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, 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 August 4, 1995 was 13,985,847, 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 JUNE 30, 1995
PAGE
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months and six months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Six months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 5-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-24
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART II - OTHER INFORMATION
Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 27-28
Exhibits and Current Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30,
1995 December 31,
(Unaudited) 1994
----------- -----------
Assets
Cash and cash equivalents ................................. $ 23,695 $ 56,359
Temporary investments - reserve accounts .................. 118,124 81,980
Investment securities
Trading ................................................ 838 679
Available-for-sale ..................................... 1,115,715 960,100
Held-to-maturity ....................................... 54,098 57,391
Other .................................................. 24,683 26,672
Loans - net ............................................... 387,753 369,382
Capitalized excess servicing income ....................... 227,304 179,065
Deferred policy acquisition costs ......................... 92,823 91,915
Accrued interest receivable ............................... 46,705 37,200
Property - net ............................................ 34,625 30,565
Deferred income tax benefit ............................... -- 7,420
Net assets of discontinued operations ..................... 6,896 9,736
Other assets .............................................. 77,066 69,791
----------- -----------
Total assets ................................. $ 2,210,325 $ 1,978,255
=========== ===========
Liabilities and Stockholders' Equity
Annuity reserves .......................................... $ 1,437,685 $ 1,425,973
Notes payable ............................................. 212,022 213,668
Insurance reserves ........................................ 116,288 120,992
Deferred income taxes payable ............................. 36,900 --
Allowance for loss on loans serviced ...................... 35,339 26,822
Other liabilities ......................................... 47,325 35,550
----------- -----------
Total liabilities ................................. 1,885,559 1,823,005
----------- -----------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 1,955,000 shares of 6 3/4% PRIDES(SM) ..... 3,910 --
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 14,493,385 and 14,270,577 shares .......... 28,987 28,541
Additional paid-in capital ............................. 205,847 122,670
Net unrealized gain (loss) on securities ............... 10,974 (46,858)
Retained earnings ...................................... 88,157 62,025
Treasury stock and ESOP debt ........................... (13,109) (11,128)
----------- -----------
Total stockholders' equity ........................ 324,766 155,250
----------- -----------
Total liabilities and stockholders' equity ... $ 2,210,325 $ 1,978,255
=========== ===========
See notes to consolidated financial statements.
2
4
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ----------- ------------
Revenues:
Interest, charges and fees on loans . . . . . . $ 34,554 $ 30,045 $ 65,342 $ 57,330
Loan sale gains . . . . . . . . . . . . . . . . 37,253 20,792 63,987 43,346
Investment income . . . . . . . . . . . . . . . 27,717 20,709 52,729 38,930
Loan servicing income . . . . . . . . . . . . . 2,206 3,995 5,689 7,684
Net insurance premiums . . . . . . . . . . . . 2,217 2,634 4,319 5,702
------------ ------------ ----------- ------------
Total . . . . . . . . . . . . . . . . 103,947 78,175 192,066 152,992
------------ ------------ ----------- ------------
Expenses:
Interest on annuity policies . . . . . . . . . 20,062 18,061 39,588 35,854
Personnel . . . . . . . . . . . . . . . . . . . 18,464 14,142 35,535 27,649
Interest . . . . . . . . . . . . . . . . . . . 7,878 3,274 13,772 5,699
Loan loss provision . . . . . . . . . . . . . . 3,757 2,315 7,821 6,311
Insurance commissions . . . . . . . . . . . . . 3,280 3,520 6,828 6,942
Insurance benefits . . . . . . . . . . . . . . 2,946 3,479 5,376 6,487
Other operating . . . . . . . . . . . . . . . . 17,181 10,631 33,218 20,465
------------ ------------ ----------- ------------
Total 73,568 55,422 142,138 109,407
------------ ------------ ----------- ------------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 30,379 22,753 49,928 43,585
Provision for income taxes . . . . . . . . . . . 11,240 7,814 17,965 15,168
------------ ------------ ----------- ------------
Income from continuing operations . . . . . . . . 19,139 14,939 31,963 28,417
Loss from discontinued operations:
Loss from discontinued operations, net of
income tax expense (benefit) of $(493),
$(122), $(694) and $5, respectively . . . (823) (240) (1,196) (8)
Loss on disposal, net of income tax benefit
of $746 and $1,791, respectively . . . . . (1,890) -- (1,645) --
------------ ------------ ----------- ------------
Total . . . . . . . . . . . . . . . . (2,713) (240) (2,841) (8)
------------ ------------ ----------- ------------
Net income . . . . . . . . . . . . . . . . . . . $ 16,426 $ 14,699 $ 29,122 $ 28,409
============ ============ =========== ============
Per share data:
Income from continuing operations . . . . . . $ 1.32 $ 1.04 $ 2.23 $ 1.97
Loss from discontinued operations . . . . . . (.19) (.02) (.20) --
------------ ------------ ----------- ------------
Net income . . . . . . . . . . . . . . . . . . $ 1.13 $ 1.02 $ 2.03 $ 1.97
============ ============ =========== ============
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)
Six Months Ended June 30,
-------------------------
1995 1994
--------- ----------
Cash flows from continuing operating activities:
Income from continuing operations .............................. $ 31,963 $ 28,417
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating activities:
Increase in deferred policy acquisition costs ............ (908) (2,746)
Increase in accrued interest receivable .................. (9,505) (2,200)
Increase in other assets ................................. (2,299) (1,436)
Decrease in insurance reserves ........................... (4,704) (5,502)
Increase in other liabilities ............................ 11,706 3,897
Loan sale gains .......................................... (63,987) (43,346)
Amortization of capitalized excess servicing income ...... 30,070 17,358
Investment gains ......................................... (371) (99)
Interest on annuity policies ............................. 39,588 35,854
Loan loss provision ...................................... 7,821 6,311
Amortization and depreciation ............................ 2,071 1,459
Deferred income taxes .................................... 13,180 (2,428)
Proceeds from sales and principal collections of loans
held for sale .......................................... 640,142 466,414
Originations and purchases of loans held for sale ........ (691,548) (433,146)
Net cash flows from trading investment securities ........ (159) --
--------- ---------
Net cash provided by continuing operating activities .. 3,060 68,807
--------- ---------
Cash flows from investing activities:
Principal collected on loans held for investment ......... 29,960 32,951
Originations and acquisition of loans held for
investment ............................................. (10,552) (937)
Increase in reserve accounts ............................. (36,144) (28,520)
Proceeds from sales of investment securities ............. 25,640 7,459
Proceeds from maturities or calls of investment
securities ............................................. 22,061 52,061
Purchase of held-to-maturity securities .................. (76) --
Purchases of available-for-sale securities ............... (108,615) (182,062)
Capital expenditures ..................................... (5,413) (2,155)
--------- ---------
Net cash used by investing activities ................. (83,139) (121,203)
--------- ---------
Cash flows from financing activities:
Proceeds from mortgage loan .............................. 2,563 621
Increase in revolving credit debt ........................ (27,162) 30,000
Decrease in repurchase agreement ......................... -- (20,000)
Increase in debt with maturities of three months
or less ................................................ 21,365 1,300
Deposits received from annuities ......................... 85,375 116,323
Payments on annuities .................................... (113,252) (84,951)
Cash dividends paid ...................................... (2,990) (2,478)
Increase (decrease) in managed cash overdraft ............ (2,796) 18,083
Proceeds from issuance of stock .......................... 83,254 4,545
Loan made to ESOP ........................................ (683) --
Proceeds from exercise of stock options and warrants ..... 1,741 538
--------- ---------
Net cash provided by financing activities ............. 47,415 63,981
--------- ---------
Increase (decrease) in cash and cash equivalents ............... (32,664) 11,585
Cash and cash equivalents at beginning of period ............... 56,359 39,942
--------- ---------
Cash and cash equivalents at end of period ..................... $ 23,695 $ 51,527
========= =========
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 on Form 10-K for the year ended December 31,
1994, as amended by Amendment Nos. 1 and 2 on Form 10-K/A, filed with the
United States Securities and Exchange Commission.
The consolidated results of operations for the three months and six months
ended June 30, 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.
United General Title Insurance Company. 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. The decision to dispose of UG
Title is independent of the consummation of the sale thereof contemplated by
the amended letter of intent referred to below. 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 Company's decision to dispose of UG Title, a letter
of intent to sell UG Title was signed in April 1995 which initially provided
for 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. On July 14, 1995, the Company and the prospective
purchaser agreed to certain amendments to the terms of the letter of intent,
including a reduction of the sale price to equal the statutory capital and
surplus of UG Title at closing and a provision making the Company liable to
UG Title for claims from defalcations and fraud losses incurred by UG Title
which are unknown and occur prior to closing and are discovered within 24
months thereafter. The Company recorded a loss from discontinued operations
(net of income tax benefit) of $2.7 million in the second quarter of 1995
primarily to reflect the reduction in the anticipated sale price and losses
currently estimated through completion of disposal. Additionally, the
Company has estimated the risk of loss related to the potential claims from
defalcations and fraud losses incurred by UG Title and recorded a provision
for such loss. Should such claims materially exceed the Company's estimates
for such losses, such consequence will have an adverse impact on the
Company's operations. The transaction contemplated by the amended letter of
intent is subject to completion of negotiations and execution of a
definitive agreement and the satisfaction of certain conditions, including
receipt of necessary regulatory approvals. The Company believes that the
failure to consummate this transaction should not have a material adverse
effect on the Company's financial condition.
5
7
Foster Mortgage Corporation. On May 7, 1993, the Company decided to divest
its subsidiary Foster Mortgage Corporation ("FMC"). 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 to cause the remaining affairs of FMC
to be wound up under the supervision of the bankruptcy court. The FMC
Institutional Lenders filed and the bankruptcy court has approved a plan of
liquidation for FMC providing for the appointment of a trustee selected by
the FMC Institutional Lenders. The FMC Institutional Lenders allege that FMC
has certain claims against the Company, including a claim with respect to
the Company's alleged failure to remit all sums due FMC regarding federal
income taxes estimated by the FMC Institutional Lenders to range from $2.1
million to $29 million. FMC and the Company executed, subject to the
approval of the bankruptcy court, a settlement agreement relating to
payments between FMC and the Company in connection with the federal income
tax benefits resulting from FMC's losses and to certain prior intercompany
payments between FMC and the Company. The settlement agreement included a
release by FMC in favor of the Company of any and all claims relating to
federal income taxes. The FMC Institutional Lenders opposed the proposed
settlement agreement. At the conclusion of a hearing on the proposed
settlement on August 18, 1994, the bankruptcy court approved the portion of
the settlement providing for a net payment by the Company of $1.65 million
to FMC in satisfaction of the federal income tax benefits resulting from
FMC's losses and the release of any claims regarding federal income taxes.
The Company had previously recorded substantially all of the impact of this
portion of the settlement in its prior financial statements. The bankruptcy
court declined to approve the other portion of the proposed settlement
relating to payments received by the Company from FMC within twelve months
of the bankruptcy filing. These matters may be pursued by the trustee under
the plan of liquidation approved by the bankruptcy court. If the Company
were required to refund such payments, the Company has estimated the
potential additional loss to be $1.9 million, net of tax benefits. The
decision of the bankruptcy court on the settlement is not final and was
appealed by the FMC Institutional Lenders to the U.S. District Court which
affirmed the bankruptcy court's decision. The FMC Institutional Lenders have
appealed this decision to the U.S. Fifth Circuit Court of Appeals. In July,
1995, the Company was notified that a date for oral arguments would be set
during the week of September 25, 1995 by the U.S. Fifth Circuit Court of
Appeals. Management of the Company does not believe that any additional
amounts are owed by the Company to FMC and intends to vigorously contest any
claims which may be brought against it for such amounts. The Company did not
guarantee any debt of FMC and believes, based upon advice of its counsel,
that it has no responsibility for the obligations of FMC under FMC's
primary 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.
