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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period from ........................ to ........................
Commission file number 1-7067
UNITED COMPANIES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Louisiana 71-0430414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 Essen Lane 70809
Baton Rouge, Louisiana (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (504) 987-0000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of $2.00 par value common stock issued and
outstanding as of May 1, 1997 was 28,495,326, 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 MARCH 31, 1997
PAGE
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 5-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-15
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Independent Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31,
1997 December 31,
Assets (Unaudited) 1996
- ------ ----------- ------------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 619 $ 14,064
Investment securities
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17,418
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 17,100 17,510
Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,811 118,750
Interest-only and residual certificates . . . . . . . . . . . . . . . . . . 666,657 604,474
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . 62,885 61,483
Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,066 46,323
Capitalized mortgage servicing rights . . . . . . . . . . . . . . . . . . . 27,742 23,806
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,446 21,445
----------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 991,326 $ 925,273
=========== ============
Liabilities and Stockholders' Equity
- ------------------------------------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446,996 $ 425,671
Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 60,547 52,971
Managed cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . 16,075 -
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,709 26,354
----------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 555,327 504,996
----------- ------------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 1,955,000 shares of 6 3/4% PRIDES(SM) ($44 per share
liquidation preference) . . . . . . . . . . . . . . . . . . . . 3,910 3,910
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 29,654,508 and 29,627,734 shares . . . . . . . . . . . . . 59,309 59,255
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 185,202 184,397
Net unrealized gain on securities . . . . . . . . . . . . . . . . . . . 38 48
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,044 190,579
Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . . . . . (19,504) (17,912)
----------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 435,999 420,277
----------- ------------
Total liabilities and stockholders' equity . . . . . . . . . . . $ 991,326 $ 925,273
=========== ============
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
March 31,
----------------------------
1997 1996
------------ -----------
Revenues:
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,196 $ 39,809
Finance income, fees earned and other
loan income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,997 27,300
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,748 2,881
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,481 1,182
------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,422 71,172
------------ -----------
Expenses:
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,749 20,593
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,230 7,673
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,946 16,014
------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,925 44,280
------------ -----------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,497 26,892
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 11,339 9,663
------------ -----------
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . 20,158 17,229
Income from discontinued operations:
Income from discontinued operations, net of
income tax expense of $758 . . . . . . . . . . . . . . . . . . . . . . - 1,576
Loss on disposal, net of income tax
benefit of $393 . . . . . . . . . . . . . . . . . . . . . . . . . . . - (966)
------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 610
------------ -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,158 $ 17,839
============ ===========
Per share data:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.53
Income from discontinued operations . . . . . . . . . . . . . . . . . . . - 0.02
------------ -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.55
============ ===========
See notes to consolidated financial statements.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------------
1997 1996
------------ --------------
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . $ 20,158 $ 17,229
Adjustments to reconcile income from continuing operations
to net cash used by continuing operating activities:
Increase in accrued interest receivable . . . . . . . . . . . . . . . . . . (1,402) (2,165)
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . (24,001) (5,378)
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . 6,043 28,544
Increase in interest-only and residual certificates . . . . . . . . . . . . (62,183) (41,423)
Increase in capitalized mortgage servicing rights . . . . . . . . . . . . . (5,610) (2,877)
Amortization of capitalized mortgage servicing rights . . . . . . . . . . . 1,674 288
Loan loss provision on owned loans . . . . . . . . . . . . . . . . . . . . 874 438
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . 1,070 907
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,581 8,375
Proceeds from sales and principal collections of loans
held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,716 674,196
Originations and purchases of loans held for sale . . . . . . . . . . . . . (626,651) (697,783)
Decrease in trading securities . . . . . . . . . . . . . . . . . . . . . . 17,418 -
------------ --------------
Net cash used by continuing operating activities . . . . . . . . . . (40,313) (19,649)
------------ --------------
Cash flows provided by discontinued operations . . . . . . . . . . . . . . . . . . - 1,045
------------ --------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities . . . . . . . . . . . 395 -
Proceeds from disposition of title insurance subsidiary . . . . . . . . . . - 5,126
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,665) (1,398)
------------ --------------
Net cash (used) provided by investing activities . . . . . . . . . . (5,270) 3,728
------------ --------------
Cash flows from financing activities:
Proceeds from construction loan . . . . . . . . . . . . . . . . . . . . . . 1,833 -
Increase in debt with maturities of three months or less . . . . . . . . . 23,450 78,150
Decrease in warehouse loan facility . . . . . . . . . . . . . . . . . . . . (4,429) (8,773)
Proceeds from ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . . 850 2,000
Payments on ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (379) (249)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,694) (3,397)
Increase (decrease) in managed cash overdraft . . . . . . . . . . . . . . . 16,075 (27,052)
Increase in unearned ESOP compensation . . . . . . . . . . . . . . . . . . (1,592) (1,751)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 24 159
------------ --------------
Net cash provided by financing activities . . . . . . . . . . . . . 32,138 39,087
------------ --------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . (13,445) 24,211
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 14,064 5,284
------------ --------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $ 619 $ 29,495
============ ==============
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,
1996, filed with the United States Securities and Exchange Commission (the
"Commission").
