company's loan loss provision was $6.3 million and $7.8 million for
the six months ended June 30, 1994 and 1993, respectively. The decrease in the
provision resulted primarily from a $.4 million decrease by UC Life in the
provision for losses on commercial real estate mortgage loans and a decrease of
$1.1 million in the provision for losses on home equity loans due to a
reduction in the amount of property placed into foreclosure and a lower
incidence of loss per property.
12
14
Interest expense for the first six months of 1994 increased
approximately $.3 million from the same period of 1993 primarily as the result
of an increase in the weighted average interest rate charged on the debt offset
by a decrease of $14 million in the average amount of debt outstanding.
Other operating expenses for the six months ended June 30, 1994
declined approximately $.7 million when compared to the same period of 1993.
Other operating expenses in the second quarter of 1994 included a $.9 million
charge by UG Title in connection with losses associated with a loan broker in
California while other operating expenses in the first six months of 1993
included a $2.3 million accrual for the estimated cost of a legal settlement
and $1.4 million in estimated losses in connection with termination of a third
party administrative contract for credit insurance.
FINANCIAL INFORMATION ON BUSINESS SEGMENTS
The following tables reflect income from continuing operations before
income taxes for each of the Company's business segments for the six months
ended June 30, 1994 and 1993, respectively.
Six months ended June 30, 1994
------------------------------
Corporate,
Life Title Other Operations,
Mortgage Insurance Insurance & Eliminations Total
-------- --------- ---------- ----------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans $ 32,385 $ 23,056 $ 1,664 $ 57,105
Loan sale gains . . . . . . . . . . 43,346 - 43,346
Investment income . . . . . . . . . 770 38,788 $ 361 (727) 39,192
Net insurance premiums . . . . . . 5,703 19,449 25,152
Loan servicing income . . . . . . . 10,077 (136) (2,257) 7,684
Investment gains (losses) . . . . . 99 99
--------- --------- ---------- --------- ----------
Total . . . . . . . . . . . . . 86,578 67,510 19,810 (1,320) 172,578
--------- --------- ---------- --------- ----------
Expenses:
Interest on annuity policies . . . 35,854 35,854
Personnel . . . . . . . . . . . . . 21,989 2,509 536 3,151 28,185
Insurance commissions . . . . . . . 6,620 16,761 323 23,704
Loan loss provision . . . . . . . . 4,348 1,963 6,311
Insurance benefits . . . . . . . . 6,487 454 6,941
Interest . . . . . . . . . . . . . 2,608 856 2,235 5,699
Other operating . . . . . . . . . . 15,856 8,717 2,062 (4,333) 22,302
--------- --------- ---------- --------- ----------
Total . . . . . . . . . . . . . 44,801 63,006 19,813 1,376 128,996
--------- --------- ---------- --------- ----------
Income (loss) from continuing operations
before income taxes . . . . . . . $ 41,777 $ 4,504 $ (3) $ (2,696) $ 43,582
========= ========= ========== ========= ==========
13
15
Six months ended June 30, 1993
------------------------------
Corporate,
Life Title Other Operations,
Mortgage Insurance Insurance & Eliminations Total
-------- --------- --------- ----------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans $ 18,362 $ 22,787 $ 3,385 $ 44,534
Investment income . . . . . . . . . 400 36,671 $ 267 (317) 37,021
Net insurance premiums . . . . . . 10,493 8,202 18,695
Loan sale gains . . . . . . . . . . 22,625 220 22,845
Loan servicing income . . . . . . . 8,470 124 (2,940) 5,654
Investment gains (losses) . . . . . 72 (4) 68
----------- ----------- ------------ ----------- -----------
Total . . . . . . . . . . . . . 49,857 70,147 8,469 344 128,817
----------- ----------- ------------ ----------- -----------
Expenses:
Interest on annuity policies . . . 38,190 38,190
Personnel . . . . . . . . . . . . . 14,837 2,065 336 2,363 19,601
