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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
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 8, 1996 was 28,276,438, excluding 1,159,682 treasury
shares.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
PAGE
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months and six months ended June 30, 1996 and 1995 . . . 3
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995 . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . 5-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 9-14
Review by Independent Accountants . . . . . . . . . . . . . . . . 15
Independent Accountants' Report . . . . . . . . . . . . . . . . . 16
PART II - OTHER INFORMATION 17
Submission of Matters to a Vote of Security Holders . . . . . . . 17
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . 19
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30,
1996 December 31,
Assets (Unaudited) 1995
- ------ ----------- ------------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 18,254 $ 5,284
Temporary investments - reserve accounts . . . . . . . . . . . . . . . . 176,283 155,254
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,710 74,877
Capitalized excess servicing income . . . . . . . . . . . . . . . . . . . 339,943 280,985
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . 44,501 36,897
Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,893 15,239
Net assets of discontinued operations . . . . . . . . . . . . . . . . . . 153,636 163,293
Capitalized mortgage servicing rights . . . . . . . . . . . . . . . . . . 13,879 5,813
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,380 22,542
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $925,479 $760,184
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $388,764 $265,756
Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . 60,730 41,692
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . 61,970 51,454
Managed cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . - 27,052
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,379 21,756
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 546,843 407,710
-------- --------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 1,955,000 shares of 6 3/4% PRIDES(SM)
($44 per share liquidation preference) . . . . . . . . . . . . . . 3,910 3,910
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 29,404,160 and 29,302,246 shares . . . . . . . . . . . . 58,808 58,604
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 181,556 179,848
Net unrealized gain on securities . . . . . . . . . . . . . . . . . . 36 37
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 149,545 122,816
Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . . . . (15,219) (12,741)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 378,636 352,474
-------- --------
Total liabilities and stockholders' equity . . . . . . . . . . $925,479 $760,184
======== ========
See notes to consolidated financial statements.
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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,
---------------------- --------------------------
1996 1995 1996 1995
------- ------- -------- --------
Revenues:
Loan sale gains . . . . . . . . . . . . . . . $49,878 $35,181 $ 89,688 $ 60,631
Finance income, fees earned and other
loan income . . . . . . . . . . . . . . . 33,172 26,560 62,588 51,806
Investment income . . . . . . . . . . . . . . 2,671 1,608 5,552 3,123
Other . . . . . . . . . . . . . . . . . . . . 1,111 1,251 2,293 2,641
------- ------- -------- --------
Total . . . . . . . . . . . . . . . . . 86,832 64,600 160,121 118,201
------- ------- -------- --------
Expenses:
Personnel . . . . . . . . . . . . . . . . . . 23,177 17,129 43,770 32,794
Interest . . . . . . . . . . . . . . . . . . . 9,146 6,416 16,819 12,243
Loan loss provision . . . . . . . . . . . . . 3,949 2,806 6,505 6,304
Other operating . . . . . . . . . . . . . . . 17,504 12,434 33,079 24,665
------- ------- -------- --------
Total . . . . . . . . . . . . . . . . 53,776 38,785 100,173 76,006
------- ------- -------- --------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 33,056 25,815 59,948 42,195
Provision for income taxes . . . . . . . . . . . 12,229 9,640 21,892 15,461
------- ------- -------- --------
Income from continuing operations . . . . . . . . 20,827 16,175 38,056 26,734
Gain (loss) from discontinued operations:
Gain from discontinued operations, net of
income tax expense of $894, $1,107,
$1,651 and $1,811, respectively . . . . . 1,623 2,141 3,199 4,033
Loss on disposal, net of income tax
benefit of $474, $746, $868
and $1,791, respectively . . . . . . . . . (6,765) (1,890) (7,731) (1,645)
------- ------- -------- --------
Total . . . . . . . . . . . . . . . . (5,142) 251 (4,532) 2,388
------- ------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . $15,685 $16,426 $ 33,524 $ 29,122
======= ======= ======== ========
Per share data:
Income from continuing operations . . . . . . $ .64 $ .56 $ 1.16 $ .93
Loss from discontinued operations . . . . . . (.16) - (.14) .08
------- ------- -------- --------
Net income . . . . . . . . . . . . . . . . . . $ .48 $ .56 $ 1.02 $ 1.01
======= ======= ======== ========
See notes to consolidated financial statements.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30,
---------------------------------