The consolidated results of operations for the three months ended March 31,
1997 are not necessarily indicative of the results to be expected for the
full year. Certain 1996 amounts have been reclassified to conform with the
current year presentations. Such reclassifications had no effect on net
income.
2. INTEREST-ONLY AND RESIDUAL CERTIFICATES.
In June, 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125"). SFAS No. 125 focuses on control of the financial asset and provides
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 125 provides certain
conditions that must be met in order to determine that control of the
financial asset has been surrendered. SFAS No. 125 requires that servicing
assets and other retained interests in the transferred assets be measured
by allocating the carrying amount prior to the transfer between the assets
sold and the retained interests, if any, based on their relative fair values
at the date of transfer. In addition, the retained interests are now
classified as trading securities under the provisions of SFAS No. 115 and,
as such, are recorded at fair value with the resultant unrealized gain or
loss recorded in the results of operations, under the caption "Finance
income, fees earned and other loan income", in the period of change in
value. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application was not
permitted.
The Company implemented SFAS No. 125 during the quarter ended March 31,
1997. As a result of the implementation of SFAS No. 125, net income for
the three months ended March 31, 1997 was increased by $4.5 million or $.14
per share on a fully diluted basis. In addition, the amounts previously
reflected on the Company's balance sheets as "Capitalized excess servicing
income" and "Temporary investments -- reserve accounts" have been
reclassified as "Interest-only and residual certificates" and are net of
the allowance for loan losses on serviced loans (recorded in connection
with loan sale transactions), such allowance having been previously
recorded as a liability. The allowance for loan losses on serviced loans
is a component in determining the fair value of the interest-only and
residual certificates.
The fair value of the Company's interest-only and residual certificates is
determined by computing the present value of the excess of the weighted
average coupon on the loans sold over the sum of: (1) the rate paid to the
buyer, (2) a normal servicing fee and (3) where applicable, a trustee fee
and surety bond fee. For home equity loans, prepayment assumptions used in
the present value computation are based on the actual prepayment experience
of the Company's owned and serviced loan portfolio. Prepayment assumptions
for manufactured housing contracts are based on comparable industry
prepayment statistics. The cash flows expected to be received by the
Company are discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on
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a financial instrument comprised of such cash flows.
The following schedule sets forth the components of the Interest-only and
residual certificates owned by the Company at March 31, 1997 and December
31, 1996.
March 31, December 31,
1997 1996
------------- ------------
(IN THOUSANDS)
Certificated interests . . . . . . . . . . . . . . . . $ 458,464 $ 426,393
Temporary investments - reserve accounts . . . . . . . 287,775 251,183
Allowance for losses on loans serviced . . . . . . . . (79,582) (73,102)
------------- ------------
Total . . . . . . . . . . . . . . . . . . . . $ 666,657 $ 604,474
============= ============
3. LOANS
Loans Owned. The following schedule sets forth the components of Loans
owned by the Company at March 31, 1997 and December 31, 1996.
March 31, December 31,
1997 1996
------------- ------------
(in thousands)
Home equity . . . . . . . . . . . . . . . . . . . . . . $ 108,735 $ 99,849
Manufactured housing chattel contracts . . . . . . . . 3,728 7,397
Credit card receivables . . . . . . . . . . . . . . . . 2,347 1,543
Other . . . . . . . . . . . . . . . . . . . . . . . . . 810 600
------------- ------------
Total . . . . . . . . . . . . . . . . . . . . 115,620 109,389
Real estate owned:
Home equity . . . . . . . . . . . . . . . . . . . 5,125 6,647
Commercial and other . . . . . . . . . . . . . . . 7,674 9,446
Manufactured housing . . . . . . . . . . . . . . . 251 372
Nonrefundable loan fees . . . . . . . . . . . . . . . . (3,434) (2,945)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (1,190) (18)
------------- ------------
Total . . . . . . . . . . . . . . . . . . . . 124,046 122,891
------------- ------------
Less:
Allowance for loan losses . . . . . . . . . . . . (4,235) (4,141)
------------- ------------
$ 119,811 $ 118,750
============= ============
Included in Loans owned at March 31, 1997 and December 31, 1996 were
nonaccrual loans totaling $10.8 million and $6.6 million, respectively.
Loans Serviced. The following table sets forth the loans serviced by the
Company for third parties at March 31, 1997 and December 31, 1996, by type
of loan. Substantially all of these loans were originated by the Company.