Insurance commissions . . . . . . . 7,188 6,780 406 14,374
Insurance benefits . . . . . . . . 9,641 203 9,844
Loan loss provision . . . . . . . . 5,430 2,395 7,825
Interest . . . . . . . . . . . . . 2,087 467 2,875 5,429
Other operating . . . . . . . . . . 13,890 11,571 571 (3,055) 22,977
----------- ----------- ------------ ----------- -----------
Total . . . . . . . . . . . . . 36,244 71,517 7,890 2,589 118,240
----------- ----------- ------------ ----------- -----------
Income (loss) from continuing operations
before income taxes . . . . . . . $ 13,613 $ (1,370) $ 579 $ (2,245) $ 10,577
=========== =========== ============ =========== ===========
MORTGAGE OPERATIONS
The following tables reflect results of operations and selected
financial data for the indicated periods for the Company's mortgage operations.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
(in thousands)
Revenues:
Loan sale gains . . . . . . . . . . . . $ 20,792 $ 12,963 $ 43,346 $ 22,625
Loan fees . . . . . . . . . . . . . . . 14,745 8,564 27,210 14,523
Loan servicing income . . . . . . . . . 5,080 4,450 10,077 8,470
Other . . . . . . . . . . . . . . . . . 3,503 2,316 5,945 4,239
---------- -------- --------- ----------
Total . . . . . . . . . . . . . 44,120 28,293 86,578 49,857
---------- -------- --------- ----------
Expenses . . . . . . . . . . . . . . . 22,962 16,905 44,801 36,244
---------- -------- --------- ----------
Income from operations before taxes . . $ 21,158 $ 11,388 $ 41,777 $ 13,613
========== ======== ========= ==========
14
16
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------------
1994 1993 1994 1993
--------- -------- ----------- ---------
(dollars in thousands)
Selected Mortgage Financial Data
Home Equity Originations:
Loan originations . . . . . . . . . . . . . $ 228,117 $ 120,363 $ 425,446 $ 209,758
Number of loans originated . . . . . . . . 5,498 3,153 10,035 5,786
Average loan origination amount . . . . . . $ 41 $ 38 $ 42 $ 36
Home Equity Loan Sales:
Loan sales . . . . . . . . . . . . . . . . $ 262,027 $ 101,017 $ 460,359 $ 167,889
Loan sale gains . . . . . . . . . . . . . . 20,792 12,963 43,346 22,625
Interest spread retained on loans sold . . 4.33% 6.06% 4.88% 6.26%
Loan Portfolio - Period-end:
Total home equity portfolio (period end). . $ 1,388,876 $ 916,629
Total loan portfolio (period end) . . . . . 1,777,022 1,412,031
Loans 30+ days past due (period end) . . . 117,400 103,916
INSURANCE RESULTS OF OPERATIONS
The following tables reflect results of operations and selected
financial data for the respective periods for the Company's insurance
operations.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
(dollars in thousands)
Revenues:
Investment income . . . . . . . . . . . $ 20,616 $ 19,052 $ 39,149 $ 36,938
Interest on loans . . . . . . . . . . . 11,586 11,734 23,056 22,787
Title insurance premiums . . . . . . . 10,536 4,279 19,449 8,202
Life insurance premiums . . . . . . . . 2,635 4,229 5,703 10,493
Other . . . . . . . . . . . . . . . . . (41) (185) (37) 196
----------- ----------- ------------ -----------
Total . . . . . . . . . . . . . 45,332 39,109 87,320 78,616
----------- ----------- ------------ -----------
Expenses . . . . . . . . . . . . . . . 42,769 39,667 82,819 79,407
----------- ----------- ------------ -----------
Income (loss) from operations
before income taxes . . . . . . . . $ 2,563 $ (558) $ 4,501 $ (791)
=========== =========== ============ ===========
Selected Insurance Financial Data
Annuities:
Annuity sales . . . . . . . . . . . . . $ 71,293 $ 61,679 $ 116,322 $ 120,028
Annuity reserves . . . . . . . . . . . 1,363,382 1,246,758 1,363,382 1,246,758
Average interest margin on annuities . 2.73% 2.24% 2.68% 2.04%
ASSET QUALITY AND RESERVES
The quality of the Company's loan and bond portfolios and of the loan
portfolio 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, reductions in collateral values and declines in the value of
investments resulting from a reduced capacity of issuers to repay the bonds.
