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 March 31, 1995
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 May 10, 1995 was 13,908,931, excluding 579,841 treasury
shares.
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2
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
PAGE
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
March 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months ended March 31, 1995 and 1994 . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Three months ended March 31, 1995 and 1994 . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 5-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 10-23
Review by Independent Accountants . . . . . . . . . . . . . . . . . . 24
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . 25
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31,
1995 December 31,
(Unaudited) 1994
------------- ------------
Assets
- ------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 11,591 $ 56,359
Temporary investments - reserve accounts . . . . . . . . . . . 97,821 81,980
Investment securities
Trading . . . . . . . . . . . . . . . . . . . . . . . . . 764 679
Available-for-sale . . . . . . . . . . . . . . . . . . . . 1,058,343 960,100
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . 57,091 57,391
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,756 26,672
Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . . 394,362 369,382
Capitalized excess servicing income . . . . . . . . . . . . . . 195,609 179,065
Deferred policy acquisition costs . . . . . . . . . . . . . . . 92,802 91,915
Accrued interest receivable . . . . . . . . . . . . . . . . . . 40,101 37,200
Property - net . . . . . . . . . . . . . . . . . . . . . . . . 31,747 30,565
Deferred income tax benefit . . . . . . . . . . . . . . . . . . - 7,420
Net assets of discontinued operations . . . . . . . . . . . . . 8,563 9,736
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 72,256 69,791
------------- ------------
Total assets . . . . . . . . . . . . . . . . . . $ 2,087,806 $ 1,978,255
============= ============
Liabilities and Stockholders' Equity
- ------------------------------------
Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . $ 1,440,233 $ 1,425,973
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . 240,342 213,668
Insurance reserves . . . . . . . . . . . . . . . . . . . . . . 117,950 120,992
Allowance for loss on loans serviced . . . . . . . . . . . . . 29,580 26,822
Deferred income taxes payable . . . . . . . . . . . . . . . . . 12,301 -
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 53,508 35,550
------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . 1,893,914 1,823,005
------------- ------------
Stockholders' equity:
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 14,464,790 and 14,270,577 shares . . . . . . 28,930 28,541
Additional paid-in capital . . . . . . . . . . . . . . . . 126,085 122,670
Net unrealized loss on securities . . . . . . . . . . . . . (21,132) (46,858)
Retained earnings . . . . . . . . . . . . . . . . . . . . . 73,314 62,025
Treasury stock and ESOP debt . . . . . . . . . . . . . . . (13,305) (11,128)
------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . 193,892 155,250
------------- ------------
Total liabilities and stockholders' equity . . . $ 2,087,806 $ 1,978,255
============= ============
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
March 31
---------------------------
1995 1994
---------- ----------
Revenues:
Interest, charges and fees on loans . . . . . . . . . . . . . . . . . . $ 30,788 $ 27,285
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,734 22,554
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,011 18,221
Loan servicing income . . . . . . . . . . . . . . . . . . . . . . . . . 3,484 3,689
Net insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . 2,102 3,068
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,119 74,817
---------- ----------
Expenses:
Interest on annuity policies . . . . . . . . . . . . . . . . . . . . . 19,526 17,793
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,071 13,507
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,894 2,425
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . . . . 4,064 3,996
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . 3,548 3,423
Insurance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 2,429 3,008
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,038 9,833
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,570 53,985
---------- ----------
Income from continuing operations before income taxes . . . . . . . . . . 19,549 20,832
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . 6,725 7,355
---------- ---------
Income from continuing operations . . . . . . . . . . . . . . . . . . . . 12,824 13,477
Income (loss) from discontinued operations:
Income (loss) from discontinued operations net of income taxes (benefit) of
$(201) and $127, respectively . . . . . . . . . . . . . . . . . . . . (373) 233
Gain on disposal, including estimated operating losses during
phaseout (including income tax benefit of $1,045) . . . . . . . . . . 245 -
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128) 233
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,696 $ 13,710
========== ==========
Per share data:
Income from continuing operations . . . . . . . . . . . . . . . . . . . $ .91 $ .93
Income (loss) from discontinued operations . . . . . . . . . . . . . . (.01) .02
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .90 $ .95
========== ==========
See notes to consolidated financial statements.
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5
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
---------------------------------
1995 1994
----------- -----------
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . $ 12,824 $ 13,477
Adjustments to reconcile income from continuing operations
to net cash provided (used) by continuing operating activities:
Increase in deferred policy acquisition costs . . . . . . . . . . . . (887) (89)
Decrease (increase) in accrued interest receivable . . . . . . . . . . . (2,901) 753
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . 7,189 (155)
Decrease in insurance reserves . . . . . . . . . . . . . . . . . . . . . (3,042) (3,935)
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . 1,386 6,267
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,734) (22,554)
Amortization of capitalized excess servicing income . . . . . . . . . . . 13,467 8,181
Investment (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . (85) 60
Interest on annuity policies . . . . . . . . . . . . . . . . . . . . . . 19,526 17,793
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,064 3,996
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . 945 703
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 5,868 (1,170)
Proceeds from sales and principal collections of loans
held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,655 201,822
Originations and purchases of loans held for sale . . . . . . . . . . . . (321,427) (202,041)
Net cash flows from trading investment securities . . . . . . . . . . (84) -
----------- -----------
Net cash provided (used) by continuing operating activities . . . (8,236) 23,108
----------- -----------
Cash flows from investing activities:
Principal collected on loans held for investment . . . . . . . . . . . 15,047 18,521
Originations and acquisition of loans held for investment . . . . . . . (4,839) -
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . . . (15,841) (7,869)
Proceeds from sales of available-for-sale securities . . . . . . . . 17,606 -
Proceeds from maturities or calls of investment securities . . . . . . 5,584 33,449
Purchases of available-for-sale securities . . . . . . . . . . . . . . (81,553) (106,525)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (1,853) (863)
----------- -----------
Net cash used by investing activities . . . . . . . . . . . . . . (65,849) (63,287)
----------- -----------
Cash flows from financing activities:
Proceeds from mortgage loan . . . . . . . . . . . . . . . . . . . . . 1,194 -
Increase in revolving credit debt . . . . . . . . . . . . . . . . . . 35,000 20,000
Decrease in repurchase agreement . . . . . . . . . . . . . . . . . . . - (24,968)
Increase (decrease) in debt with maturities of three months or less . (11,150) 5,450
Deposits received from annuities . . . . . . . . . . . . . . . . . . . 48,563 45,029
Payments on annuities . . . . . . . . . . . . . . . . . . . . . . . . (53,829) (39,927)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (1,407) (1,234)
Increase in managed cash overdraft . . . . . . . . . . . . . . . . . . 10,092 14,789
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . - 4,545
Loan made to ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . (682) -
Proceeds from exercise of stock options and warrants . . . . . . . . . 1,536 206
----------- -----------
Net cash provided by financing activities . . . . . . . . . . . . 29,317 23,890
----------- -----------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . (44,768) (16,289)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . 56,359 39,942
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 11,591 $ 23,653
=========== ===========
See notes to consolidated financial statements.