1996 1995
----------- -----------
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . $ 38,056 $ 26,734
Adjustments to reconcile income from continuing operations
to net cash used by continuing operating activities:
Increase in accrued interest receivable . . . . . . . . . . . . . . . . (7,604) (5,501)
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . (7,987) (4,483)
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . 14,495 12,445
Increase in capitalized excess servicing income . . . . . . . . . . . . (117,914) (83,360)
Amortization of capitalized excess servicing income . . . . . . . . . . 58,922 33,752
Increase in capitalized mortgage servicing rights . . . . . . . . . . . (8,879) -
Amortization of capitalized mortgage servicing rights . . . . . . . . . 813 -
Investment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . - 61
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . . . . 17,599 14,010
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . 1,740 1,230
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 19,038 13,321
Proceeds from sales and principal collections of loans
held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,734,395 1,251,997
Originations and purchases of loans held for sale . . . . . . . . . . . (1,797,090) (1,284,589)
----------- ------------
Net cash used by continuing operating activities . . . . . . . (54,416) (24,383)
----------- ------------
Cash flows used by discontinued operations . . . . . . . . . . . . . . . . . . (39) (14)
------------ ------------
Cash flows from investing activities:
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . . . . (21,029) (36,144)
Proceeds from sales of held-to-maturity securities . . . . . . . . . . . - 74
Purchase of held-to-maturity securities . . . . . . . . . . . . . . . . - (76)
Proceeds from disposition of title insurance subsidiary . . . . . . . . 5,126 -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (3,664) (5,102)
----------- -----------
Net cash used by investing activities . . . . . . . . . . . . . (19,567) (41,248)
----------- -----------
Cash flows from financing activities:
Proceeds from mortgage loan . . . . . . . . . . . . . . . . . . . . . . - 2,563
Decrease in revolving credit debt . . . . . . . . . . . . . . . . . . . - (27,163)
Increase in debt with maturities of three months or less . . . . . . . . 93,050 21,365
Increase in warehouse loan facility . . . . . . . . . . . . . . . . . . 27,480 -
Proceeds from ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . 3,000 -
Payments on ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . (522) -
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (6,796) (2,990)
Decrease in managed cash overdraft . . . . . . . . . . . . . . . . . . . (27,052) (13,376)
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . . - 83,254
Increase in unearned ESOP compensation . . . . . . . . . . . . . . . . . (2,478) (683)
Proceeds from exercise of stock options and warrants . . . . . . . . . . 310 1,741
----------- -----------
Net cash provided by financing activities . . . . . . . . . . . 86,992 64,711
----------- -----------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . 12,970 (934)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 5,284 1,695
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 18,254 $ 761
=========== ===========
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,
1995, as amended by Form 10-K/A-3, filed with the United States Securities
and Exchange Commission.
The consolidated results of operations for the three months and six months
ended June 30, 1996 and 1995 are not necessarily indicative of the results
to be expected for the full year. Certain 1995 amounts have been
reclassified to conform with the current year presentations. Such
reclassifications had no effect on net income.
2. DISCONTINUED OPERATIONS.
United Companies Life Insurance Company. On February 2, 1996, the Company
signed an agreement to sell all of the outstanding capital stock of its
wholly-owned life insurance subsidiary, United Companies Life Insurance
Company ("UCLIC"), subject to approval by the Company's shareholders,
regulatory authorities and the satisfaction of certain other conditions.
In June, 1996, the Company's shareholders approved the sale, and in July,
1996, regulatory approval was obtained and the remaining conditions to
closing the transaction were satisfied. The sale was concluded on July 24,
1996. The sales price of $167.6 million was comprised of approximately $110
million in cash (including a $10 million dividend paid by UCLIC immediately
prior to the closing) and UCLIC real estate and other assets which were
distributed to the Company prior to the closing. The real estate
distributed includes portions of the United Plaza office park, including the
Company's home office. In addition, the Company purchased a convertible
promissory note from PennCorp Financial Group, Inc. ("PennCorp"), the parent
of the purchaser, for $15 million in cash and converted the note into
483,839 shares of the common stock of PennCorp. The Company recorded a net
loss of $6.8 million on the disposition. As a result of the sale, the
assets (including $67 million of assets transferred to the Company by UCLIC
immediately prior to the closing) and the operations of UCLIC have been
classified as discontinued operations.