15
17
Loans. Substantially all of the loans owned by the Company were
originated by UC Lending through its branch (i.e, retail) network or wholesale
loan program. The Company's loan portfolio at June 30, 1994 was comprised
primarily of $254 million in home equity loans and $173 million in commercial
loans. In connection with its origination of home equity loans, the Company
relies on thorough underwriting and credit review procedures by UC Lending, a
mortgage on the borrower's residence and, in some cases, other security, and,
in its retail origination program, close personal contact with borrowers
through its branch office system to manage credit risk on its loans. In
addition to servicing the loans owned by the Company, UC Lending serviced
approximately $1.4 billion in loans for third parties at June 30, 1994. The
Company is subject to risk of loss on loans in its owned portfolio and for
loans sold under loan sale agreements that provide limited recourse against the
Company or subordination of cash and excess interest spread relating to the
sold loans by the Company. Such recourse and subordination relate to credit
losses which may occur after the sale of the loans and continues until the
earlier of the payment in full of the loans or termination of the agreement
pursuant to which the loans were sold. The Company is also obligated to
repurchase or replace loans 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. 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. For loans sold with limited
recourse or subordination of certain cash and excess interest spread relating
to the sold loans, the Company reduces the amount of gain recognized on the
sale by the estimated amount of credit losses, subject to the recourse
limitation or maximum subordination amount of the related loan sale agreements,
and records such amount on its balance sheet in the allowance for loss on loans
serviced. At June 30, 1994, the maximum recourse associated with sales of home
equity loans according to terms of the loan sale agreements totaled
approximately $195.5 million, of which amount approximately $179.6 million
relates to the subordinated cash and excess interest spread. However, the
Company's estimate of its losses was approximately $20.5 million at June 30,
1994, and is recorded in the Company's allowance for loss on loans serviced.
Should credit losses on loans sold with limited recourse or subordination of
certain cash and excess interest spread materially exceed the Company's
estimates for such losses, such consequence will have a material adverse impact
on the Company's operations.
At June 30, 1994, the contractual balance of loans serviced by UC
Lending was approximately $1.8 billion comprised of approximately $.4 million
serviced for the Company and approximately $1.4 billion serviced for investors.
The geographic distribution of this portfolio by state and by loan category was
as follows at June 30, 1994:
Percent
State Home Equity Commercial Conventional Consumer Total of Total
----- ----------- ---------- ------------ -------- ------- --------
(dollars in thousands)
Florida . . . . . . . . $ 187,750 $ 86,815 $ 9,499 $ 18 $ 284,082 16.0%
Louisiana . . . . . . . . 134,153 13,192 41,058 21 188,424 10.6%
Ohio . . . . . . . . . . 175,585 6,112 1,671 183,368 10.3%
Tennessee . . . . . . . . 108,966 19,998 5,312 7 134,283 7.6%
Alabama . . . . . . . . . 111,305 12,536 5,340 3 129,184 7.3%
North Carolina . . . . . 119,099 15,906 1,877 136,882 7.7%
Georgia . . . . . . . . . 73,022 47,097 2,651 11 122,781 6.9%
Virginia . . . . . . . . 50,543 23,414 2,766 76,723 4.3%
Indiana . . . . . . . . . 68,810 3,469 1,206 73,485 4.1%
South Carolina . . . . . 63,440 1,271 1,271 65,982 3.7%
Michigan . . . . . . . . 51,597 182 51,779 2.9%
Other States . . . . . . 244,607 75,558 9,872 12 330,049 18.6%
------------ ----------- ---------- ---- ---------- ------
Total . . . . . . . . $ 1,388,877 $ 305,368 $ 82,705 $ 72 $1,777,022 100.0%
============ =========== ========== ===== ========== ======
16
18
The following table provides a summary of loans owned and/or serviced
by UC Lending which are past due 30 days or more, foreclosed properties and
loans charged off as of the dates indicated.