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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, 1994 filed with the United States Securities and Exchange Commission.
The consolidated results of operations for the three months ended March 31,
1995 and 1994 are not necessarily indicative of the results to be expected
for the full year. Certain 1994 amounts have been reclassified to conform
with the current year presentations. Such reclassifications had no effect
on net income.
2. DISCONTINUED OPERATIONS.
On April 10, 1995, the Company made a decision to dispose of its investment
in United General Title Insurance Company ("UG Title"), a wholly owned
subsidiary of the Company, and, on May 1, 1995, approved a formal plan of
disposal. As a result, the operations of UG Title have been classified as
discontinued operations, and, accordingly, the consolidated financial
statements and the related notes of the Company segregate continuing and
discontinued operations. It is anticipated that the disposal will be
completed during 1995.
In connection with the decision to dispose of UG Title, the Company
recorded a $128,000 after tax loss in its financial statements as of and
for the quarter ended March 31, 1995. Total revenues of UG Title for the
three months ended March 31, 1995 and 1994 were $9.0 million and $9.1
million, respectively, and net income (loss) was $(373,000) and $233,000,
respectively. Total assets of UG Title at March 31, 1995 and December 31,
1994 were $16.0 million and $18.0 million, respectively.
3. CASH PAID FOR INTEREST AND INCOME TAXES.
During the three months ended March 31, 1995 and 1994, the Company paid
interest on notes payable in the amount of $2.6 million and $2.5 million,
respectively. There were no payments made for income taxes during the
three months ended March 31, 1995. During the three months ended March 31,
1994 the Company paid income taxes in the amount of $7.7 million.
5
7
4. INVESTMENT SECURITIES.
At March 31, 1995, the Company's investment securities consisted of the
following (in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
Trading
Common stock $ 676 $ 109 $ 21 $ 764
=========== =========== =========== ===========
Available-for-sale
Debt securities
Corporate . . . . . . . . . . . . . . . $ 318,804 $ 3,165 $ 5,945 $ 316,024
U.S. Treasury . . . . . . . . . . . . . 10,720 39 97 10,662
Mortgage-backed . . . . . . . . . . . . 742,730 997 30,430 713,297
Foreign governments . . . . . . . . . . 17,471 487 283 17,675
Other . . . . . . . . . . . . . . . . . 425 20 - 445
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . 1,090,150 4,708 36,755 1,058,103
----------- ----------- ----------- -----------
Equity securities . . . . . . . . . . . . . 704 35 499 240
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 1,090,854 $ 4,743 $ 37,254 $ 1,058,343
=========== =========== =========== ===========
Held-to-maturity
Debt securities
Corporate . . . . . . . . . . . . . . . $ 10,488 $ 354 $ 200 $ 10,642
Mortgage-backed . . . . . . . . . . . . 46,603 709 1,565 45,747
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 57,091 $ 1,063 $ 1,765 $ 56,389
=========== =========== =========== ===========
Other
Investment in limited
partnership . . . . . . . . . . . . . . . . $ 26,756 $ 26,756
=========== ===========
Net unrealized losses on available-for-sale securities in stockholders'
equity at March 31, 1995 are presented net of deferred income taxes of
$11.4 million. Realized investment gains (losses) for the three months
ended March 31, 1995 and 1994 were $85,000 and $(60,000), respectively, and
are included in investment income.
6
8
5. LOANS - NET
The following schedule sets forth the components of Loans owned by the
Company at March 31, 1995 and December 31, 1994.
March 31, December 31,
1995 1994
------------ ------------
(in thousands)
Home equity . . . . . . . . . $ 228,175 $ 202,551
Commercial . . . . . . . . . . 157,110 155,271
Conventional . . . . . . . . . 1,089 1,106
Foreclosed properties . . . . 29,321 31,073
Nonrefundable loan fees . . . (4,850) (4,538)
Consumer and other . . . . . . 1,313 1,536
------------ -----------
Total . . . . . $ 412,158 $ 386,999
============ ===========
Included in owned loans at March 31, 1995 and December 31, 1994 were
nonaccrual loans totaling $20.7 million and $21.7 million, respectively.
The following schedule summarizes the composition of Loans - net at
March 31, 1995 and December 31, 1994:
March 31, December 31,
1995 1994
------------ ------------
(in thousands)
Loans . . . . . . . . . . . . $ 412,158 $ 386,999
Allowance for loan losses . . (16,842) (16,508)
Unearned discount . . . . . . (954) (1,109)
------------ -----------
Loans - net . . . . . . . $ 394,362 $ 369,382
============ ===========
6. OTHER ASSETS AND OTHER LIABILITIES.
At March 31, 1995, other assets included amounts due from reinsurers of
$34.5 million and policy loans of $19.8 million compared to $35.0 million
and $20.2 million, respectively, at December 31, 1994. In addition,
included in other assets at March 31, 1995 and December 31, 1994 was a
federal income tax receivable of $9.7 million and $6.2 million,
respectively.