3. CASH PAID FOR INTEREST AND INCOME TAXES.
During the six months ended June 30, 1995 and 1994, the Company paid
interest on notes payable in the amount of $13.9 million and $5.7 million,
respectively. During the six months ended June 30, 1995 and 1994 the
Company paid income taxes in the amount of $.2 million and $22.3 million,
respectively.
6
8
4. INVESTMENT SECURITIES.
At June 30, 1995, the Company's investment securities consisted of the
following (in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------
Trading
Common stock . . . . . . . . . . . . . . . . $ 651 $ 192 $ 5 $ 838
============ =========== =========== ===========
Available-for-sale
Debt securities
Corporate . . . . . . . . . . . . . . . $ 323,652 $ 14,548 $ 1,688 $ 336,512
U.S. Treasury . . . . . . . . . . . . . 11,387 245 1 11,631
Mortgage-backed . . . . . . . . . . . . 745,276 10,622 7,657 748,241
Foreign governments . . . . . . . . . . 17,447 1,104 - 18,551
Other . . . . . . . . . . . . . . . . . 425 21 - 446
------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . . 1,098,187 26,540 9,346 1,115,381
Equity securities . . . . . . . . . . . . . 644 54 364 334
------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 1,098,831 $ 26,594 $ 9,710 $ 1,115,715
============ =========== =========== ===========
Held-to-maturity
Debt securities
Corporate . . . . . . . . . . . . . . . $ 8,193 $ 472 $ - $ 8,665
Mortgage-backed . . . . . . . . . . . . 45,905 1,207 1,060 46,052
------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 54,098 $ 1,679 $ 1,060 $ 54,717
============ =========== =========== ===========
Other
Investment in limited
partnership . . . . . . . . . . . . . . . . $ 24,683 $ 24,683
============ ===========
Net unrealized gains on available-for-sale securities in stockholders'
equity at June 30, 1995 are presented net of deferred income taxes of $5.9
million. Realized investment gains for the six months ended June 30, 1995
and 1994 were $.4 million and $.1 million, respectively, and are included in
investment income.
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9
5. LOANS - NET
The following schedule sets forth the components of Loans owned by the
Company at June 30, 1995 and December 31, 1994.
June 30, December 31,
1995 1994
------------ ------------
(in thousands)
Home equity . . . . . . . . . $ 221,909 $ 202,551
Commercial . . . . . . . . . . 158,263 155,271
Conventional . . . . . . . . . 1,175 1,106
Foreclosed properties . . . . 28,294 31,073
Nonrefundable loan fees . . . (4,901) (4,538)
Consumer and other . . . . . . 71 1,536
------------ ----------
Total . . . . . . . . . . $ 404,811 $ 386,999
============ ==========
Included in owned loans at June 30, 1995 and December 31, 1994 were
nonaccrual loans totaling $21.5 million and $21.7 million, respectively.
The following schedule summarizes the composition of Loans - net at June 30,
1995 and December 31, 1994:
June 30, December 31,
1995 1994
------------ ------------
(in thousands)
Loans . . . . . . . . . . . . $ 404,811 $ 386,999
Allowance for loan losses . . (16,234) (16,508)
Unearned discount . . . . . . (824) (1,109)
------------ ----------
Loans - net . . . . . . . $ 387,753 $ 369,382
=========== ==========
6. OTHER ASSETS AND OTHER LIABILITIES.
At June 30, 1995, other assets included amounts due from reinsurers of $34.3
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 June 30, 1995 and December 31, 1994 was a federal income tax
receivable of $5.1 million and $6.2 million, respectively.
Other liabilities included a $10.0 million and $12.8 million managed cash
overdraft at June 30, 1995 and December 31, 1994, respectively.
8
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7. NOTES PAYABLE.
To help finance its originations and acquisitions of home equity loans,
United Companies Lending Corporation ("UC Lending") and other mortgage
lending subsidiaries of the Company entered into a credit agreement dated as
of May 23, 1995 with First Union National Bank of North Carolina and certain
other lenders signatory thereto (the "Warehouse Facility"). Under the
Warehouse Facility, UC Lending and the other mortgage lending subsidiaries
may borrow up to $150 million on a revolving basis secured by home equity
loans eligible thereunder. Loans under the Warehouse Facility are subject to
the satisfaction of certain borrowing conditions, including a minimum
borrowing base and bear interest at a floating rate. Borrowings under the
Warehouse Facility are required to be repaid from the proceeds of the sale
or other disposition of the home equity loan collateral. The Warehouse
Facility contains certain provisions that may affect the ability of UC
Lending to pay dividends to the Company. The lenders' commitment under the
Warehouse Facility is scheduled to terminate on May 23, 1997. As of June 30,
1995, approximately $12.2 million was outstanding under the Warehouse
Facility.
8. 6 3/4% CONVERTIBLE PREFERRED STOCK ("PRIDES(SM)").
On June 16, 1995, the Company concluded the sale of 1,955,000 shares of its
Preferred Redeemable Increased Dividend Equity Securities(SM), 6 3/4%
PRIDES(SM), Convertible Preferred Stock, par value $2.00 per share
("PRIDES(SM)"), at a price per share of $44.00. After deducting underwriting
discounts but before deducting expenses payable by the Company, proceeds to
the Company were approximately $83.7 million. The net proceeds from the sale
of shares of PRIDES(SM) were used for general corporate purposes.