Foreclosed Properties
-----------------------
Contractual Delinquencies Owned Serviced for % of
Balance Contractual % of by the Third Party Net Loans Average
Period Ended of Loans Balance Amount Company Investors Charged Off Loans*
- - ------------ -----------------------------------------------------------------------------------------
(dollars in thousands)
Six months ended June 30, 1994
- - ------------------------------
Home equity . . . $ 1,388,877 $ 103,319 7.44% $ 10,849 $ 7,056 $ 6,931 1.10%
Commercial . . . 305,368 11,090 3.63% 27,196 10,336 1,133 0.28%
Conventional . . 82,705 2,972 3.59% 35 - 15 0.04%
Consumer . . . . 72 19 - - - (23) -
----------- --------- ---------- -------- --------
Total . . . $ 1,777,022 $ 117,400 6.61% $ 38,080 $ 17,392 $ 8,056
=========== ========= ========== ======== ========
Year ended December 31, 1993
- - ----------------------------
Home equity . . . $ 1,125,139 $ 92,974 8.26% $ 17,014 $ 8,355 $ 8,548 0.88%
Commercial . . . 345,365 19,292 5.59% 20,871 9,275 3,579 0.95%
Conventional . . 98,189 3,730 3.80% 148 - 112 0.09%
Consumer . . . . 88 17 - - - (35) -
----------- --------- ---------- -------- --------
Total . . . $ 1,568,781 $ 116,013 7.40% $ 38,033 $ 17,630 $ 12,204
=========== ========= ========== ======== ========
Year ended December 31, 1992
- - ----------------------------
Home equity . . . $ 819,448 $ 71,762 8.76% $ 13,092 $ 7,244 $ 4,498 .59%
Commercial . . . 404,857 29,954 7.40% 20,976 7,338 4,805 1.14%
Conventional . . 143,311 2,933 2.05% 291 - 4 -
Consumer . . . . 206 64 - - - 82 2.86%
----------- --------- ---------- -------- --------
Total . . . $ 1,367,822 $ 104,713 7.66% $ 34,359 $ 14,582 $ 9,389
=========== ========= ========== ======== ========
*Annualized for the six months ended June 30, 1994
Management continues to focus on reducing the level of non-earning
assets owned and/or serviced by focusing on expediting the foreclosure process.
As the result of being more aggressive in liquidating foreclosed property, the
Company's net charge-offs on home equity loans in the six months ended June 30,
1994 increased to $6.9 million compared to $4.6 million during the same period
of 1993. During the first six months of 1994, the balance of foreclosed home
equity loans owned and/or serviced by the Company was reduced by $7.5 million.
The Company will continue to focus resources on further reductions in the level
of foreclosed properties.
The above delinquency and loan loss experience represents the
Company's recent experience. However, the delinquency, foreclosure and net
loss percentages may be affected by the increase in the size and relative lack
of seasoning of the portfolio. As a result, the information in the above
tables should not be considered as a basis for assessing the likelihood, amount
or severity of delinquencies or losses in the future on loans and no assurance
can be given that the delinquency and loss experience presented in the tables
will be indicative of such experience on loans.
17
19
A summary analysis of the changes in the Company's allowance for loan
losses for the indicated periods is as follows.