Other liabilities included a $22.9 million and $12.8 million managed cash
overdraft at March 31, 1995 and December 31, 1994, respectively.
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7. EMPLOYEE BENEFITS.
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers all employees who meet minimum age and service requirements. The
Company makes annual contributions to the ESOP in amounts as determined by
the Board of Directors. These contributions are used to purchase
additional shares and to pay debt service on shares acquired with the
proceeds of loans ("leveraged shares"). The ESOP's leveraged shares are
initially pledged as collateral for the debt incurred in connection with
the acquisition of such shares. As the debt is repaid, shares are released
from collateral and allocated to plan participants, based on the proportion
of debt service paid in the year. During the first quarter of 1995, the
ESOP was granted a $10 million line of credit from a financial institution.
At March 31, 1995 the ESOP had notes payable with a balance of $1.6 million
under this line of credit. Because the source of the loan payments is
primarily contributions received by the ESOP from the Company, such debt is
included in the Company's notes payable, with a corresponding reduction of
stockholders' equity. In addition, the ESOP has notes payable to the
Company with a balance of $5.0 million at March 31, 1995, including loans
with a principal balance of $1.9 million made prior to December 31, 1992.
The balance of the loans to the Company are also reflected as a reduction
of stockholders' equity. In accordance with Statement of Position 93-6
("SOP 93-6"), leveraged shares purchased subsequent to December 31, 1992
are upon release reflected as compensation expense based on the then
current market price of the shares. Shares which have not been committed
to be released are not considered outstanding for purposes of the
computation of earnings per share. During the three months ended March 31,
1995, 82,500 shares of the Company's common stock which were considered
outstanding for earnings per share purposes in prior periods were not
considered outstanding. During the first quarter of 1995, approximately
2,700 shares of common stock were committed to be released and as a result
the Company recorded compensation expense of approximately $94,000. The
Company has elected not to apply the provisions of SOP 93-6 to shares
purchased on or before December 31, 1992.
8. COMMITMENTS AND CONTINGENCIES.
On March 21, 1994, the United States Court of Appeals for the Eleventh
Circuit 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 final
court decision has been rendered as to the 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, as of May 12, 1995 no claims have been filed against the Company
under this court decision (other than as a defense in foreclosure
proceedings) 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 the
intent of the Florida Legislature is not upheld and if a substantial number
of claims are filed by borrowers against the Company resulting in
rescission or repurchase, 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.
Amendments to the TILA which may become effective on October 1, 1995,
impose additional disclosure requirements and prohibit certain prepayment
penalty charges, among other requirements, on loans with a specified level
of origination fees or a specified interest rate level. A significant
percentage of the Company's loans originated after the effective date could
be subject to the requirements of this legislation. The Company is
currently reviewing this legislation in its final form to determine the
impact of its provisions on the Company's business or results of
operations.
8
10
As discussed in Note 2 above, the Company has formalized a plan of
disposition of its investment in UG Title. In connection therewith, a
letter of intent to sell UG Title has been signed which provides a
reduction of the sale price for certain claims relating to transactions
occurring prior to the date of sale and discovered within twelve months
thereafter. The Company has estimated the risk of loss related to such
potential claims and recorded a provision for such loss in connection with
the disposition. Should such claims materially exceed the Company's
estimates for such losses, such consequence will have an adverse impact on
the Company's operations by reducing the proceeds to be received from the
sale.
The Company used a prefunding feature in connection with its loan
securitization transaction during the first quarter of 1995. At March 31,
1995, approximately $79 million was held in a prefunding account for the
purchase of the Company's home equity loans during the second quarter of
1995. Pursuant to this commitment, home equity loans with a remaining
principal balance of approximately $79 million will be delivered prior to
June 12, 1995.
9. ACCOUNTING STANDARDS.
In May, 1993 and in October, 1994 the FASB issued Statements of Financial
Accounting Standards Nos. 114 and 118 ("SFAS 114" and "SFAS 118") which
address the accounting by creditors for impairment of loans and specify how
allowances for credit losses related to certain loans should be determined.
The statements also address the accounting by creditors for all loans that
are restructured in a troubled debt restructuring involving modification of
the terms of a receivable. The implementation of the provisions of SFAS
114 and SFAS 118 in the first quarter of 1995 did not have a material
effect on the financial statements of the Company.
9
11
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.
RESULTS OF OPERATIONS
The Company's financial statements present United General Title Insurance
Company ("UG Title") 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.
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
Income from continuing operations for the first quarter of 1995 was $12.8
million ($.91 per share based on 14.1 million weighted average shares
outstanding) compared to net income of $13.5 million ($.93 per share based on
14.4 million shares outstanding) for the same period of 1994. In comparison to
the 1994 period, the decline in income in 1995 was primarily the result of
costs of expanding the Company's mortgage operations. Personnel costs in the
Company's mortgage division increased approximately $3.9 million as the average
number of employees in the unit increased by approximately 300 from the first
quarter of 1994 to the same period of 1995. In addition, advertising expenses
increased approximately $2.0 million and occupancy costs of the mortgage
operations increased approximately $.6 million as the result of an increase in
the number of retail branches from 125 at March 31, 1994 to 143 at March 31,
1995. The negative effect on income of these increased expense items was
offset to some extent by a $76 million increase in the amount of loans sold,
which resulted in an increase in loan sale gains from $22.6 million for the
first quarter of 1994 to $26.7 million for the same period in 1995.