In connection with the sale of UCLIC, the Company entered into an agreement
with UCLIC which will provide a facility for the purchase of up to $300
million in first mortgage residential loans. The agreement provides that
the Company shall have the right for a limited time to repurchase certain
loans which are eligible for securitization. The agreement also has a
sublimit of up to $150 million for loans that are not eligible for
securitization.
Revenues of UCLIC for the six months ended June 30, 1996 and 1995 were
$68.1 million and $73.8 million, respectively, and net income of UCLIC was
$3.4 million and $5.2 million, respectively. At June 30, 1996, total
assets and total liabilities of UCLIC were $1.692 billion and $1.531
billion, respectively.
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 ("UGTIC"), a wholly owned subsidiary of the Company, and,
on May 1, 1995, approved a formal plan of disposal. The decision to
dispose of UGTIC was independent of the consummation of the sale thereof
pursuant to the definitive stock sale agreement signed on August 11, 1995.
As a result, the operations of UGTIC have been classified as discontinued
operations. The sale was concluded on February 29, 1996 at a sales price
of approximately $5.1 million.
The definitive stock sale agreement provided for the sale of 100% of the
stock of UGTIC and contains a provision making the Company liable to UGTIC
for claims from defalcations and fraud losses incurred by UGTIC which are
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unknown and occur prior to closing and are discovered within 24 months
thereafter. The Company is also liable, up to $4.2 million, for policy
claims paid over a ten year period after closing that exceed certain
specified levels. The Company recorded a loss from discontinued operations
(net of income tax benefit) of $1.1 million and $2.8 million for the six
months ended June 30, 1996 and 1995, respectively, in connection with the
sale of UGTIC.
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 concluded under the supervision of the
bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy
court 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 under a tax agreement
among the Company and its subsidiaries, including FMC, estimated by the FMC
Institutional Lenders to range from $2 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 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. 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 was appealed by the FMC Institutional Lenders to the U.S.
District Court which affirmed the bankruptcy court's decision. The FMC
Institutional Lenders then appealed this decision to the U.S. Fifth Circuit
Court of Appeals. In a decision rendered on November 9, 1995, the U.S.
Fifth Circuit Court of Appeals reversed the district court, vacated the
settlement between FMC and the Company and remanded the matter for further
proceedings. The trustee under the plan of liquidation has filed an
adversary proceeding in the bankruptcy proceedings against the Company
seeking avoidance of alleged preferential payments totaling $3.72 million
and has also instituted a suit in federal court against the Company
alleging claims under the tax agreement estimated by the trustee to range
from $2 million to $29 million. Management of the Company does not believe
that any additional amounts are owed by the Company to FMC or the trustee
and is vigorously contesting the claims which have been brought against it
for such amounts by the trustee. The Company did not guarantee any debt of
FMC.
3. CASH PAID FOR INTEREST AND INCOME TAXES.
During the six months ended June 30, 1996 and 1995, the Company paid
interest on notes payable in the amount of $16.1 million and $12.4 million,
respectively. During the six months ended June 30, 1996 and 1995, the
Company paid income taxes in the amount of $2.4 million and $2.8 million,
respectively.
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4. LOANS
The following schedule sets forth the components of Loans owned by the
Company at June 30, 1996 and December 31, 1995.