The PRIDES(SM) rank prior to the Company's common stock as to payment of
dividends and distribution of assets upon liquidation. The shares of
PRIDES(SM) mandatorily convert into shares of common stock on July 1, 2000
(the "Mandatory Conversion Date") on a one share to one share basis, and the
shares of PRIDES(SM) are convertible into shares of common stock at the
option of the holder at any time prior to the Mandatory Conversion Date on
the basis of .826 of a share of common stock for each share of PRIDES(SM) in
each case subject to adjustment in certain events. In addition, the Company
has the option to convert the shares of PRIDES(SM), in whole or in part, on
or after July 1, 1998 until the Mandatory Conversion Date, into shares of
its common stock according to a formula.
9. COMMITMENTS AND CONTINGENCIES.
On March 21, 1994, the United States Court of Appeals for the Eleventh
Circuit, in Rodash v. AIB Mortgage Company, 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 August 4, 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.
9
11
Amendments to the TILA which 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 portion of the
Company's loans as currently originated will be subject to the requirements
of this legislation. The Company has reviewed this legislation in its final
form and intends to comply with the additional disclosure requirements of
the legislation. Management of the Company does not believe that the
requirements of this legislation will have a material effect on the
Company's financial condition or results of operations.
As discussed in Note 2 above, the Company has formalized a plan of
disposition of its investment in UG Title. In connection therewith, an
amended letter of intent to sell UG Title has been signed which includes a
provision making the Company liable to UG Title for claims from defalcations
and fraud losses incurred by UG Title which are unknown and occur prior to
closing and are discovered within 24 months thereafter. The Company has
estimated the risk of loss related to such potential claims and recorded a
provision for such loss. Should such claims materially exceed the Company's
estimates for such losses, such consequence will have an adverse impact on
the Company's operations.
As also discussed in Note 2 above, the appeal by the FMC Institutional
Lenders of the decision of the bankruptcy court approving the settlement
discussed therein will be set for oral argument before the U.S. Fifth
Circuit Court of Appeals during the week of September 25, 1995.
The Company used a prefunding feature in connection with its loan
securitization transaction during the second quarter of 1995. At June 30,
1995, approximately $125 million was held in a prefunding account for the
purchase of the Company's home equity loans during the third quarter of
1995. Pursuant to this commitment, home equity loans with a remaining
principal balance of approximately $125 million must be delivered prior to
September 10, 1995.
10. ACCOUNTING STANDARDS.
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122 ("SFAS No. 122")
"Accounting for Mortgage Servicing Rights". The provisions of SFAS No. 122
are to be applied prospectively in fiscal years beginning after December 15,
1995; however, the FASB encourages earlier application in periods for which
financial statements have not been issued. The Statement amends certain
provisions of FASB Statement No. 65 to eliminate the accounting distinction
between rights to service loans for others that are acquired through loan
origination activities and those acquired through purchase transactions.
Management believes that the adoption of SFAS No. 122 will not have a
material effect on the financial statements of the Company.
11. SUBSEQUENT EVENT.
On July 25, 1995, the Company publicly sold $100 million of its senior
unsecured notes. The notes bear interest at the rate of 7.00% per annum,
payable semi-annually, mature on July 15, 1998 and are not redeemable prior
to maturity. The notes rank on a parity with other unsecured and senior
indebtedness of the Company. A portion of the proceeds from the issuance of
the notes were used to repay the principal amount of indebtedness
outstanding under the Company's primary revolving credit facility with a
group of banks which was scheduled to mature on December 31, 1996. The
remainder of the proceeds will be used for general corporate purposes. The
Company terminated this revolving credit facility effective July 25, 1995.
10
12
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.
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Income from continuing operations for the first six months of 1995 was $32.0
million ($2.23 per share based on 14.4 million weighted average shares
outstanding) compared to net income of $28.4 million ($1.97 per share based on
14.5 million shares outstanding) for the same period of 1994. The above per
share data is calculated on a fully diluted basis, and, for 1995, reflects the
issuance of 1,955,000 shares of 6 3/4% Convertible Preferred Stock
("PRIDES(SM)") on June 16, 1995. Net income for the first six months of 1995
was positively affected by a $175 million increase in the amount of loans sold
during the period as compared to the same period of 1994 and the recognition
of loan sale gains and loan fees in connection with such sales. The effect on
income of these items was reduced by increased costs in the Company's mortgage
lending division associated with expansion of operations, as personnel costs
increased $8.1 million, advertising expense increased $3.7 million and loan
purchase premiums rose $2.6 million.
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,
-------------------------------
1995 1994
---- ----
(dollars in thousands)
Mortgage ...................................... $ 45,983 $ 41,777
Life insurance ................................ 7,733 4,504
Corporate, other operations and eliminations... (3,788) (2,696)
--------- ---------
Total ...................................... $ 49,928 $ 43,585
========= =========
Home equity loan originations ................. $ 672,451 $ 425,446
Home equity loans sold ........................ 635,357 460,359
Interest spread retained on home equity
loans sold ................................. 4.87% 4.88%
11
13
The following table sets forth certain financial data for the periods
indicated.
Six Months Ended June 30,
-----------------------------
1995 1994
-------- --------
(in thousands)
Total revenues . . . . . . . . . . . $192,066 $152,992
Total expenses . . . . . . . . . . . 142,138 109,407
Income from continuing operations
before income taxes . . . . . . . . 49,928 43,585
Income from continuing operations . . 31,963 28,417
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the six months ended June 30, 1995
and 1994.