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:
Three Months Ended March 31,
----------------------------
1995 1994
-------- --------
(dollars in thousands)
Mortgage . . . . . . . . . . . . . . . . . . . . . . . $ 17,903 $ 20,350
Life insurance . . . . . . . . . . . . . . . . . . . . 3,169 1,579
Corporate, other operations and eliminations . . . . . (1,523) (1,097)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 19,549 $ 20,832
=========== ===========
Home equity loan originations . . . . . . . . . . . . . $ 309,290 $ 197,357
Home equity loans sold . . . . . . . . . . . . . . . . 274,653 198,332
Interest spread retained on home equity
loans sold . . . . . . . . . . . . . . . . . . . . . 4.42% 5.61%
10
12
The following table sets forth certain financial data for the periods
indicated.
Three Months Ended March 31,
----------------------------
1995 1994
------ ------
(dollars in thousands)
Total revenues . . . . . . . . . . . . . . . . . . . $ 88,119 $ 74,817
Total expenses . . . . . . . . . . . . . . . . . . . 68,570 53,985
Income from continuing operations
before income taxes . . . . . . . . . . . . . . . 19,549 20,832
Income from continuing operations . . . . . . . . . . 12,824 13,477
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the three months ended March 31, 1995
and 1994.
Three Months Ended March 31,
-------------------------------
1995 1994
---------- ----------
(in thousands)
Interest, charges and fees on loans . . . . . . $ 30,788 $ 27,285
Loan sale gains . . . . . . . . . . . . . . . . 26,734 22,554
Investment income . . . . . . . . . . . . . . . 25,011 18,221
Loan servicing income . . . . . . . . . . . . . 3,484 3,689
Net insurance premiums . . . . . . . . . . . . . 2,102 3,068
---------- ----------
Total . . . . . . . . . . . . . . . . . . . $ 88,119 $ 74,817
========== ==========
Interest, charges and fees on loans increased $3.5 million for the
first three months of 1995 compared to the same period of 1994. This line item
includes interest on mortgage loans owned by the mortgage and life 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 and are recognized at the time
of sale on loans sold to third parties. During the three months ended March
31, 1995 and 1994, the Company sold approximately $275 million and $198
million, respectively, in home equity loans and recognized approximately $8.2
million and $7.0 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.
Three Months Ended March 31,
-------------------------------
1995 1994
----------- ----------
(in thousands)
Loan origination fees . . . . . . . . . . . . . $ 15,502 $ 12,465
Mortgage loan interest . . . . . . . . . . . . . 10,650 11,258
Other loan income . . . . . . . . . . . . . . . 4,636 3,562
----------- ---------
Total . . . . . . . . . . . . . . . . . . . $ 30,788 $ 27,285
=========== =========
11
13
The Company estimates that non-accrual loans reduced mortgage loan
interest for the first three months of 1995 and 1994 by approximately $2.9
million and $2.5 million, respectively. During the three months ended March
31, 1995 the average amount of non-accrual loans owned by the Company was $21.5
million compared to approximately $28.7 million during the same period of 1994.
In addition, the average balance of loans serviced for third parties which were
on a non-accrual basis or in foreclosure was $69.3 million and $50.8 million
during the first three months of 1995 and 1994, respectively, representing 3.9%
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 which have been sold until satisfaction of the note, liquidation of the
collateral or charge off of the delinquent loan. At March 31, 1995, the
Company owned approximately $10.5 million of commercial loans which were on an
accrual status, but which the Company considers as potential problem loans,
compared to $8.2 million at March 31, 1994. 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.
Loan sale gains increased $4.2 million during the first three months
of 1995 over the same period in 1994. 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
$76 million increase in the amount of loans sold which offset a decline 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. During 1994, guidelines were published
by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., defining a
normal servicing fee as 50 basis points for servicing "B" and "C" quality home
equity loans, such as those originated by the Company. As the result of this
industry data, the servicing fee rate used by the Company in its securitization
transactions subsequent to July 1, 1994 has been 50 basis points compared to
previous securitizations which include a servicing fee rate of 75 basis points.
The following table presents information regarding home equity loan
sale transactions for the periods indicated.
Three Months Ended March 31,
--------------------------------
1995 1994
----------- -----------
(dollars in thousands)
Home equity loans sold . . . . . . . . . . . . . $ 274,653 $ 198,332
Average coupon on home equity loans sold . . . . 12.65% 11.67%
Interest spread retained on home equity loans sold 4.42% 5.61%
Home equity loan sale gains . . . . . . . . . . $ 26,734 $ 22,554
In comparison to the first quarter of 1994, market interest rates were
higher in the first quarter of 1995, and, as a result, the Company experienced
a decrease in the weighted average interest spread retained on home equity
loans sold from 5.61% in 1994 to 4.42% in 1995. 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 actions have
been taken by the Company during a rising interest rate environment to mitigate
the impact on earnings of fluctuations in market rates, such as increasing the
coupon rate charged on its loan products, the effect of such
12
14
actions will generally lag the impact of market rate fluctuations. The
weighted average interest spread retained by the Company on loan sales during
the first quarter of 1995 increased to 4.42% from 4.10% retained on loan sales
during the fourth quarter of 1994. This increase is primarily attributable to
an increase in the weighted average coupon on loans sold which offset an
increase in the pass-through rates attributable to such loans.
Historically, the Company has not entered into commercial interest rate
hedge transactions in connection with future loan securitizations; however,
during the first quarter of 1995 the Company entered into a hedge with respect
to a portion of the home equity mortgage loan securitization transaction to
close during the quarter. In addition, the Company has used a prefunding
feature in connection with recent loan securitization transactions. The
prefunding feature "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
home equity loan securitization transaction which closed in the first quarter
of 1995, approximately $79 million was held in a prefunding account for
purchase of the Company's home equity loans during the second quarter of 1995.
Pursuant thereto, home equity loans with a remaining principal balance of
approximately $79 million will be delivered prior to June, 1995.