June 30, December 31,
1996 1995
------------- ------------
(in thousands)
Home equity . . . . . . . . . . . . . . . . . . . . . . $ 69,225 $ 67,673
Commercial . . . . . . . . . . . . . . . . . . . . . . 478 479
Conventional . . . . . . . . . . . . . . . . . . . . . 194 323
Foreclosed properties . . . . . . . . . . . . . . . . . 10,079 11,451
Nonrefundable loan fees . . . . . . . . . . . . . . . . (2,917) (4,950)
Manufactured homes . . . . . . . . . . . . . . . . . . 52,814 234
Consumer and other . . . . . . . . . . . . . . . . . . 52 17
Unearned discount . . . . . . . . . . . . . . . . . . . (215) (350)
------------- --------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 129,710 $ 74,877
============= =============
Included in loans owned at June 30, 1996 and December 31, 1995 were
nonaccrual loans totaling $6.1 million and $5.7 million, respectively.
5. OTHER ASSETS AND OTHER LIABILITIES.
At June 30, 1996 and December 31, 1995, other assets included $12.3 million
and $13.5 million in federal income tax receivable, respectively.
Other liabilities at June 30, 1996 and December 31, 1995 included $11.0
million and $7.0 million in escrow balances and $6.2 million and $5.5
million in accrued interest payable, respectively.
6. NOTES PAYABLE
Notes payable consisted of the following:
June 30, December 31,
1996 1995
-------------- --------------
(in thousands)
9.35% Senior unsecured notes due 11/1/99 . . . . . . . $ 125,000 $ 125,000
7% Senior unsecured notes due 7/15/98 . . . . . . . . . 100,000 100,000
Warehouse facilities . . . . . . . . . . . . . . . . . 46,801 19,321
Guaranteed bank loan to ESOP . . . . . . . . . . . . . 8,440 5,962
Mortgage loan . . . . . . . . . . . . . . . . . . . . . 5,473 5,473
Subordinated debenture . . . . . . . . . . . . . . . . 10,000 10,000
Short-term borrowings . . . . . . . . . . . . . . . . . 93,050 -
-------------- --------------
$ 388,764 $ 265,756
============== ==============
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7. COMMITMENTS AND CONTINGENCIES.
The Company has certain contingencies in connection with the sale of
its investment in UGTIC and the divestiture of FMC. For information
regarding these contingencies see Note 2. Discontinued Operations.
The Company used a prefunding feature in connection with its loan
securitization transaction during the second quarter of 1996. At June
30, 1996, approximately $46.1 million was held in a prefunding account
for the purchase of the Company's home equity loans during the third
quarter of 1996. Pursuant to this commitment, home equity loans with
a remaining principal balance of approximately $46.1 million were
delivered in July, 1996.
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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 Companies Life Insurance
Company ('UCLIC") and United General Title Insurance Company ("UGTIC") as
discontinued operations (see Note 2 to consolidated financial statements).
Discussed below are results of continuing operations for the periods presented.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Income from continuing operations for the first six months of 1996 was
$38.1 million ($1.16 per share based on 32.7 million weighted average shares
outstanding) compared to $26.7 million ($.93 per share based on 28.7 million
shares outstanding) for the same period of 1995. In comparison to the 1995
period, the increase in income in 1996 was primarily the result of a $418
million increase in the amount of loans sold and the recognition of loan sale
gains and loan fees in connection with such sales.
Loan sale gains increased $29.1 million during the first six months of 1996
over the same period in 1995. Loan sale gains approximate the present value
for 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, and a surety bond fee, if any, in
mortgage-backed securitization transactions and an estimate of future credit
losses. Loan sale gains for the six months ended June 30, 1996 and 1995 was
reduced by $19.6 million and $12.6 million, respectively, to provide for
estimated future credit losses on the loans sold. The increase in the amount
of loan sale gains was due primarily to a $418 million increase in the amount
of loans sold partially offset by a decrease in the interest spread retained by
the Company. Interest spread retained by the Company on loans sold includes
the normal servicing fee.
The following table presents information regarding home equity loan sale
transactions for the periods indicated.