March 31, December 31,
1997 1996
-------------- -------------
(IN THOUSANDS)
Home equity . . . . . . . . . . . . . . . . . . . . . . $ 4,192,973 $ 3,940,289
Manufactured housing chattel contracts . . . . . . . . 150,831 107,741
Other . . . . . . . . . . . . . . . . . . . . . . . . . 41,775 44,649
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . $ 4,385,579 $ 4,092,679
============== =============
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4. NOTES PAYABLE
Notes payable consisted of the following:
MARCH 31, DECEMBER 31,
1997 1996
--------------- --------------
(IN THOUSANDS)
9.35% Senior unsecured notes due November, 1999 . . . . . . . . $ 125,000 $ 125,000
7% Senior unsecured notes due July, 1998 . . . . . . . . . . . 100,000 100,000
7.7% Senior unsecured notes due January, 2004 . . . . . . . . 100,000 100,000
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . 70,550 47,100
Warehouse facilities . . . . . . . . . . . . . . . . . . . . . 19,243 23,672
ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,604 11,133
Subordinated debentures . . . . . . . . . . . . . . . . . . . . 10,000 10,000
Mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . 5,473 5,473
Construction loan . . . . . . . . . . . . . . . . . . . . . . . 5,126 3,293
--------------- --------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 446,996 $ 425,671
=============== ==============
In April, 1997, the Company entered into a $800 million senior unsecured
revolving credit facility syndicated with a total of 22 participating
lenders. The Company plans to use proceeds from this three-year credit
facility to refinance existing debt and for general corporate purposes,
including warehouse financing.
5. CASH PAID FOR INTEREST AND INCOME TAXES.
During the three months ended March 31, 1997 and 1996, the Company paid
interest on notes payable in the amount of $8.8 million and $6.0 million,
respectively. During the three months ended March 31, 1997 and 1996, the
Company paid income taxes in the amount of $3.0 million and $5,000,
respectively.
6. DISCONTINUED OPERATIONS; COMMITMENTS AND CONTINGENCIES.
As discussed in Notes 11 and 12 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, the Company has certain contingencies
in connection with the sale, during 1996, of its investments in United
General Title Insurance Company and United Companies Life Insurance Company
and the divestiture, during 1993, of Foster Mortgage Company. There were
no material changes in these contingencies in the first quarter of 1997.
The operations of each of these companies have been classified as
discontinued operations.
The Company used a prefunding feature in connection with its securitization
transactions during the first quarter of 1997. At March 31, 1997,
approximately $53.5 million was held in a prefunding account for the
purchase of the Company's home equity loans during the second quarter of
1997. In addition, at March 31, 1997, approximately $5.2 million was held
in a prefunding account for purchase of the Company's manufactured housing
contracts during the second quarter of 1997.
In considering a pretrial motion of the plaintiffs in a class action
lawsuit pending in Alabama state district court involving 910 home equity
loans alleged to be subject to the Alabama Mini Code, Autrey v. United
Companies Lending Corporation, the trial judge advised counsel for the
parties by letter dated May 5, 1997, that he had determined retroactive
application of the 1996 amendments to the Alabama Mini Code would be
unconstitutional as applied to the plaintiffs' class. The 1996 amendments,
which in general limited the remedy for finance charges in excess of the
maximum permitted by the Alabama Mini Code, were expressly made retroactive
by the Alabama legislature. The trial judge requested a proposed order
relating to the plaintiffs' pretrial motion on the applicability of the
remedy for finance charges exceeding the maximum permitted by the Alabama
Mini Code and has apparently determined he will grant the plaintiffs'
motion. The Company strenuously disagrees with the trial judge's
determinations and believes that the liability, if any, should be limited
to $495,000, being the aggregate finance charges allegedly exceeding the
maximum permitted by the Alabama Mini Code, plus interest thereon. If
upheld after a trial on the merits and related appeals, the trial judge's
determinations could result in a liability for the Company's subsidiary
presently estimated by the Company to be approximately $21 million. Trial
on the merits is currently set for July 1997. The Company does not believe
the Alabama Mini Code provision alleged to have been violated is applicable
to the loans in this class and its motion for summary judgment to dismiss
all claims asserted under this provision to the Alabama Mini Code, based on
a recent decision of an Alabama state appeals court that this provision is
not applicable to loans in excess of $2,000, is currently pending before
the trial court. The Company further believes that it has other valid
defenses to the claims asserted in this suit and intends to continue its
vigorous defense of this matter.
7. ACCOUNTING STANDARDS.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). This Statement establishes new standards for computing and
presenting earnings per share ("EPS") information and requires dual
presentation of "basic" and "diluted" EPS on the face of the income
statement. SFAS No. 128 replaces the presentation of "primary" and "fully
diluted" required by APB Opinion No. 15 and its related interpretations and
is effective for financial statements issued for periods ending after
December 15, 1997. At that time, the Company will be required to change
the method currently used to compute EPS and to restate all prior periods.
Earlier implementation of the provisions of SFAS No. 128 is not permitted.
Basic EPS excludes common stock equivalents from the EPS calculation, while
calculation of diluted EPS is generally consistent with the Company's
current method of
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determining fully diluted EPS. Basic and diluted earnings per share, as
computed under SFAS No. 128, would have been $.65 and $.62, respectively,
for the first quarter of 1997.
8. OTHER.
On February 19, 1997, the Company filed a shelf registration statement on
Form S-3 with the Commission for up to $500 million in corporate debt and
equity securities. The registration statement was declared effective on
February 28, 1997.