Six months ended June 30,
-------------------------
1994 1993
--------- ----------
(in thousands)
Balance at beginning of period . . . . . . . $ 21,017 $ 15,842
Loans charged to allowance
Home equity . . . . . . . . . . . . . . . (7,367) (4,856)
Commercial . . . . . . . . . . . . . . . . (1,141) (1,193)
Conventional . . . . . . . . . . . . . . . (17) (49)
Consumer . . . . . . . . . . . . . . . . . (1) (12)
---------- ---------
Total . . . . . . . . . . . . . . . . (8,526) (6,110)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . 470 293
---------- ---------
Net loans charged off . . . . . . . . . . . . (8,056) (5,817)
---------- ---------
Loan loss provision . . . . . . . . . . . . 6,311 7,825
Reserve reclassification . . . . . . . . . . (107) (82)
---------- ---------
Balance at end of period . . . . . . . . . . $ 19,165 $ 17,768
========== =========
Specific reserves . . . . . . . . . . . . . . $ 8,234 $ 7,750
Unallocated reserves . . . . . . . . . . . . 10,931 10,018
---------- --------
Total reserves . . . . . . . . . . . . . . . $ 19,165 $ 17,768
========== =========
Specific reserves are provided for foreclosures in which the carrying
value of the loan exceeds the market value of the collateral. Unallocated
reserves are provided for loans not in foreclosure and are calculated primarily
using objective measurement techniques. Unallocated reserves also include
reserves for active loans which have been modified or indicate potential
problems as well as reserves for a $32.5 million subordinated position the
Company acquired in connection with the securitization and sale of
approximately $230 million in commercial real estate mortgage loans in 1990.
At June 30, 1994, the Company owned $38.1 million of property acquired in
settlement of loans, excluding the specific reserves attributed to these
properties. These balances are included in the loans owned by the Company.
The specific reserve in the table above is provided to reduce the carrying
value of these properties to their market value.
A summary of the amounts provided by the Company for future credit
losses on loans and foreclosed properties owned by the Company and loans sold
with recourse (including for purposes hereof loans sold with subordination of
cash and excess interest spread owned by the Company) as of the dates indicated
is as follows:
June 30, December 31, June 30,
1994 1993 1993
---------- ------------ ---------
(in thousands)
Allowance for loan losses
(Applicable to loans and foreclosed properties
owned by the Company) . . . . . . . . . . $ 19,165 $ 21,017 $ 17,768
Allowance for loss on loans serviced
(Applicable to loans
sold with recourse) . . . . . . . . . . . 20,549 12,938 9,041
--------- ---------- ----------
Total . . . . . . . . . . . . . . . $ 39,714 $ 33,955 $ 26,809
========= ========== ==========
As of June 30, 1994, approximately $1.1 billion of home equity loans
sold were serviced by UC Lending under agreements which provide limited
recourse, or subordination of cash and excess interest spread owned by the
Company, for credit losses ("loans sold with recourse"). The Company's
estimate of its losses, based on historical
18
20
loan loss experience, was approximately $20.5 million at June 30, 1994 and is
recorded in the Company's allowance for loss on loans serviced. Should credit
losses on loans sold with limited recourse, or subordination of cash and excess
interest spread owned by the Company, materially exceed the Company's estimate
for such losses, such consequence will have a material adverse impact on the
Company's financial statements.
Recent legal developments related to mortgage loans. A recent federal
appeals court decision held, in part, that a lender improperly disclosed the
collection of the Florida state intangible tax from the borrower, thereby
subjecting the loan to rescission under the Federal Truth-in-Lending Act (the
"TILA") by the borrower for three years after it was made. Subsequent to the
court's initial decision and prior to its refusal to reconsider its decision,
the Florida legislature amended the language of the intangible tax to clarify
the legislature's previous intention that the intangible tax be disclosed for
purposes of the TILA in the manner that had been followed by most lenders in
Florida, including the Company. Although the Florida legislature intended this
legislation to apply retroactively, no judicial determination has yet been made
as to the retroactive effect of this legislation on loans originated prior to
its effective date. This court decision may also apply to a similar intangible
tax imposed by other states. To its knowledge, no claims have been filed
against the Company under this recent court decision and no notice of a breach
of a representation has been received under the Company's loan sale agreements
requesting it to repurchase, cure or substitute other loans for the loans
sold. If a substantial number of loans are rescinded or required to be
repurchased, the Company's financial statements and operations will be
materially adversely affected. As the financial impact, if any, of this
contingency cannot presently be reasonably estimated, the Company has made no
accrual therefor.