Six Months Ended June 30,
---------------------------------
1996 1995
----------- -------------
(in thousands)
Home equity loans sold . . . . . . . . . . . . . . . . $ 1,053,053 $ 635,357
Average coupon on home equity loans sold . . . . . . . 11.19% 12.31%
Interest spread retained on home equity loans sold . . 4.67% 4.87%
Home equity loan sale gains . . . . . . . . . . . . . . $ 89,688 $ 60,631
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. In connection with its loan securitization transactions, the
Company has used a prefunding feature which "locks in" the pass-through rate
that the Company will pay to the investors on a prefunded amount which will be
used to acquire loans at a future date. The Company is obligated for the
difference between the earnings on such prefunded amount and the pass-through
interest paid to the investors during the period from the date of the closing
of the securitization transaction until the date of delivery of the loans. In
connection with the home equity loan securitization transaction which closed in
the second quarter of 1996, approximately $46.1 million was held in a
prefunding account for purchase of the Company's home
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equity loans during the third quarter of 1996. Pursuant thereto, home equity
loans with a remaining principal balance of approximately $46.1 million were
delivered in July, 1996.
The following table presents the composition of finance income, fees earned
and other loan income for the periods indicated.
Six Months Ended June 30,
--------------------------------
1996 1995
---------- -----------
(in thousands)
Servicing fees earned . . . . . . . . . . . . . . . . . $ 61,754 $ 39,757
Loan origination fees . . . . . . . . . . . . . . . . . 40,895 33,170
Mortgage loan interest . . . . . . . . . . . . . . . . 7,122 3,123
Other loan income . . . . . . . . . . . . . . . . . . . 4,019 4,573
Amortization . . . . . . . . . . . . . . . . . . . . . (51,202) (28,817)
---------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 62,588 $ 51,806
========== ===========
The average portfolio of loans serviced for third party investors was $3.2
billion and $2.2 billion during the first six months of 1996 and 1995,
respectively. The Company estimates that non-accrual loans reduced mortgage
loan interest for the first six months of 1996 and 1995 by approximately $9.6
million and $6.0 million, respectively. 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.
During the six months ended June 30, 1996 the average amount of non-accrual
loans owned and/or serviced by the Company was $150 million compared to
approximately $95 million during the same period of 1995.
Loan origination fees in excess of direct origination costs on loans held
by the Company are recognized over the lives of the loans and are recognized at
the time of sale on loans sold to third parties. During the six months ended
June 30, 1996 and 1995, the Company sold approximately $1.1 billion and $635
million, respectively, in home equity loans and recognized approximately $21.9
million and $17.5 million, respectively, in net loan origination fees in
connection with these sales.
Investment income totaled $5.6 million for the first six months of 1996
compared to investment income of $3.1 million during the same period of 1995.
Investment income is primarily related to interest earned on temporary
investments-reserve accounts.
Other income includes overhead reimbursement from discontinued operations
prior to their disposition and income earned by the Company's telecommunication
and property management services with respect to its office park.
Personnel expenses increased approximately $11.0 million primarily because
of costs associated with the expansion of the Company's mortgage operations.
Interest expense for the first six months of 1996 increased $4.6 million
from the same period of 1995 primarily as the result of an increase in average
amount of debt outstanding.
Other operating expenses for the six months ended June 30, 1996 increased
approximately $8.4 million when compared to the same period of 1995 primarily
as the result of expansion of the Company's mortgage operations including a
$4.3 million increase in occupancy, general operating and administrative
expenses and a $1.1 million increase in professional and legal expenses.
10
12
ASSET QUALITY AND RESERVES
The quality of the loans owned and those serviced for third parties
significantly affects the profitability of the Company. The values of and
markets for these assets are dependent on a number of factors, including
general economic conditions, interest rates and governmental regulations.
Adverse changes in such factors, which become more pronounced in periods of
economic decline, may affect the quality of these assets and the Company's
resulting ability to sell these assets for acceptable prices. General economic
deterioration can result in increased delinquencies on existing loans and
reductions in collateral values.