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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 and identifies the major factors which influenced the results of
operations of the Company during the indicated periods.
RESULTS OF OPERATIONS
The Company's Consolidated Financial Statements present United Companies
Life Insurance Company ("UCLIC") and United General Title Insurance Company as
discontinued operations. Discussed below are results of continuing operations
for the periods presented.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Income from continuing operations for the first quarter of 1997 was $20.2
million ($.62 per share based on 32.6 million weighted average shares
outstanding) compared to $17.2 million ($.53 per share based on 32.7 million
weighted average shares outstanding) for the same period of 1996. In
comparison to the 1996 period, the increase in income in 1997 was primarily the
result of an increase of approximately $110 million in the amount of home
equity loans sold and the sale of approximately $71 million in manufactured
housing contracts and the recognition of loan sale gains and loan fees in
connection with such sales. In addition, the implementation of a new
accounting pronouncement, as discussed below, increased net income by $4.5
million ($.14 per share) in the first quarter of 1997. The positive effect on
earnings of the above factors was partially offset by increased personnel and
operating expenses relating to an enlargement of infrastructure designed to
handle a higher level of loan production than that which occurred during the
first quarter of 1997.
As discussed in Note 2 of the Notes to Consolidated Financial Statements,
during the first quarter of 1997, the Company implemented Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125") which
required the Company to change the method it previously utilized in calculating
the gain on its sale of loans and required the reclassification of the assets
and liabilities retained by the Company (the "retained interests") in
connection with such sales. Previously, the retained interests were classified
as "Capitalized excess servicing income", "Temporary investments-reserve
accounts" and the "Allowance for loan losses on serviced loans". Such amounts
are now classified as "Interest-only and residual certificates". Effective with
the implementation of SFAS No. 125, the fair value of the interest-only and
residual certificates was estimated using the expected dates that the retained
interests are to be released from the related reserve accounts. In addition, the
Interest- only and residual certificates are classified as trading securities
under the provisions of SFAS No. 115 and, as such, recorded at fair value with
the resultant change in unrealized gain or loss recorded in the results of
operations in the period of change in value.
Loan sale gains increased $7.4 million during the first quarter of 1997
over the same period in 1996. The increase in the amount of loan sale gains
was due primarily to the increase in the amount of loans sold, as discussed
above, partially offset by a decrease in the interest spread retained by the
Company, higher purchase premiums paid in connection with an increase of
approximately $62 million in loans acquired by the Company's bulk purchase
program and a negative adjustment of approximately $1.9 million related to the
implementation of SFAS No. 125 (compared to the prior method of calculating
loan sale gains). In addition, loan sale gains for the three months ended
March 31, 1997 includes the capitalization of mortgage servicing rights in the
amount of $5.6 million compared to $2.9 million for same period of 1996.
9
11
The following table presents information regarding loan sale transactions
for the periods indicated:
Home Equity Loans Manufactured Housing Contracts
---------------------------------- ----------------------------------
Three months ended March 31, Three months ended March 31
---------------------------------- ----------------------------------
1997 1996 1997 1996
------------ ------------- ----------- ----------
(dollars in thousands) (dollars in thousands)
Loans sold . . . . . . . . . . $ 517,391 $ 407,700 $ 70,803 -
Average coupon . . . . . . . . 11.20% 11.18% 10.97% -
Interest spread retained . . . 4.65% 4.86% 3.54% -
Loan sale gains . . . . . . . . $ 40,765 $ 39,809 $ 6,431 -
Fluctuations in and the level of market interest rates will impact the
interest spread retained by the Company on loans sold (which include for
purposes hereof manufactured housing contracts), and, potentially, the amount
of its loan sale gains. An increase in the level of market interest rates will
generally adversely affect the interest spread on loans sold, whereas such
interest spread generally widens during a declining interest rate environment.
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
addition, as discussed above, SFAS No. 125 requires that the retained interests
be classified as trading securities and fluctuations in the interest rate
environment can also affect the carrying value of these assets, with the
changes in unrealized gain or loss recorded in the results of operations in the
period of change in value. In connection with its securitization
transactions, the Company has used a prefunding feature which "locks in" the
pass-through rate that the Company will pay to the investors on a prefunded
amount which will be used to acquire loans at a future date. The Company is
obligated for the difference between the earnings on such prefunded amount and
the pass-through interest paid to the investors during the period from the date
of the closing of the securitization transaction until the date of delivery of
the loans. In connection with the securitization transactions which closed in
the first quarter of 1997, approximately $53.5 million and $5.2 million were
held in prefunding accounts for purchase of the Company's home equity loans and
manufactured housing contracts, respectively, during the second quarter of
1997.