Investment income totaled $25.0 million on average investments of
approximately $1.2 billion for the first three months of 1995 compared to
investment income of $18.2 million on average investments of approximately $977
million during the same period of 1994. At March 31, 1995 the amortized cost
of the fixed income portfolio totaled $1.1 billion and was comprised
principally of $789 million in investment grade mortgage-backed securities and
$336 million in investment grade bonds. At March 31, 1995, the weighted
average rating of the publicly traded bond portfolio according to nationally
recognized rating agencies was "AA". During 1994, the Company established a
trading account for a portion of its investment portfolio invested in common
stocks. At March 31, 1995, the carrying value of investments in the Company's
trading account was $.8 million reflecting an $88,000 net unrealized gain
which is included in investment income for the first quarter of 1995.
Loan servicing income declined $.2 million for the three months ending
March 31, 1995 compared to the same period of 1994. Loan servicing income was
negatively affected by a $1 million increase in the amortization of prior loan
sale gains as the result of an adjustment in the estimated prepayment
assumptions of certain mortgage loans serviced by the Company, primarily
adjustable rate mortgage loans. This adjustment was made in connection with
the Company's evaluation of capitalized excess servicing income which is
performed as of each balance sheet date. This evaluation includes an analysis
of the prepayment assumptions used in calculating loan sale gains in relation
to the current rate of prepayment, and if necessary, revising the estimate
using the original discount rate. Any losses arising from adverse prepayment
experience are recognized immediately while favorable experience is recognized
prospectively. This adjustment offset the impact of a $700 million increase in
the average amount of home equity loans serviced by the Company for third
parties during the first quarter of 1995 compared to the same period of 1994.
In addition, the reduction in the normal servicing fee from 75 to 50 basis
points as discussed above has the impact of increasing current revenues (loan
sale gains) while reducing future revenues (loan servicing income). The
following table reflects the components of loan servicing income for the
periods indicated.
Three Months Ended March 31,
------------------------------
1995 1994
------------ ---------
(in thousands)
Servicing fees earned . . . . . . . . . . . . . $ 16,951 $ 11,870
Amortization of capitalized excess
servicing income . . . . . . . . . . . . . . . (13,467) (8,181)
----------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ 3,484 $ 3,689
=========== =========
13
15
Net insurance premiums declined $1.0 million for the first three months
of 1995 compared with the same period of 1994. Net insurance premiums reflect
the recognition of credit life premiums on policies sold in prior years. The
decrease in premium income is primarily the result of UC Life's decision in
1993 to discontinue sales of credit insurance products.
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
Three Months Ended March 31,
-----------------------------
1995 1994
----------- ----------
(dollars in thousands)
Interest on annuity policies . . . . . . . . . . . $ 19,526 $ 17,793
Personnel . . . . . . . . . . . . . . . . . . . . 17,071 13,507
Interest . . . . . . . . . . . . . . . . . . . . . 5,894 2,425
Loan loss provision . . . . . . . . . . . . . . . 4,064 3,996
Insurance commissions . . . . . . . . . . . . . . 3,548 3,423
Insurance benefits . . . . . . . . . . . . . . . . 2,429 3,008
Other operating . . . . . . . . . . . . . . . . . 16,038 9,833
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ 68,570 $ 53,985
========== =========
Interest on annuity policies increased $1.7 million for the first three
months of 1995 when compared to the same period of 1994 primarily as the result
of an increase in annuity reserves. Average annuity reserves were $1.4 billion
during the first quarter of 1995, an increase of approximately $127 million
from the same period of 1994.
Personnel expenses increased approximately $3.6 million primarily
because of costs associated with the expansion of the Company's mortgage
operations and an increase in incentive bonuses based on loan production.
Interest expense for the first three months of 1995 increased $3.5
million from the same period of 1994 primarily as the result of an increase in
the weighted average interest rate on debt outstanding.
The provision for estimated losses on the commercial mortgage portfolio
during the first quarter of 1995 declined approximately $.8 million when
compared to the same period of 1994 due to a reduction in the amount of loans
serviced and an improved commercial real estate environment. The positive
effect of this reduction on net income was offset by an increase in the
provision for estimated losses on home-equity loans when compared to the first
quarter of 1994.
Insurance commissions for the first three months of 1995 was $3.5
million compared to $3.4 million for the same period of 1994. 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 three months ended
March 31, 1995, the Company capitalized approximately $3.9 million in
commissions paid on sales of annuities compared to $3.5 million during the same
period of 1994. Amortization of commission expense on annuities capitalized in
prior periods was $2.6 million during the three months ended March 31, 1995,
compared to $2.2 million during the same period of 1994.
Other operating expenses for the three months ended March 31, 1995
increased approximately $6.2 million when compared to the same period of 1994
primarily as the result of expansion of the Company's mortgage operations,
including a $2.0 million increase in advertising expenses, a $.8 million
increase in loan purchase premiums and a $.6 million increase in occupancy
expenses.
14
16
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 three months
ended March 31, 1995 and 1994, respectively.