Substantially all of the home equity loans produced by the Company are
publicly sold as mortgage backed securities ("pass-through certificates") with
servicing rights retained. The purchasers of the pass-through certificates
receive a credit enhanced security which is achieved in part through a guaranty
provided by a third party insurer and by subordinating the excess interest
spread retained by the Company to the payment of scheduled principal and
interest on the certificates. The subordination of the excess interest spread
retained by the Company 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. For loans sold, the Company records a provision for
estimated amount of credit losses at the time of sale, and records such amount
on its balance sheet in the allowance for loan losses. Estimated losses on the
owned portfolio are also provided for by an increase in the allowance for loan
losses through a charge to current operating income. At June 30, 1996, the
allowance for loan losses was $62.0 million. The maximum recourse associated
with sales of home equity loans according to terms of the loan sale agreements
totaled approximately $643 million, of which amount approximately $631 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, 1996, the contractual balance of home equity loans serviced was
approximately $3.3 billion, substantially all of which are owned by and
serviced for third party investors. The portfolio is geographically
diversified. Although the Company services loans in 48 states, at June 30,
1996 a substantial portion of the loans serviced were originated in Ohio
(9.4%), Florida (8.1%) and Louisiana (7.1%), respectively, and no other state
accounted for more than 7.0% of the serviced portfolio. 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.
11
13
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, 1996
- -------------
Home equity . . . . . . . $3,301,246 $263,453 7.98% $ 7,076 $32,074 $ 7,083 0.47%
Conventional . . . . . . 51,583 2,250 4.36% - - (18) -
Commercial . . . . . . . 238,112 2,375 - 3,003 20,217 - -
Manufactured housing . . 52,814 - - - - - -
---------- -------- ------- ------- -------
Total . . . . . . . $3,643,755 $268,078 7.80% $10,079 $52,291 $ 7,065
========== ======== ======= ======= =======
December 31, 1995
- -----------------
Home equity . . . . . . . $2,701,481 $220,145 8.15% $ 8,469 $21,604 $12,221 0.56%
Conventional . . . . . . 58,554 2,734 4.67% - - 51 -
Commercial . . . . . . . 251,241 4,518 1.80% 2,982 18,890 - -
Manufactured housing . . 888 - - - - - -
---------- -------- ------- ------- -------
Total . . . . . . . $3,012,164 $227,397 7.55% $11,451 $40,494 $12,272
========== ======== ======= ======= =======
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% 2,943 26,920 - -
Conventional . . . . . . 67,237 2,383 3.54% 285 - 50 -
---------- -------- ------- ------- -------
Total . . . . . . . $2,469,642 $160,765 7.12% $ 9,811 $41,119 $ 6,096
========== ======== ======= ======= =======
*Annualized for the six months ended June 30, 1996 and 1995.
In connection with the sale of UCLIC discussed in Note 2, Discontinued
operations, the servicing of substantially all of the commercial real estate
mortgage loans and commercial pass-through certificates was transferred to
UCLIC. Prior to this transfer of servicing, the Company serviced these loans
and pass-through certificates without recourse.
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 a substantial portion of the portfolio. In addition, the Company
can neither quantify the impact of property value declines, if any, on the home
equity loans 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.
A summary analysis of the changes in the Company's allowance for loan
losses for the indicated periods is as follows.
12
14
Six Months Ended June 30,
--------------------------------------
1996 1995
---------- ----------
(in thousands)
Balance at beginning of period . . . . . . . . . . . $ 51,454 $ 34,478
Loans charged to allowance
Home equity . . . . . . . . . . . . . . . . . . . (8,702) (6,992)
Conventional . . . . . . . . . . . . . . . . . . . - (63)
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . (8,702) (7,055)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . . . . . . 1,653 965
---------- ----------
Net loans charged off . . . . . . . . . . . . . . . . (7,049) (6,090)
Loan loss provision on owned and serviced loans . . . 17,599 14,010
Reserve reclassification . . . . . . . . . . . . . . . (34) (40)
---------- ----------
Balance at end of period . . . . . . . . . . . . . . . $ 61,970 $ 42,358
========== ==========
LIQUIDITY AND CAPITAL RESOURCES
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 senior notes and short-term
borrowings, payments of operating and interest expenses, and income taxes
related to loan sale transactions. Loan production is funded principally
through proceeds of warehouse facilities pending loan sales. In June, 1996, a
warehouse facility provided to the mortgage lending subsidiaries of the Company
was increased from $150 million to $350 million and the lenders' commitment was
extended from May, 1997 until May, 1998. In addition, in connection with the
sale of UCLIC, the Company entered into an agreement with UCLIC which will
provide a facility for the purchase of up to $300 million in first mortgage
residential loans. The agreement provides that the Company shall have the
right for a limited time to repurchase certain loans which are eligible for
securitization. The agreement also has a sublimit of up to $150 million for
loans that are not eligible for securitization.