Bonds. Investment purchases are made with the intention of holding
fixed income securities until maturity. Prior to January 1, 1994 securities
were generally carried at cost adjusted for discount accretion and premium
amortization. At June 30, 1994, the amortized cost of the Company's bond
portfolio was $1.0 billion consisting primarily of $713 million in
mortgage-backed securities and $258 million in corporate bonds. In connection
with the adoption of SFAS 115 (see note 4 to the consolidated financial
statements ) bonds with an amortized cost of approximately $939 million or 93%
of the Company's bond portfolio were classified in an available-for-sale
category and the carrying value adjusted to market value by means of an
adjustment to stockholders' equity. The remainder of the portfolio, consisting
primarily of private placements made either directly or through an investment
partnership, continues to be classified as held-to-maturity and valued at cost.
At June 30, 1994, the Company did not own any securities classified as trading
securities. The net unrealized loss in the bond portfolio (cost over market
value) at June 30, 1994 was $37.5 million compared to an unrealized gain of
$31.5 million at December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding loan
originations in its mortgage operations and the payment of policyholder claims
and surrenders incurred in its insurance operations. The Company's mortgage
operations require continued access to short and long-term sources of debt
financing, the sale of loans to UC Life and the sale of loans and asset-backed
securities in the secondary market; whereas liquidity requirements for the
Company's insurance operations are generally met by funds provided from the
sale of annuities and cash flow from its investment in fixed income securities
and mortgage loans.
The following discussion reflects the primary sources of liquidity and
capital for each of the Company's primary operating divisions.
UC Lending. The principal cash requirements of the Company's mortgage
operations arise from loan originations, repayments of inter-company debt
borrowed by the Company under its $200 million revolving credit facility,
payments of operating and interest expenses and deposits to reserve accounts
related to loan sale transactions. Loan originations are initially funded
principally through the Company's $200 million revolving credit facility and
short-term bank facilities pending loan sales to UC Life and in the secondary
market. At June 30, 1994, the Company's debt facilities available to fund
general operating needs totaled $218 million, of which $186.8 million was
outstanding, compared to December 31, 1993 when $208.5 million in such debt
facilities were available with $155.5 million outstanding. Substantially all
of the loans originated by UC Lending are sold. Net cash used by
19
21
investing activities of the Company in the six months ended June 30, 1994 and
1993, respectively, reflects approximately $436 million and $230 million,
respectively, in cash used for loan originations. The primary source of
funding for loan originations is derived from the reinvestment of proceeds from
the ultimate sale of loans in the secondary market which totaled approximately
$460 million and $168 million in the first six months of 1994 and 1993,
respectively. In connection with the loan sale transactions in the secondary
market, surety bonds and cash deposits were provided by the Company as credit
enhancements. The loan sale transactions required the subordination of certain
cash flows payable to UC Lending to the payment of scheduled principal and
interest due to certificate holders. In connection with these transaction, UC
Lending was required, in some instances, to fund an initial deposit, and
thereafter, in each transaction, a portion of the amounts receivable by UC
Lending and its subsidiary from the excess interest spread is 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 the reserve account until a specified level of
cash, which is less than the maximum subordination amount, is accumulated
therein. The capitalized excess servicing income of the Company is 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 underlying the pass-through certificates
issued until the total of the Company's deposits into the reserve account equal
the maximum subordination amount. In connection with the issuance and sale of
approximately $1.3 billion of pass-through certificates through June 30, 1994,
the aggregate subordination amounts were initially set at approximately $179.6
million. 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 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 June 30, 1994, the amounts on deposit in such reserve
accounts totaled $56.2 million.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market and to UC Life,
are essential for the continuation of the Company's loan origination
operations. The Company's available, but unfunded, debt capacity for general
operating needs as of June 30, 1994 was $31.2 million while such capacity as of
December 31, 1993 totaled $53 million. During the second quarter of 1994, peak
borrowings under the such credit facilities reached $210.9 million. The
Company's $200 million revolving credit facility has a committed term to
December 31, 1995. The interest rate on such credit facility is based upon
various floating rate indices as may be selected by the Company from time to
time. There can be no assurance that the Company's present credit facilities
will be available in the future on terms or in amounts which the Company would
consider favorable.