Three Months Ended March 31, 1995
------------------------------------------------------
Corporate,
Life Other Operations,
Mortgage Insurance & Eliminations Total
-------- --------- -------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans $ 20,140 $ 9,267 $ 1,381 $ 30,788
Loan sale gains . . . . . . . . . . 26,734 26,734
Investment income . . . . . . . . . 1,465 24,145 (599) 25,011
Loan servicing income . . . . . . . 4,734 (427) (823) 3,484
Net insurance premiums . . . . . . 2,102 2,102
---------- --------- --------- ---------
Total . . . . . . . . . . . . . 53,073 35,087 (41) 88,119
---------- --------- --------- ---------
Expenses:
Interest on annuity policies . . . 19,526 19,526
Personnel . . . . . . . . . . . . . 14,530 1,406 1,135 17,071
Interest . . . . . . . . . . . . . 3,643 396 1,855 5,894
Loan loss provision . . . . . . . . 3,498 566 4,064
Insurance commissions . . . . . . . 3,444 104 3,548
Insurance benefits . . . . . . . . 2,429 2,429
Other operating . . . . . . . . . . 13,499 4,151 (1,612) 16,038
---------- --------- --------- ---------
Total . . . . . . . . . . . . . 35,170 31,918 1,482 68,570
---------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes . . . . . . . $ 17,903 $ 3,169 $ (1,523) $ 19,549
========== ========= ========= =========
15
17
Three Months Ended March 31, 1994
-------------------------------------------------------
Corporate,
Life Other Operations,
Mortgage Insurance & Eliminations Total
-------- --------- -------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans . $ 14,798 $ 11,577 $ 910 $ 27,285
Loan sale gains . . . . . . . . . . . 22,554 22,554
Investment income . . . . . . . . . . 266 18,313 (358) 18,221
Loan servicing income . . . . . . . . 4,977 (44) (1,244) 3,689
Net insurance premiums . . . . . . . 3,068 3,068
-------- -------- -------- ---------
Total . . . . . . . . . . . . . . 42,595 32,914 (692) 74,817
-------- -------- -------- ---------
Expenses:
Interest on annuity policies . . . . 17,793 17,793
Personnel . . . . . . . . . . . . . . 10,612 1,340 1,555 13,507
Interest . . . . . . . . . . . . . . 1,216 248 961 2,425
Loan loss provision . . . . . . . . . 2,664 1,332 3,996
Insurance commissions . . . . . . . . 3,360 63 3,423
Insurance benefits . . . . . . . . . 3,008 3,008
Other operating . . . . . . . . . . . 7,752 4,254 (2,173) 9,833
-------- ------- -------- ---------
Total . . . . . . . . . . . . . . 22,244 31,335 406 53,985
-------- ------- -------- ---------
Income (loss) from continuing operations
before income taxes . . . . . . . . $ 20,351 $ 1,579 $(1,098) $ 20,832
======== ======== ======== =========
16
18
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.
Loans. Substantially all of the loans owned by the Company were
originated through the Company's branch (i.e., retail) network or wholesale
loan programs. In connection with its origination of home equity loans, the
Company relies on thorough underwriting and credit review procedures, a
mortgage on the borrower's residence and, in some cases, other security, and,
in its retail origination program, 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, the mortgage division serviced approximately $1.9
billion in loans for third parties at March 31, 1995, $1.7 billion of which are
home equity loans. Substantially all of the home equity loans serviced for
third parties were publicly sold as mortgage backed securities ("pass-through
certificates"). The purchasers of the pass-through certificates receive a
credit enhanced security which is generally achieved in part by subordinating
the excess interest spread retained by the Company to the payment of scheduled
principal and interest on the certificates. Such subordination relates 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. If cumulative payment defaults exceed
the amount subordinated, a third party insurer is obligated to pay any further
losses experienced by the owners of the pass-through certificates.
The Company is also obligated to cure, 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. At March 31, 1995, the Company's allowance
for loan losses was $16.8 million. For loans sold, the Company reduces the
amount of gain recognized on the sale by the estimated amount of credit losses,
and records such amount on its balance sheet in the allowance for loss on loans
serviced. At March 31, 1995, the allowance for loss on loans serviced was
$29.6 million. The maximum recourse associated with sales of home equity loans
according to terms of the loan sale agreements totaled approximately $323
million, of which amount approximately $312 million relates to the subordinated
cash and excess interest spread. Should credit losses on loans sold
materially exceed the Company's estimates for such losses, such consequence
will have a material adverse impact on the Company's operations.
At March 31, 1995, the contractual balance of loans serviced was
approximately $2.2 billion comprised of approximately $387 million serviced for
the Company and approximately $1.9 billion serviced for investors. The
portfolio is geographically diversified. Although the Company services loans
in 46 states, at March 31, 1995 a substantial portion of the loans serviced
were originated in Florida (13.4%), Ohio (11.5%) and Louisiana (10.1%),
respectively, and no other state accounted for more than 8.0% of the serviced
portfolio. Included in the serviced portfolio are commercial loans originated
by the Company, a substantial portion of which were originated in Florida
(27.4%) and Georgia (16.8%) and no other state accounted for more than 8.5% of
the commercial loans serviced. The risk inherent in such 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.
17
19
The following table provides a summary of loans owned and/or serviced
which are past due 30 days or more, foreclosed properties and loans charged off
as of the dates indicated.
Foreclosed Properties
-----------------------
Contractual Delinquencies % of Owned Serviced for % of
Balance Contractual Contractual by the Third Party Net Loans Average
Period Ended of Loans Balance Balance Company Investors Charged Off Loans*
- ------------ ------------- ------------- ----------- -------- ------------ ----------- -------
(dollars in thousands)
March 31, 1995
- --------------
Home equity . . . $ 1,895,955 $ 134,514 7.09% $ 7,527 $ 13,187 $ 3,470 .76%
Commercial . . . 267,291 5,208 1.95% 21,509 10,738 210 .32%
Conventional . . 70,986 2,634 3.71% 285 - 36 .20%
----------- ---------- --------- --------- ---------
Total . . . $ 2,234,232 $ 142,356 6.37% $ 29,321 $ 23,925 $ 3,716
=========== ========== ========= ========= =========
December 31, 1994
- -----------------
Home equity . . . $ 1,683,698 $ 129,203 7.67% $ 8,791 $ 11,837 $ 11,694 0.84%
Commercial . . . 274,413 5,377 1.96% 22,131 8,784 5,658 1.83%
Conventional . . 74,294 2,672 3.60% 35 - 100 0.16%
------------ ---------- --------- --------- ---------
Total . . . $ 2,032,405 $ 137,252 6.75% $ 30,957 $ 20,621 $ 17,452
------------ ========== ========= ========= =========
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 . . 98,277 3,747 3.81% 148 - 77 0.09%
------------ ---------- ---------- --------- ---------
Total . . . $ 1,568,781 $ 116,013 7.40% $ 38,033 $ 17,630 $ 12,204
============ ========== ========== ========= =========
*Annualized for the three months ended March 31, 1995.