Six Months Ended June 30,
-----------------------------
1995 1994
-------- --------
(in thousands)
Interest, charges and fees on loans . . $ 65,342 $ 57,330
Loan sale gains . . . . . . . . . . . . 63,987 43,346
Investment income . . . . . . . . . . . 52,729 38,930
Loan servicing income . . . . . . . . . 5,689 7,684
Net insurance premiums . . . . . . . . 4,319 5,702
-------- --------
Total . . . . . . . . . . . . . . . $192,066 $152,992
======== ========
Interest, charges and fees on loans increased $8.0 million for the first six
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 six months ended June 30, 1995 and 1994,
the Company sold approximately $635 million and $460 million, respectively, in
home equity loans and recognized approximately $17.5 million and $15.6 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,
-----------------------------
1995 1994
-------- --------
(in thousands)
Loan origination fees . . . . . . . $ 33,170 $ 27,210
Mortgage loan interest . . . . . . 22,595 22,884
Other loan income . . . . . . . . . 9,577 7,236
-------- --------
Total . . . . . . . . . . . . . $ 65,342 $ 57,330
======== ========
The Company estimates that non-accrual loans reduced mortgage loan interest
for the first six months of 1995 and 1994 by approximately $6.0 million and $5.1
million, respectively. During the six months ended June 30, 1995 the average
amount of non-accrual loans owned by the Company was $21.5 million compared to
12
14
approximately $28.2 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 $73.5 million and $52.4 million during the first six
months of 1995 and 1994, respectively, representing 3.9% and 4.4%, 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 June 30, 1995, the Company owned approximately $8.3
million of commercial loans which were on an accrual status, but which the
Company considers as potential problem loans, compared to $9.8 million at June
30, 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 $20.6 million during the first six 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 $175 million
increase in the amount of loans sold. In connection with the securitization
transaction concluded in June, 1995, the Company utilized a series of interest
rate hedge mechanisms with respect to the fixed rate classes of loans to be
included in the transaction so as to protect the Company against an increase in
market interest rates. The gain recorded by the Company in connection with the
loans delivered during the second quarter of 1995 was reduced by approximately
$5.0 million as the result of a decline in interest rates prior to the pricing
of the securitization transaction.
The following table presents information regarding home equity loan sale
transactions for the periods indicated.
Six Months Ended June 30,
----------------------------
1995 1994
-------- --------
(dollars in thousands)
Home equity loans sold ............................. $635,357 $460,359
Average coupon on home equity loans sold ........... 12.31% 11.51%
Interest spread retained on home equity loans sold.. 4.87% 4.88%
Home equity loan sale gains ........................ $ 63,987 $ 43,346
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 actions will generally lag the impact of market rate fluctuations. The
weighted average interest spread retained by the Company on loan sales during
the three months ended June 30, 1995 increased to 5.21% from 4.42% retained on
loan sales during the first quarter of 1995. This increase is primarily
attributable to a decrease in the weighted pass-through rates on loans sold as
the result of market rates declining during the second quarter of 1995. In
connection with the loan securitization transactions, the Company has used a
prefunding feature which "locks in" the pass-through rate that the Company will
pay to 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
the prefunded amount and the pass-through interest paid to the investors during
the period from the date of closing of the securitization transaction until the
date of delivery of the loans. In connection with the home equity loan
securitization transaction which closed during the second quarter of 1995,
approximately $125 million was held in prefunding accounts for purchase of the
Company's home equity loans during the third quarter of 1995. Pursuant thereto,
home equity loans with a remaining principal balance of approximately $125
million must be delivered prior to September 10, 1995.
13
15
Investment income totaled $52.7 million on average investments of
approximately $1.2 billion for the first six months of 1995 compared to
investment income of $38.9 million on average investments of approximately $1.0
billion during the same period of 1994. In addition to interest earned on the
higher asset base, investment income during the first six months of 1995 was
positively affected by a $3.6 million increase in income related to the
Company's investment in a limited partnership and a $1.8 million increase in
interest earned on temporary investments - reserve accounts. At June 30, 1995
the amortized cost of the fixed income portfolio totaled $1.2 billion and was
comprised principally of $791 million in investment grade mortgage-backed
securities and $342 million in investment grade bonds. At June 30, 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 June 30, 1995, the carrying value of investments in the
Company's trading account was $.8 million reflecting a $.2 million net
unrealized gain which is included in investment income for the first six months
of 1995.
Loan servicing income declined $2.0 million for the six months ending June
30, 1995 compared to the same period of 1994. Loan servicing income was
negatively affected by a $2.0 million increase in the amortization of
capitalized excess servicing income 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 an increase of
approximately $725 million in the average amount of home equity loans serviced
by the Company for third parties during the first six months of 1995 compared
to the same period of 1994. In addition, the reduction in the normal servicing
fee from 75 to 50 basis points effective July 1, 1994 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.
Six Months Ended June 30,
-------------------------
1995 1994
----------- ------------
(in thousands)
Servicing fees earned ............ $ 35,759 $ 25,042
Amortization of capitalized excess
servicing income ............... (30,070) (17,358)
-------- --------
Total ......................... $ 5,689 $ 7,684
======== ========
Net insurance premiums declined $1.4 million for the first six 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.
14
16
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
Six Months Ended June 30,
-------------------------
1995 1994
----------- -----------
(in thousands)
Interest on annuity policies ..... $ 39,588 $ 35,854
Personnel ........................ 35,535 27,649
Interest ......................... 13,772 5,699
Loan loss provision .............. 7,821 6,311
Insurance commissions ............ 6,828 6,942
Insurance benefits ............... 5,376 6,487
Other operating .................. 33,218 20,465
-------- --------
Total ......................... $142,138 $109,407
======== ========
Interest on annuity policies increased $3.7 million for the first six
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 six months of 1995, an increase of approximately $109 million
from the same period of 1994.
Personnel expenses increased approximately $7.9 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 six months of 1995 increased $8.1 million
from the same period of 1994 primarily as the result of an increase in the
average amount of debt outstanding and in the weighted average interest rate on
debt outstanding.
The provision for loan losses increased $1.5 million during the first six
months of 1995 compared to the same period of 1994. During the first six months
of 1994, the amount of loans owned by the Company declined by approximately $83
million compared to an increase of $18 million in the amount of loans owned
during the same period of 1995. In addition, during the first six months of 1994
the Company reduced the amount of home equity foreclosed properties by
approximately $6.2 million compared to a reduction of $2.2 million during the
same period of 1995.