Finance income, fees earned and other loan income increased $11.7 million
for the first quarter of 1997 compared to the same period of 1996 as the result
of the following factors: (i) growth in the portfolio of loans warehoused
pending loan sales; (ii) a $1.4 billion increase in the average portfolio of
home equity loans serviced; (iii) the recognition of loan fees at the time of
sale of the loans and the impact of finance income earned from the manufactured
housing unit; and (iv) the positive effect of implementation of SFAS No. 125
which increased finance income by $8.9 million as the result of changes
required in the method of valuing the Company's retained interests at period
end. The following table presents the composition of Finance income, fees
earned and other loan income for the periods indicated:
Three months ended March 31,
--------------------------------
1997 1996
---------- -----------
(in thousands)
Servicing fees earned . . . . . . . . . . . . . . . . . $ 45,346 $ 29,988
Loan origination fees . . . . . . . . . . . . . . . . . 21,488 19,128
Loan interest . . . . . . . . . . . . . . . . . . . . . 4,358 3,029
Other loan income . . . . . . . . . . . . . . . . . . . 2,350 1,904
Valuation adjustment on interest-only and
residual certificates . . . . . . . . . . . . . . . (34,545) (26,749)
---------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 38,997 $ 27,300
========== ===========
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The Company estimates that non-accrual loans reduced loan interest for the
first three months of 1997 and 1996 by approximately $8.2 million and $4.3
million, respectively. The Company is generally obligated to advance interest
on delinquent loans serviced for third party investors until satisfaction of
the note, liquidation of the collateral or charge off of the delinquent loan.
During the three months ended March 31, 1997 the average amount of non-accrual
loans owned and/or serviced by the Company was $249.0 million compared to
approximately $132.7 million during the same period of 1996.
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 three months ended
March 31, 1997 and 1996, the Company sold approximately $517 million and $408
million, respectively, in home equity loans and recognized approximately $9.7
million and $10.5 million, respectively, in net loan origination fees in
connection with these sales. The amount of loan fees earned as a percent of the
amount of loans sold in the first quarter of 1997 declined when compared to the
same period of 1996 as the result of an increase in the amount of loans
originated by the wholesale and bulk purchase units that were included in loan
securitization transactions.
Investment income totaled $4.7 million for the first quarter of 1997
compared to investment income of $2.9 million during the same period of 1996.
Investment income is primarily related to interest earned on funds in reserve
accounts established in connection with loan sales in securitization
transactions. Investment income during the first quarter of 1997 also includes
approximately $.5 million in realized gains on common stock classified as
trading securities sold during the quarter. Other assets at March 31, 1997
includes a $17.7 million receivable in connection with such sale.
Other income includes income earned by the Company's property management
and telecommunication services operations with respect to its office park. In
the first quarter of 1996, Other income also included overhead reimbursement
from discontinued operations prior to their disposition.
Personnel expenses increased approximately $6.2 million primarily because
of costs associated with the expansion of the Company's lending operations.
Approximately 23% of the increase in personnel costs is related to the
Company's manufactured housing lending operations. The remaining increase is
primarily related to expansion of the Company's lending distribution network
and incentive compensation related to an increase in home equity loan
production.
Interest expense for the first quarter of 1997 increased $4.6 million from
the same period of 1996 primarily as the result of an increase in the average
amount of debt outstanding.
Other operating expenses for the three months ended March 31, 1997
increased approximately $5.9 million when compared to the same period of 1996
primarily as the result of expansion of the Company's lending operations. The
increase in Other operating expenses included a $2.1 million increase in
occupancy and general office expenses.
ASSET QUALITY AND RESERVES
The quality of the loans owned and those serviced for third parties
significantly affects the profitability of the Company. The values of and
markets for these assets are dependent on a number of factors, including
general economic conditions, interest rates and governmental regulations.
Adverse changes in such factors, which become more pronounced in periods of
economic decline, may affect the quality of these assets and the Company's
resulting ability to sell these assets for acceptable prices. General economic
deterioration can result in increased delinquencies on existing loans and
reductions in collateral values.
Substantially all of the home equity loans and manufactured housing
contracts produced by the Company are sold in securitization transactions in
which securities backed by these loans and contracts ("pass-through
certificates") are publicly offered and sold, with servicing rights retained.
The purchasers of the pass-through certificates receive a credit enhanced
security which is provided in part in home equity loan securitizations through
a guaranty provided by a third party insurer or, in connection with certain
manufactured housing contract securitization transactions, through a
senior/subordinated structure. Credit enhancement for the pass-through
11
13
certificates is also provided by subordinating a cash deposit and the excess
interest spread retained by the Company to the payment of scheduled principal
and interest on the certificates. The subordination of the cash deposit and
the excess interest spread retained by the Company relates to credit losses
which may occur after the sale of the loans and contracts and generally
continues until the earlier of the payment in full of the loans and contracts
or termination of the agreement pursuant to which the loans and contracts were
sold. If cumulative payment defaults exceed the amount subordinated, a third
party insurer, except in certain manufactured housing securitization
transactions, is obligated to pay any further losses experienced by the owners
of the pass-through certificates. Such losses are borne first by the
subordinated pass-through certificates in certain of the Company's
manufactured housing contract securitization transactions.