Management continues to focus on reducing the level of non-earning
assets owned and/or serviced by expediting the foreclosure process. The
balance of foreclosed home equity loans owned and/or serviced totaled $20.7
million at March 31, 1995 compared to $22.0 million at March 31, 1994.
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. In addition, the Company can neither quantify
the impact of property value declines, if any, on the home equity loans nor
predict whether or to what extent or how long such declines may exist. In a
period of such declines, the rates of delinquencies, foreclosures and losses on
the home equity loans could be higher than those theretofore experienced in the
mortgage lending industry in general. Adverse economic conditions (which may
or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments of principal and interest on the home equity
loans and, accordingly, the actual rates of delinquencies, foreclosures 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 or losses in the future on home equity loans and no assurance
can be given that the delinquency and loss experience presented in the tables
will be indicative of such experience on home equity loans.
18
20
A summary analysis of the changes in the Company's allowance for loan
losses for the indicated periods is as follows.
Three Months Ended March 31,
--------------------------------------
1995 1994
---------- ---------
(in thousands)
Balance at beginning of period . . . . . . . . . . . $ 16,508 $ 21,017
Loans charged to allowance
Home equity . . . . . . . . . . . . . . . . . . . (3,827) (4,029)
Commercial . . . . . . . . . . . . . . . . . . . . (210) -
Conventional . . . . . . . . . . . . . . . . . . . (36) (15)
---------- ----------
(4,073) (4,044)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . . . . . . 357 276
---------- ----------
Net loans charged off . . . . . . . . . . . . . . . . (3,716) (3,768)
Loan loss provision . . . . . . . . . . . . . . . . . 4,064 3,996
Reserve reclassification . . . . . . . . . . . . . . . (14) (61)
---------- ----------
Balance at end of period . . . . . . . . . . . . . . . $ 16,842 $ 21,184
========== ==========
Specific reserves . . . . . . . . . . . . . . . . . . $ 6,353 $ 8,429
Unallocated reserves . . . . . . . . . . . . . . . . . 10,489 12,755
---------- ----------
Total reserves . . . . . . . . . . . . . . . . . . . . $ 16,842 $ 21,184
========== ==========
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 March 31, 1995, the Company owned $29.3 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
19
21
limited guarantees and subordination of cash and excess interest spread owned
by the Company) as of the dates indicated is as follows:
March 31, December 31, March 31,
1995 1994 1994
------------ ------------ -----------
(in thousands)
Allowance for loan losses
(Applicable to loans and foreclosed properties
owned by the Company) . . . . . . . . . . $ 16,842 $ 16,508 $ 21,184
Allowance for loss on loans serviced
(Applicable to loans
sold with recourse) . . . . . . . . . . . 29,580 26,822 16,393
--------- ---------- ----------
Total . . . . . . . . . . . . . . . $ 46,422 $ 43,330 $ 37,577
========= ========== ==========
As of March 31, 1995, approximately $1.7 billion of home equity loans sold
were serviced by UC Lending under agreements substantially all of which provide
for the subordination of cash and excess interest spread owned by the Company
for credit losses ("loans sold with recourse"). The maximum recourse
associated with sales of home equity loans according to terms of the loan sales
agreements was approximately $323 million at March 31, 1995, of which $312
million relates to the subordinated cash and excess interest spread. The
Company's estimate of its losses, based on historical loan loss experience, was
approximately $29.6 million at March 31, 1995 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 operations.
Recent legal developments related to mortgage loans. On March 21, 1994,
the United States Court of Appeals for the Eleventh Circuit 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 final court decision has been rendered as to the 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, as of May 12, 1995, no claims have been filed against the
Company under this court decision (other than as a defense in foreclosure
proceedings) 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 the intent of the Florida
Legislature is not upheld and if a substantial number of claims are filed by
borrowers against the Company resulting in rescission or repurchase, 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.
Amendments to the TILA which may become effective on October 1, 1995,
impose additional disclosure requirements and prohibit certain prepayment
penalty charges, among other requirements, on loans with a specified level of
origination fees or a specified interest rate level. A significant percentage
of the Company's loans originated after the effective date could be subject to
the requirements of this legislation. The Company is currently reviewing this
legislation in its final form to determine the impact of its provisions on
the Company's business or results of operations.
Investment securities. The Company's investment portfolio consists
primarily of mortgage backed securities and corporate bonds, comprising 66%
and 29% of the portfolio at March 31, 1995, respectively. At March 31,
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1995, approximately 93% of the Company's portfolio of investment securities
were classified in an available-for-sale category and the carrying value
adjusted to fair value by means of an adjustment to stockholders' equity. The
remainder of the portfolio consists primarily of private placements made either
directly or through an investment partnership and are classified as
held-to-maturity and valued at cost. At March 31, 1995, the Company owned $.8
million in equity securities classified as trading securities. The net
unrealized loss in the debt securities portfolio (amortized cost over fair
value) at March 31, 1995 was $32.7 million compared to an unrealized loss of
$73.9 million at December 31, 1994.
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 life insurance operations. The Company's
mortgage operations require continued access to short and long-term sources of
debt financing, the sale of loans to United Companies Life Insurance Company
("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 investments 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.
Mortgage. The principal cash requirements of the Company's mortgage
operations arise from loan originations, deposits to reserve accounts,
repayments of inter-company debt borrowed under the Company's revolving credit
facility (the "Bank Facility") and the senior notes due November 1, 1999,
payments of operating and interest expenses, and income taxes related to loan
sale transactions. Loan originations are funded principally through the Bank
Facility and short-term bank facilities pending loan sales to UC Life and in
the secondary market. In addition, at March 31, 1995, UC Lending had available
a secured warehouse facility provided by the investment bank that acted as sole
underwriter of the Company's first quarter public loan securitization
transaction. The warehouse facility was directly related to this
securitization transaction and initially provided funding for up to $200
million of eligible home equity loans for such securitization and will mature
with the closing of the last delivery of loans under the prefunding account
relative to this securitization.