Substantially all of the loans originated or acquired by the Company are
sold. Net cash from operating activities of the Company in the first six
months of 1996 and 1995 reflects approximately $1.8 billion and $1.3 billion,
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 $1.7 billion and $1.3 billion in the six months ended June 30,
1996 and 1995. 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 of certain cash flows payable to UCLC and its subsidiaries to the
payment of principal and interest due to certificate holders. In connection
with these transactions, UCLC has been required, in some instances, to fund an
initial deposit, and thereafter, in each transaction, a portion of the amounts
receivable by UCLC 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. 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, 1996, the amounts on deposit in such reserve
accounts totaled
13
15
$176.3 million. In April, 1996, a subsidiary of the Company entered into a
letter of credit and reimbursement agreement with the domestic branch of an
international bank pursuant to which the bank issued a letter of credit to
replace a substantial portion of the cash previously required to be maintained
in the reserve accounts for five loan securitization transactions consummated
in 1993 and 1994. As a consequence, $40 million was released from the related
reserve accounts to the Company, and these proceeds, net of transaction costs,
were used to pay down outstanding debt of the Company in April, 1996.
RATINGS.
In July, 1996, Moody's Investor Services, Inc. raised its rating on the
Company's senior unsecured debt to Ba1 from Ba2.
14
16
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,
1996 and the related consolidated statements of income and cash flows for the
three months and six months ended June 30, 1996 and 1995 and previously audited
and expressed an unqualified opinion dated February 29, 1996 (July 24, 1996 as
to Notes 3.4, 6 and 11) on the consolidated financial statements of the Company
and its subsidiaries as of December 31, 1995, from which the consolidated
balance sheet as of this date is derived.
15
17
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, 1996, and the
related consolidated statements of income and cash flows for the three-month
and six-month periods ended June 30, 1996 and 1995. 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, 1995, 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 29,
1996 (July 24, 1996 as to Notes 3.4, 6 and 11), 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, 1995 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 12, 1996
16
18
PART II
OTHER INFORMATION
Items 1 through 3. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The matters discussed below were submitted to a
vote of security holders at the Company's Annual
Meeting of Shareholders held on June 28, 1996.
(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, as amended, 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:
Approval and adoption of an Amended and
Restated Stock Purchase Agreement dated as of
January 30, 1996, which relates to the sale by
the Company of 100% of the outstanding capital
stock of United Companies Life Insurance
Company.
For Against Abstentions Broker non-votes
---------- ------- ----------- ----------------
21,671,389 103,466 303,871 3,558,793
Item 5. Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - (2) Amended and Restated Stock
Purchase Agreement dated as
of July 24, 1996, between
United Companies Financial
Corporation and Pacific
Life and Accident Insurance
Company. Incorporated
herein by reference to the
designated Exhibit of the
Company's Current Report on
Form 8-K filed on August 8,
1996
- (11) Statement re computation of
earnings per share
- (15) Letter of Deloitte &
Touche LLP
- (27) Financial data schedule
(b) Reports on Form 8-K
On August 8, 1996, the Company filed a Current
Report on Form 8-K to report the sale of its
wholly-owned subsidiary, United Companies Life
Insurance Company.
17
19
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: August 13, 1996 By: /s/ J. TERRELL BROWN
-------------------------- ---------------------------------
J. Terrell Brown
Chairman and Chief Executive
Officer
Date: August 13, 1996 By: /s/ DALE E. REDMAN
--------------------------- ---------------------------------
Dale E. Redman
Executive Vice President and
Chief Financial Officer
18
20
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No.
2 Amended and Restated Stock Purchase Agreement dated as of
July 24, 1996, between United Companies Financial
Corporation and Pacific Life and Accident Insurance Company.
Incorporated herein by reference to the designated Exhibit of
the Company's Current Report on Form 8-K filed on August 8,
1996
11 Statement re computation of earnings per share
15 Letter of Deloitte & Touche LLP
27 Financial Data Schedule
19