The Company is also obligated to cure, repurchase or replace loans and
contracts which may be determined after the sale to violate representations and
warranties relating to them and which are made by the Company at the time of the
sale. The Company regularly evaluates the quality of the loan portfolio and
estimates its risk of loss based upon historical loss experience, prevailing
economic conditions, estimated collateral value and such other factors which, in
management's judgment, are relevant in estimating the credit risk in owned
and/or serviced loans. For loans and contracts sold, the Company estimates the
amount of credit losses at the time of sale and, because such amount is a
component of and is considered in determining the fair value of Interest-only
and residual certificates, records such amount on its balance sheet as a
reduction of this asset. Estimated losses on the owned portfolio are provided
for by an increase in the allowance for loan losses through a charge to current
operating income. At March 31, 1997, the carrying value of the Company's
interest-only and residual certificates was reduced by $79.6 million to provide
for estimated credit losses on loans sold. At March 31, 1997 the allowance for
loan losses on owned loans totaled $4.2 million. (See also the analysis of the
allowance for loan losses below). The maximum recourse associated with sales of
home equity loans and manufactured housing contracts according to terms of the
sale agreements totaled approximately $948 million at March 31, 1997, of which
amount approximately $924 million relates to the subordinated cash and excess
interest spread. Should credit losses on loans and contracts sold materially
exceed the Company's estimates for such losses, such consequence will have a
material adverse impact on the Company's operations.
At March 31, 1997, the contractual balance of home equity loans serviced
was approximately $4.3 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 50 states, at March 31,
1997 a substantial portion of the home equity loans serviced were originated in
California (10.1%), Louisiana (7.8%), Ohio (7.4%), and Florida (7.4%),
respectively, and no other state accounted for more than 7% of the serviced
portfolio. In addition, at March 31, 1997, the Company serviced approximately
$155 million of manufactured housing contracts, 40.0% of which were originated
in Texas, 14.7% in South Carolina, 12.8% in North Carolina and 11% in Georgia.
The risk inherent in geographic concentrations is dependent not only upon
regional and general economic stability which affects property values, but also
the financial well-being and creditworthiness of the borrower.
The following table provides certain contractual delinquency and default
information for home equity loans serviced as of the dates indicated:
March 31, 1997 December 31, 1996
--------------------------- ----------------------------
% of % of
Contractual Contractual Contractual Contractual
Balance Balance Balance Balance
----------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
Home equity loans
serviced . . . . . . . . . . $ 4,301,708 $ 4,040,138
=========== =============
Delinquency
- -----------
30-59 days . . . . . . . . . $ 137,616 3.20% $ 136,976 3.39%
60-89 days . . . . . . . . . 35,604 0.83 53,124 1.31
90+ days . . . . . . . . . . 19,500 0.45 28,663 0.71
----------- -------- ------------- ---------
192,720 4.48 218,763 5.41
----------- -------- ------------- ---------
Defaults
- --------
Foreclosures in process . . . 166,638 3.87 135,779 3.36
Bankruptcy . . . . . . . . . 85,948 2.00 73,887 1.83
----------- -------- ------------- ---------
252,586 5.87 209,666 5.19
----------- -------- ------------- ---------
Total delinquency
and defaults . . . . . . . $ 445,306 10.35% $ 428,429 10.60%
=========== ======== ============= =========
12
14
The contractual balances exclude home equity real estate owned and/or
serviced which totaled $61.4 million and $52.6 million at March 31, 1997 and
December 31, 1996, respectively. The charge-off rate on the average home
equity loan portfolio for the first quarter of 1997 was .67% (annualized) and
was .51% for 1996.