UC Life. The principal cash requirements of UC Life consist of
contractual obligations to policyholders, principally through policy claims and
surrenders. The primary sources of funding these obligations, in addition to
cash flow from investments, are the sale of annuities. Net cash flow from
underwriting operations is used to build an investment portfolio, which in turn
produces future cash flows from investment income and provides a secondary
source of liquidity for this division. Net cash provided by operating
activities of the insurance division in the six months ended June 30, 1994 and
1993 was approximately $31.7 million and $34.3 million, respectively, resulting
primarily from cash earnings on investments. The Company monitors available
cash and cash equivalents to maintain adequate balances for current payments
while maximizing cash available for longer term investment activities. The
Company's financing activities during the second quarter of 1994 and 1993
reflect approximately $116 million and $120 million, respectively, in cash
received primarily from sales by UC Life of its annuity products. As reflected
in the net cash used by investing activities during the same periods,
investment purchases were approximately $182 million and $147 million,
respectively, reflecting the investment of these funds and the reinvestment of
proceeds from maturities of investments. Cash used by financing activities
also reflects payments of $85 million and $58 million primarily on annuity
products resulting from policyholder surrenders and claims. In response to the
decline in interest rates in 1992 and 1993, the Company reduced the crediting
rates on its annuity policies. At June 30, 1994, the interest margin on the
Company's annuity liabilities was 2.73% compared to 2.46% at December 31, 1993
and 2.24% at June 30, 1993. Notwithstanding reductions in renewal crediting
rates on these policies, the percentages of annuities surrendered has generally
remained stable. UC Life's investments at June 30, 1994, included
approximately $394 million in residential and commercial mortgage loans, $288
million in corporate and government
20
22
bonds and private debt placements and $711 million in mortgage-backed
securities. The investment portfolio is also managed to provide a secondary
source of liquidity as investments can be sold, if necessary, to fund abnormal
levels of policy surrenders, claims and expenses. An unanticipated increase in
surrenders would impact the Company's liquidity, potentially requiring the sale
of certain assets, such as bonds and loans prior to their maturities, which may
be at a loss.
As a Louisiana domiciled insurance company, UC Life is subject to
certain regulatory restrictions on the payment of dividends. UC Life has the
capacity at June 30, 1994 to pay dividends of $8.5 million. UC Life did not
pay any dividends to the Company during 1991, 1992 and 1993 or in 1994 in order
to retain capital in UC Life.
UG Title. Liquidity requirements for the Company's title insurance
business are generally met from funds provided by the sale of title insurance
policies and cash flow from its investment portfolio. UG Title's investments
at June 30, 1994 included approximately $3.3 million in residential mortgage
loans, $6.9 million in U.S. government and agency securities and $1.1 million
in temporary investments, primarily certificates of deposit. An unanticipated
increase in policy claims would impact UG Title's liquidity, potentially
requiring the sale of its investments prior to their maturities, which may be
at a loss. The principal liability of UG Title is the loss reserve established
for title policy claims.
ACCOUNTING STANDARDS
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114 ("SFAS 114") which addresses the accounting by creditors for
impairment of loans and specifies how allowances for credit losses related to
certain loans should be determined. SFAS 114 also addresses the accounting by
creditors for all loans that are restructured in a troubled debt restructuring
involving modification of terms of a receivable. SFAS 114 is effective for
financial statements for fiscal years beginning after December 15, 1994. The
Company is reviewing the provisions of this pronouncement but has not yet
determined the effect of its implementation on the Company's financial
condition or results of operations.