Substantially all of the loans originated or acquired by UC Lending
are sold. Net cash from operating activities of the Company in the first
quarter of 1995 and 1994 reflects approximately $321 million and $202 million,
respectively, in cash used for loan originations and acquisitions. 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 $275 million and $198 million in the three months ended March 31,
1995 and 1994. In connection with the loan sale transactions in the secondary
market, third-party surety bonds and cash deposits by the Company as credit
enhancements were provided. The loan sale transactions required the
subordination of certain cash flows payable to UC Lending and its subsidiaries
to the payment of principal and interest due to certificate holders. In
connection with these transactions, 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 subsidiaries 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 a 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 $1.8 billion of pass-through
certificates through March 31, 1995 under the Company sponsored
shelf-registration statement, the subordination amounts aggregate
approximately $273 million. After the Company's
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deposits into the reserve account equal the maximum subordination amount for a
transaction, the subordination of the related excess interest spread (including
the guarantee fee payable therefrom) for these purposes is terminated. The
excess interest spread required to be deposited and maintained in the
respective reserve accounts will not be available to support the cash flow
requirements of the Company until such amount exceeds the maximum subordinated
amount (other than amounts, if any, in excess of the specified levels required
to be maintained in the reserve accounts, which may be distributed periodically
to the Company). At March 31, 1995, the amounts on deposit in such reserve
accounts totaled $97.8 million.
The expansion of the Company's mortgage division and the increase in
the amount of loans originated are capital intensive operations; therefore,
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 and the growth in the Company's loan
operations. At March 31, 1995, the Company's debt facilities available to fund
general operating needs totaled $276 million, of which $236 million was
outstanding, resulting in available, but unfunded debt capacity for general
operating needs of $40 million. During the first quarter of 1995, peak
borrowings under such credit facilities reached $262 million and rose to $273
million subsequent to quarter end. At December 31, 1994, the Company had $266
million in such debt facilities available with $212 million outstanding,
resulting in $54 million in available, but unfunded debt capacity. The Company
continues to evaluate its current resources and to explore the feasibility of
additional capital market transactions.
Life insurance. The principal cash requirement of UC Life consists 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
annuity 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 first quarter of 1995 and 1994 was
approximately $24.2 million and $19.5 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 first quarter of 1995 and 1994
reflect approximately $48.6 million and $45.0 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 $81.6 million and $106.5 million,
respectively, reflecting the investment of these funds and the reinvestment of
proceeds from maturities of investments. Cash used by financing activities
during these three month periods also reflects payments of $53.8 million and
$39.9 million primarily on annuity products resulting from policyholder
surrenders and claims. The increase in annuity surrenders during the first
quarter of 1995 was expected, due in part to an increase in the amount of
annuity policies which were beyond the surrender penalty period. The interest
margin on the Company's annuity liabilities during the first quarter of 1995
was 2.38% compared to 2.61% during the same period of 1994. UC Life's
investments at March 31, 1995 included approximately $337 million in
residential and commercial mortgage loans, and the amortized cost of its bond
portfolio included $358 million in corporate and government bonds and private
debt placements and $789 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 had the
capacity at March 31, 1995 to pay dividends of $8.2 million. UC Life did not
pay any dividends to the Company during 1992, 1993 or 1994 in order to retain
capital in UC Life.
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ACCOUNTING STANDARDS
In May 1993 and in October 1994, the FASB issued Statements of
Financial Accounting Standards Nos. 114 and 118 ("SFAS 114" and "SFAS 118")
which address the accounting by creditors for impairment of loans and specify
how allowances for credit losses related to certain loans should be determined.
The statements also address the accounting by creditors for all loans that are
restructured in a troubled debt restructuring involving modification of terms
of a receivable. The implementation of the provisions of SFAS 114 and SFAS 118
in the first quarter of 1995 did not have a material effect on the financial
statements of the Company.
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REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Deloitte & Touche LLP, have performed a
review of the accompanying unaudited consolidated balance sheet as of March 31,
1995 and the related consolidated statements of income and cash flows for the
three months ended March 31, 1995 and 1994 and previously audited and expressed
an unqualified opinion dated February 28, 1995 on the consolidated financial
statements of the Company and its subsidiaries as of December 31, 1994, from
which the consolidated balance sheet as of this date is derived.
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INDEPENDENT ACCOUNTANTS' REPORT
United Companies Financial Corporation:
We have reviewed the accompanying consolidated balance sheet of United
Companies Financial Corporation and subsidiaries as of March 31, 1995, and the
related consolidated statements of income and cash flows for the three-month
periods ended March 31, 1995 and 1994. 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.
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, 1994, 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,
1995, 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, 1994 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
May 12, 1995
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PART II
OTHER INFORMATION
Items 1 through 5 - Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - (3) Amended and restated by-laws
(10) Indemnification Agreements
(11) Statement re computation of earnings per share
(15) Consent of Deloitte & Touche LLP
(27) Financial Data Schedule
(b) Reports of Form 8-K - None
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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: 5/12/95 By: /s/ J. Terrell Brown
---------------- ----------------------------------------
J. Terrell Brown
President and Chief Executive Officer
Date: 5/12/95 By: /s/ Dale E. Redman
---------------- ----------------------------------------
Dale E. Redman
Executive Vice President and Chief
Financial Officer
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No. Page No.
- ----------- --------
3 Amended and restated by-laws 29 - 40
10 Indemnification Agreements 41 - 48
11 Statement re computation of 49
earnings per share
15 Consent of Deloitte & Touche LLP 50
27 Financial Data Schedule 51
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