The following table provides certain contractual delinquency and default
data with respect to the Company's home equity loans serviced, by year of loan
origination, as of the dates indicated:
March 31, 1997
----------------------------------------------------------------------------------------------
Defaults
Delinquency ------------------------------
---------------------------------- Foreclosures Total
Contractual in Bank- Delinquency
Balance 30-59 60-89 90+ Total Process ruptcy Total & Defaults
------------ ----- ----- ---- ----- ------- ------ ----- ----------
(DOLLARS IN THOUSANDS)
1991 & prior . . . $ 102,823 3.56% 0.96% 0.81% 5.33% 5.79% 5.87% 11.66% 16.99%
1992 . . . . . . . 58,083 3.42% 0.83% 1.50% 5.75% 5.79% 5.86% 11.65% 17.40%
1993 . . . . . . . 181,471 4.41% 0.85% 0.60% 5.86% 5.43% 5.34% 10.77% 16.63%
1994 . . . . . . . 410,873 4.98% 0.86% 0.56% 6.40% 6.94% 5.07% 12.01% 18.41%
1995 . . . . . . . 971,949 4.41% 1.37% 0.62% 6.40% 7.51% 3.67% 11.18% 17.58%
1996 . . . . . . . 2,030,000 2.97% 0.78% 0.41% 4.16% 2.26% 0.51% 2.77% 6.93%
1997 . . . . . . . 546,509 0.08% - - 0.08% 0.01% - 0.01% 0.09%
------------
Total . . . . . $ 4,301,708 3.20% 0.83% 0.45% 4.48% 3.87% 2.00% 5.87% 10.35%
============
DECEMBER 31, 1996
----------------------------------------------------------------------------------------------
Defaults
Delinquency ------------------------------
---------------------------------- Foreclosures Total
Contractual in Bank- Delinquency
Balance 30-59 60-89 90+ Total Process ruptcy Total & Defaults
------------ ----- ----- ---- ----- ------- ------ ----- ----------
(DOLLARS IN THOUSANDS)
1990 & prior . . . $ 75,252 5.12% 1.20% 1.22% 7.54% 5.97% 4.85% 10.82% 18.36%
1991 . . . . . . . 38,114 5.26% 0.97% 0.83% 7.06% 5.45% 6.59% 12.04% 19.10%
1992 . . . . . . . 63,842 4.74% 1.74% 1.97% 8.45% 5.87% 5.40% 11.27% 19.72%
1993 . . . . . . . 199,037 4.39% 1.28% 1.07% 6.74% 4.94% 5.05% 9.99% 16.73%
1994 . . . . . . . 451,224 5.15% 1.58% 0.92% 7.65% 4.70% 6.37% 11.07% 18.72%
1995 . . . . . . . 1,069,818 4.75% 2.12% 1.17% 8.04% 2.64% 6.26% 8.90% 16.94%
1996 . . . . . . . 2,142,851 2.11% 0.86% 0.35% 3.32% 0.20% 0.95% 1.15% 4.47%
------------
Total . . . . . $ 4,040,138 3.39% 1.31% 0.71% 5.41% 3.36% 1.83% 5.19% 10.60%
============
The Company's management believes that the decrease in delinquencies and
defaults is not attributable to any single factor but rather reflects a
combination of factors, such as the seasonal nature of delinquencies inherent
in the portfolio and changes made in internal collection procedures.
The following table reflects, as of the periods indicated, the allowance
for loan losses for loans owned by the Company and loans serviced for third
parties. These allowance accounts are deducted in the Company's balance sheet
from the asset to which they apply.
Three Months Ended March 31, 1997
----------------------------------------
Owned Serviced Total
---------- --------- ----------
(dollars in thousands)
Allowance for loan losses, beginning of period . . . . . . . . $ 4,141 $ 73,102 $ 77,243
Provision for loan losses . . . . . . . . . . . . . . . . . . . 874 12,914 13,788
Net loans charged off . . . . . . . . . . . . . . . . . . . . . (967) (6,434) (7,401)
Reserve reclassification . . . . . . . . . . . . . . . . . . . 187 - 187
---------- --------- ----------
Allowance for loan losses, end of period . . . . . . . . . . . $ 4,235 $ 79,582 $ 83,817
========== ========= ==========
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15
Three Months Ended March 31, 1996
----------------------------------------
Owned Serviced Total
---------- --------- ----------
(dollars in thousands)
Allowance for loan losses, beginning of period . . . . . . . . $ 6,484 $ 44,970 $ 51,454
Provision for loan losses . . . . . . . . . . . . . . . . . . . 438 5,638 6,076
Net loans charged off . . . . . . . . . . . . . . . . . . . . . (856) (2,118) (2,974)
Reserve reclassification . . . . . . . . . . . . . . . . . . . (10) - (10)
---------- --------- ----------
Allowance for loan losses, end of period . . . . . . . . . . . $ 6,056 $ 48,490 $ 54,546
========== ========= ==========
The above delinquency and default experience represents the Company's
recent experience. However, the delinquency and default 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 and manufactured housing contracts nor predict whether or to what extent
or how long such declines may exist. In a period of such declines, the rates
of delinquencies and defaults on the home equity loans and manufactured housing
contracts could be higher than those theretofore experienced in the residential
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 manufactured housing contracts and, accordingly, the actual rates of
delinquencies and defaults. 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 and defaults in the future and no assurance can be
given that the delinquency and default experience presented in the tables will
be indicative of such experience.
LIQUIDITY AND CAPITAL RESOURCES
The principal cash requirements of the Company's lending 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. At March 31,
1997, the Company had three secured warehouse facilities available for its home
equity loan product: (i) a warehouse facility provided by a syndicate of
commercial banks (the "Commercial Bank Warehouse"), (ii) a warehouse facility
provided by the investment banker which acted as lead underwriter for the
Company's first quarter home equity loan securitization (the "Investment Bank
Warehouse"), and (iii) a warehouse facility provided by UCLIC (the "UCLIC
Warehouse"). The Commercial Bank Warehouse was a $350 million facility
committed until May, 1998. As of March 31, 1997, $11.8 million was outstanding
under the Commercial Bank Warehouse. In April, 1997, the Company entered into
a $800 million senior unsecured revolving credit facility syndicated with a
total of 22 participating lenders. This facility replaced the Commercial Bank
Warehouse and certain lines of credit totaling $107 million. The Investment
Bank Warehouse was directly related to the first quarter home equity loan
securitization, initially provided for funding up to $300 million of eligible
home equity loans for such securitization and terminated upon the closing of
the last delivery of loans under the prefunding accounts relative to this
securitization. As of March 31, 1997, $150 million was available and no
amounts were outstanding under the Investment Bank Warehouse. The UCLIC
Warehouse, which was established upon the sale of UCLIC, provides for the
purchase of up to $300 million in first mortgage residential loans and has a
maturity of July, 1999. The Company has the right for a limited time to
repurchase certain loans which are eligible for securitization and as of March
31, 1997, $7.5 million in loans eligible for securitization were funded under
this facility. In addition, the Company had a manufactured housing contract
warehouse which was directly related to the first quarter manufactured housing
securitization and was provided by the investment bank which acted as lead
underwriter for such securitization (the "Manufactured Housing Warehouse").