Insurance commissions for the first six months of 1995 was $6.8 million
compared to $6.9 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 six months ended June 30, 1995, the
Company capitalized approximately $7.4 million in commissions paid on sales of
annuities compared to $9.4 million during the same period of 1994. Amortization
of commission expense on annuities capitalized in prior periods was $5.3 million
during the six months ended June 30, 1995, compared to $4.4 million during the
same period of 1994.
Other operating expenses for the six months ended June 30, 1995 increased
approximately $12.8 million when compared to the same period of 1994 primarily
as the result of expansion of the Company's mortgage operations, including a
$3.7 million increase in advertising expenses, a $2.6 million increase in loan
purchase premiums and a $1.3 million increase in occupancy expenses.
15
17
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, 1995 and 1994, respectively.
Six Months Ended June 30, 1995
----------------------------------------------------
Corporate,
Life Other Operations,
Mortgage Insurance & Eliminations Total
-------- --------- -------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans .. $ 42,920 $ 19,524 $ 2,898 $ 65,342
Loan sale gains ...................... 63,987 63,987
Investment income .................... 3,030 50,633 (934) 52,729
Loan servicing income ................ 8,056 (718) (1,649) 5,689
Net insurance premiums ............... -- 4,319 -- 4,319
--------- --------- --------- ---------
Total ............................. 117,993 73,758 315 192,066
--------- --------- --------- ---------
Expenses:
Interest on annuity policies ......... 39,588 39,588
Personnel ............................ 30,132 2,742 2,661 35,535
Interest ............................. 8,137 1,862 3,773 13,772
Loan loss provision .................. 6,304 1,517 7,821
Insurance commissions ................ 6,657 171 6,828
Insurance benefits ................... 5,376 5,376
Other operating ...................... 27,437 8,283 (2,502) 33,218
--------- --------- --------- ---------
Total ............................. 72,010 66,025 4,103 142,138
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes ............... $ 45,983 $ 7,733 $ (3,788) $ 49,928
========= ========= ========= =========
16
18
Six Months Ended June 30, 1994
-------------------------------------------------
Corporate,
Life Other Operations,
Mortgage Insurance & Eliminations Total
-------- --------- -------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans .. $ 32,385 $ 23,056 $ 1,889 $ 57,330
Loan sale gains ...................... 43,346 43,346
Investment income .................... 770 38,887 (727) 38,930
Loan servicing income ................ 10,077 (136) (2,257) 7,684
Net insurance premiums ............... 5,702 5,702
-------- -------- -------- --------
Total ............................. 86,578 67,509 (1,095) 152,992
-------- -------- -------- --------
Expenses:
Interest on annuity policies ......... 35,854 35,854
Personnel ............................ 21,989 2,509 3,151 27,649
Interest ............................. 2,608 855 2,236 5,699
Loan loss provision .................. 4,348 1,963 6,311
Insurance commissions ................ 6,620 322 6,942
Insurance benefits ................... 6,487 6,487
Other operating ...................... 15,856 8,717 (4,108) 20,465
-------- -------- -------- --------
Total ............................. 44,801 63,005 1,601 109,407
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes ............... $ 41,777 $ 4,504 $ (2,696) $ 43,585
======== ======== ======== ========
17
19
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 in fixed income securities 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 $2.1 billion in loans for
third parties at June 30, 1995, $1.9 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 June 30, 1995, the Company's allowance for loan losses was
$16.2 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 June 30, 1995,
the allowance for loss on loans serviced was $35.3 million. The maximum recourse
associated with sales of home equity loans according to terms of the loan sale
agreements totaled approximately $387 million, of which amount approximately
$377 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 June 30, 1995, the contractual balance of loans serviced was
approximately $2.5 billion comprised of approximately $381 million serviced for
the Company and approximately $2.1 billion serviced for investors. The portfolio
is geographically diversified. Although the Company services loans in 48 states,
at June 30, 1995 a substantial portion of the loans serviced were originated in
Florida (12.4%), Ohio (11.4%), Louisiana (9.6%), and North Carolina (7.5%),
respectively, and no other state accounted for more than 7.0% 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 (27.3%),
Georgia (16.7%), and Virginia (8.8%) 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.
18
20
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)
June 30, 1995
-------------
Home equity ..... $2,143,229 $ 155,001 7.23% $ 6,583 $ 14,199 $ 6,046 0.63%
Commercial ...... 259,176 3,381 1.30% 21,426 8,437 1,148 0.86%
Conventional .... 67,237 2,383 3.54% 285 -- 50 0.14%
---------- ---------- ---------- ---------- ----------
Total ...... $2,469,642 $ 160,765 6.51% $ 28,294 $ 22,636 $ 7,244
========== ========== ========== ========== ==========
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
========== ========== ========== ========== ==========
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 .... 82,777 2,991 3.61% 35 -- (08) --
---------- ---------- ---------- ---------- ----------
Total ...... $1,777,022 $ 117,400 6.61% $ 38,080 $ 17,392 $ 8,056
========== ========== ========== ========== ==========
*Annualized for the six months ended June 30, 1995 and 1994, respectively.
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 as a percentage of the owned
and/or serviced portfolio was .96% at June 30, 1995 compared to 1.27% at June
30, 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.