RIGHTS PLAN
On July 27, 1994, the Board of Directors of the Company authorized the
redemption of the rights under the Company's rights plan adopted in 1989 and
approved a new rights plan and declared a dividend distribution of rights
thereunder. The new rights plan is an update of the old plan and reduces the
threshold of beneficial ownership at which rights issued under the plan become
exercisable and trade separately from the common shares when a person or group
acquires beneficial ownership of 20% or more of the common shares. The
threshold under the old plan was 45%. The rights also become exercisable and
trade separately when a tender or exchange offer for 25% or more of the common
shares is commenced, down from 50% under the old plan. The new plan also adds
an adverse person provision whereby the rights may become exercisable and trade
separately. The trigger for a flip-in event is also reduced from 50% to 25%
ownership by a person and the redemption price of the rights is reduced from
$.01 to $.001. The new plan extends the final expiration date provided by the
old plan from January 31, 1999 to July 31, 2004 and changes the exercise price
of the rights from $80.00 to $240.00.
21
23
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Deloitte & Touche, have performed a
review of the accompanying unaudited consolidated balance sheet as of June 30,
1994 and the related consolidated statements of income and cash flows for the
three months and six months ended June 30, 1994 and 1993, and previously
audited and expressed an unqualified opinion dated February 18, 1994 on the
consolidated financial statements of the Company and its subsidiaries as of
December 31, 1993, from which the consolidated balance sheet as of this date is
derived.
22
24
INDEPENDENT ACCOUNTANTS' REPORT
United Companies Financial Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
United Companies Financial Corporation and subsidiaries as of June 30, 1994,
and the related condensed consolidated statements of income and cash flows for
the three-month and six-month periods ended June 30, 1994 and 1993. 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 condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
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, 1993, 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 18,
1994, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1993 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ DELOITTE & TOUCHE
Baton Rouge, Louisiana
July 27, 1994
23
25
PART II
OTHER INFORMATION
Items 1 through 3. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
a. The matters discussed below were submitted to a vote of
security holders at the Company's Annual Meeting of
Shareholders held on April 28, 1994.
b. Item 4(b) is inapplicable as proxies for the Annual Meeting of
Shareholders were solicited pursuant to Regulation 14A under
the Securities Exchange Act of 1934, there was no solicitation
in opposition to the management's nominees as listed in the
proxy statement and all nominees for director were elected.
c. The results of voting on the other matters submitted to a vote
of security holders were as follows:
(2) Approval of the adoption of the Company's 1993 Stock
Incentive Plan
SHARES VOTED
For Against/Withheld Abstentions Broker non-votes
-------------------------------------------------------------------------
5,778,478 777,073 35,679 1,825,642
(3) Approval of the adoption of the Company's 1993
Non-Employee Director Stock Option Plan
SHARES VOTED
For Against/Withheld Abstentions Broker non-votes
--------------------------------------------------------------------------
5,492,195 1,027,953 71,082 1,825,642
(4) Approval of the adoption of the Company's Management
Incentive Plan
SHARES VOTED
For Against/Withheld Abstentions Broker non-votes
--------------------------------------------------------------------------
7,472,741 377,051 64,552 502,528
(5) Approval of the adoption of the Company's proposed
amendment to Section 1 of Article III of the Articles of
Incorporation to increase the number of authorized shares of
the Company's $2.00 par value common stock from 20,000,000
shares to 100,000,000 shares and the number of authorized
shares of the Company's $2.00 par value preferred stock from
5,000,000 shares to 20,000,000 shares
SHARES VOTED
For Against/Withheld Abstentions Broker non-votes
-------------------------------------------------------------------------
6,494,352 1,245,332 102,962 574,226
24
26
Item 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 regarding
unaudited interim financial information
(b) Reports on Form 8-K - None
25
27
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: July 27, 1994 By:/s/ J. TERRELL BROWN
J. Terrell Brown
President and Chief Executive Officer
Date: July 27, 1994 By:/s/ DALE E. REDMAN
Dale E. Redman
Executive Vice President and Chief
Financial Officer
26
28
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No. Page No.
----------- --------
11 Statement re computation of 28
earnings per share
15 Letter of Deloitte & Touche regarding 29
unaudited interim financial information
27