19
21
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,
-------------------------
1995 1994
--------- ---------
(in thousands)
Balance at beginning of period.. $16,508 $21,017
Loans charged to allowance
Home equity ................. (6,992) (7,367)
Commercial .................. (1,148) (1,141)
Conventional ................ (69) (18)
------- -------
Total .................... (8,209) (8,526)
Recoveries on loans previously
charged to allowance ......... 965 470
------- -------
Net loans charged off .......... (7,244) (8,056)
Loan loss provision ............ 7,821 6,311
Reserve reclassification ....... (851) (107)
------- -------
Balance at end of period ....... $16,234 $19,165
======= =======
Specific reserves .............. $ 6,715 $ 8,234
Unallocated reserves ........... 9,519 10,931
------- -------
Total reserves ................. $16,234 $19,165
======= =======
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, 1995, the Company
owned $28.3 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
20
22
limited guarantees and 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,
1995 1994 1994
-------- ------------ --------
(in thousands)
Allowance for loan losses
(Applicable to loans and foreclosed properties
owned by the Company) ........................ $16,234 $16,508 $19,165
Allowance for loss on loans serviced
(Applicable to loans
sold with recourse) .......................... 35,339 26,822 20,549
------- ------- -------
Total ................................... $51,573 $43,330 $39,714
======= ======= =======
As of June 30, 1995, approximately $1.9 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 $387 million at June 30, 1995, of which $377 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 $35.3
million at June 30, 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.
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 August
4, 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 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 portion of the Company's
loans as currently originated will be subject to the requirements of this
legislation. The Company has reviewed this legislation in its final form and
intends to comply with the additional disclosure requirements of the
legislation. Management of the Company does not believe that the requirements
of this legislation will have a material effect on the Company's financial
condition or results of operations.
Investment securities. The Company's investment portfolio consists
primarily of mortgage backed securities and corporate bonds, comprising 68.6%
and 28.8% of the portfolio at June 30, 1995, respectively. At June 30,
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23
1995, approximately 93.3% 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 June 30, 1995, the Company owned $.8
million in equity securities classified as trading securities. The net
unrealized gain in the debt securities portfolio (fair value over amortized
cost) at June 30, 1995 was $17.8 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. The 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, short-term bank facilities and warehouse facilities (discussed below)
pending loan sales. In addition, at June 30, 1995, UC Lending had available a
secured warehouse facility provided by an investment bank that acted as lead
underwriter of the Company's second quarter public loan securitization
transaction. The warehouse facility was directly related to this securitization
transaction and initially provided funding for up to $245 million of eligible
home equity loans for such securitization and will terminate with the closing of
the last delivery of loans under the prefunding accounts relative to this
securitization. As of June 30, 1995, $175 million was available and no amounts
were outstanding under this warehouse facility. The Bank Facility has been
terminated with a portion of the proceeds received by the Company from its
issuance on July 25, 1995 of $100 million of 7% senior, unsecured notes due July
15, 1998. (See Note 11 to the Company's Consolidated Financial Statements.)
UC Lending and other mortgage lending subsidiaries of the Company entered
into a credit agreement dated as of May 23, 1995 with First Union National Bank
of North Carolina and certain other lenders signatory thereto (the "Warehouse
Facility"). Under the Warehouse Facility, UC Lending and the other mortgage
lending subsidiaries may borrow up to $150 million on a revolving basis secured
by home equity loans eligible thereunder. Loans under the Warehouse Facility are
subject to the satisfaction of certain borrowing conditions, including a minimum
borrowing base and will bear interest at a floating rate. Borrowings under the
Warehouse Facility are required to be repaid from the proceeds of the sale or
other disposition of the home equity loan collateral. The lenders' commitment
under the Warehouse Facility is scheduled to terminate on May 23, 1997. As of
June 30, 1995, approximately $12.2 million was outstanding under the Warehouse
Facility.
Substantially all of the loans originated or acquired by UC Lending are
sold. Net cash from operating activities of the Company in the first six months
of 1995 and 1994 reflects approximately $692 million and $433 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 $640 million and $466 million in the six months ended June 30,
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 have been provided. The loan sale transactions have required the
subordination
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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 has been 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
has been required to be placed and maintained in a reserve account to the extent
of the subordination requirements. The subordination requirements generally
provide that the excess interest spread is payable to a reserve account until a
specified level of cash, which is less than the maximum subordination amount, is
accumulated therein. The 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 $2.2 billion of pass-through certificates through June 30, 1995
under the Company sponsored shelf-registration statement, the subordination
amounts aggregate approximately $338 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 (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
June 30, 1995, amounts on deposit in such reserve accounts totaled $118 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 June 30,
1995, the Company's debt facilities available to fund general operating needs,
excluding warehouse facilities discussed above, totaled $284 million, of which
$194 million was outstanding, resulting in available, but unfunded debt capacity
for general operating needs of $90 million. (See also Note 11 to the Company's
Consolidated Financial Statements.)
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 (which excludes annuity sales and
surrenders) in the first six months of 1995 and 1994 was approximately $39.5
million and $31.7 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 six months of 1995 and 1994 reflect approximately $85 million
and $116 million, respectively, in cash received primarily from sales by UC
Life of its annuity products. The Company believes that the decrease in annuity
sales in the first six months of 1995 compared to the same period of 1994 is
due in part to the interest rate environment, particularly the relative
relationship between short term and intermediate term interest rates, and to
the focus of the Company's resources on development of its variable annuity
product. As reflected in the net cash used by investing activities during the
same periods, investment purchases were approximately $109 million and $182
million, respectively, reflecting the investment of these funds and the
reinvestment of proceeds from maturities of investments. Cash used by financing
activities during these six month periods also reflects payments of $113
million and $85 million primarily on annuity products resulting from
policyholder surrenders and claims. The increase in annuity surrenders during
the 1995 was expected, due in part to an increase in the amount of annuity
policies which were beyond the surrender penalty period. Should annuity
surrenders continue to exceed annuity sales such consequence will decrease the
liquidity of UC Life and potentially result in the sale of certain assets, such
as bonds and loans, prior to their maturity, which may be at a loss. UC Life's
investments at June 30, 1995 included approximately $298 million in residential
and commercial mortgage loans, and the amortized cost of its bond portfolio
included $361 million in corporate and government bonds and private debt
placements and $791 million in mortgage-backed securities.
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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
June 30, 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.
RATING.
On July 25, 1995 the Company issued $100 million of its unsecured and
unsubordinated 7% senior notes due July 15, 1998. The notes received ratings of
"BBB" from Duff & Phelps Credit Rating Co., "BBB-" from Standard & Poor's Rating
Group, a division of The McGraw Hill Companies, Inc. and "Ba2" from Moody's
Investors Service, Inc.
ACCOUNTING STANDARDS
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122 ("SFAS No. 122") "Accounting
for Mortgage Servicing Rights". The provisions of SFAS No. 122 are to be applied
prospectively in fiscal years beginning after December 15, 1995; however, the
FASB encourages earlier application in periods for which financial statements
have not been issued. The Statement amends certain provisions of FASB Statement
No. 65 to eliminate the accounting distinction between rights to service loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. Management believes that the adoption of
SFAS No. 122 will 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 June 30,
1995 and the related consolidated statements of income and cash flows for the
three months and six months ended June 30, 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 June 30, 1995, and the related
consolidated statements of income and cash flows for the three-month and
six-month periods ended June 30, 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
August 4, 1995
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PART II
OTHER INFORMATION
Item 1. Inapplicable
Item 2. Changes in Securities
On June 16, 1995, the Company concluded the sale of 1,955,000
shares of its Preferred Redeemable Increased Dividend Equity
Securities(SM), 6 3/4% PRIDES(SM), Convertible Preferred Stock, par
value $2.00 per share ("PRIDES(SM)"). The rights evidenced by
the Common Stock of the Company have been limited as a result of the
issuance of the PRIDES(SM). For a description of such limitations,
see the Articles of Amendment to the Company's Articles of
Incorporation dated June 13, 1995, filed as Exhibit 4.9 to the
Company's Registration Statement on Form S-3, File No. 33-60367.
Item 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 June 14, 1995.
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 Amendments to the Articles of
Incorporation of the Company to require the
affirmative vote of the holders of no less than 80%
of the total voting power of the Company to amend,
alter or repeal certain amended provisions of the
by-laws of the Company adopted by the Board of
Directors on and effective as of January 31, 1995,
which amended by-laws:
a) Authorize the Board of Directors exclusively
to fix the number of directors by no less
than a 66 2/3% vote and classify the Board of
Directors into three classes with staggered
terms:
SHARES VOTED
For Against Abstentions Broker non-votes
------- --------- ----------- ----------------
6,133,487 2,135,665 117,153 2,269,741
b) Provide procedures for removal of directors
and filling vacancies on the Board of
Directors
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
6,472,883 1,720,953 192,470 2,269,740
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c) Provide advance notice procedures for
shareholder nominations and proposals
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
6,604,919 1,573,532 207,855 2,269,740
d) Provide procedures for the calling of a
special meeting of shareholders
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
6,631,675 1,575,611 179,240 2,269,520
(3) Approval of Amendments to the Articles of
Incorporation to:
a) Provide that no action may be taken by the
shareholders except at an annual or special
meeting
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
6,160,607 1,953,505 272,194 2,269,740
b) Provide that a special meeting of the
shareholders may be called by the
shareholders only by no less than 66 2/3% of
the total voting power of the Company
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
5,995,695 2,251,905 138,707 2,269,739
c) Eliminate the right of a director to vote by
proxy
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
6,692,651 1,528,492 165,162 2,269,741
(4) Approval of an amendment to the Company's 1993 Stock
Incentive Plan to permit restricted stock awards.
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
8,876,804 992,496 182,107 604,639
(5) Approval of an amendment to the Company's Management
Incentive Plan to permit bonuses payable in Common
Stock
SHARES VOTED
For Against Abstentions Broker non-votes
--------- --------- ----------- ----------------
9,328,173 610,241 172,992 544,640
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Item 5. Inapplicable
Item 6. Exhibits and Current Reports on Form 8-K
(a) Exhibits- (3) Amendment to the Articles of Incorporation
effective June 19, 1995
(11) Statement re computation of earnings per share
(15) Consent of Deloitte & Touche LLP
(27) Financial Data Schedules
(b) Current reports on Form 8-K
During the quarter ended June 30, 1995, the following Current
Reports on Form 8-K were filed with the Commission:
(1) Current Report on Form 8-K dated October 1, 1994, filed on
June 16, 1995, enclosing the following exhibits:
1.1 Terms Agreement with respect to 9.35% Senior
Notes due November 1, 1999
1.2 Terms Agreement with respect to shares of
Preferred Redeemable Increased Dividend
Equity Securities, 6 3/4% PRIDES(SM),
Convertible Preferred Stock, par value $2.00
per share.
4.1 Senior Indenture
4.2 Subordinated Indenture
4.3 First Supplemental Indenture with respect to
9.35% Senior Notes due November 1, 1999
4.4 Form of certificate for shares of Preferred
Redeemable Increased Dividend Equity
Securities 6 3/4% PRIDES(SM), Convertible
Preferred Stock, par value $2.00 per share.
(2) Current Report on Form 8-K dated May 25, 1995 filed on May
26, 1995 enclosing the following exhibits:
4.8 Form of Articles of Amendment to Articles of
Incorporation
8.1 Opinion of Stroock & Stroock & Lavan with
respect to certain tax matters
12.1 Statement of Computation of Ratio of Earnings
to Fixed Charges
12.2 Statement of Computation of Ratio of Earnings
to Combined Fixed Charges and Preferred Stock
Dividends
23.4 Consent of Stroock & Stroock & Lavan
(included in Exhibit 8.1)
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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: 8/7/95 By: /s/ J. Terrell Brown
------- -----------------------------------------
J. Terrell Brown
Chairman and Chief Executive Officer
Date: 8/7/95 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 Amendment to the Articles of Incorporation effective 32-36
June 19, 1995
11 Statement re computation of
earnings per share 37
15 Consent of Deloitte & Touche LLP 38
27 Financial Data Schedules 39
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