The Manufactured Housing Warehouse initially provided for funding up to $75
million of eligible manufactured housing contracts and terminated upon the
closing
14
16
of the last delivery of contracts under the prefunding accounts relative to
this securitization. As of March 31, 1997, $25 million was available and no
amounts were outstanding under the Manufactured Housing Warehouse.
Substantially all of the home equity loans and manufactured housing
contracts originated or acquired by the Company are sold. Net cash from
operating activities of the Company in the first quarter of 1997 and 1996
reflects approximately $.6 billion and $.7 billion, respectively, in cash used
for loan originations and acquisitions of home equity loans and manufactured
housing contracts. The primary source of funding for loan originations is
derived from the reinvestment of proceeds from the ultimate sale of these
products in the secondary market which totaled approximately $.6 billion and $.7
billion in the first quarter of 1997 and 1996, respectively. In connection with
the sale transactions in the secondary market, third-party surety bonds (except
in the case of two manufactured housing contract securitizations) and cash
deposits by the Company as credit enhancements have been provided. The loan
sale transactions have required the subordination of certain cash flows payable
to the Company to the payment of principal and interest due to certificate
holders. In connection with these transactions, the Company has been required,
in some instances, to fund an initial deposit, and thereafter, in each
transaction, a portion of the amounts receivable by the Company from the excess
interest spread has been required to be placed and maintained in a reserve
account to the extent of the subordination requirements. The subordination
requirements generally provide that the excess interest spread is payable to a
reserve account until a specified level of cash, which is less than the maximum
subordination amount, is accumulated therein. The interest-only and residual
certificates of the Company are subject to being utilized first to replenish
cash paid from the reserve account to fund shortfalls in collections from
borrowers who default on the payment of principal or interest on the loans and
contracts underlying the pass-through certificates issued until the total of the
Company's deposits into the reserve account equal the maximum subordination
amount. After the Company's deposits into the reserve account equal the
maximum subordination amount for a transaction, the subordination of the related
excess interest spread (including the guarantee fee payable therefrom) for these
purposes is terminated. The excess interest spread required to be deposited and
maintained in the respective reserve accounts will not be available to support
the cash flow requirements of the Company until such amount exceeds the maximum
subordinated amount (other than amounts, if any, in excess of the specified
levels required to be maintained in the reserve accounts, which may be
distributed periodically to the Company). At March 31, 1997, the amounts on
deposit in such reserve accounts totaled $288 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 letters 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. In April, 1997, the Company terminated this letter
of credit and reimbursement agreement and caused the letters of credit to be
replaced by cash in the required amounts in the related reserve accounts.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q contains forward-looking statements that reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following non- exclusive factors
could cause actual results to differ materially from historical results or
those anticipated: (1) changes in the performance of the financial markets, in
the demand for and market acceptance of the Company's products, and in general
economic conditions, including interest rates; (2) the presence of competitors
with greater financial resources and the impact of competitive products and
pricing; (3) the effect of the Company's policies; and (4) the continued
availability to the Company of adequate funding sources.
15
17
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Deloitte & Touche LLP, have performed a
review of the accompanying unaudited consolidated balance sheet as of March 31,
1997 and the related consolidated statements of income and cash flows for the
three months ended March 31, 1997 and 1996, and previously audited and
expressed an unqualified opinion dated February 28, 1997 on the consolidated
financial statements of the Company and its subsidiaries as of December 31,
1996, from which the consolidated balance sheet as of this date is derived.
16
18
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
United Companies Financial Corporation:
We have reviewed the accompanying consolidated balance sheet of United
Companies Financial Corporation and subsidiaries as of March 31, 1997 and the
related consolidated statements of income and cash flows for the three months
ended March 31, 1997 and 1996. These financial statements are the
responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
As discussed in Note 2 of the Notes to the Consolidated Financial Statements,
in 1997, the Company changed its method of accounting for loan sale gains and
related retained interests to conform with Statement of Financial Accounting
Standards No. 125.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Companies Financial
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 28,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1996 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
May 9, 1997
17
19
PART II
OTHER INFORMATION
Items 1 through 5. Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - (11) Statement re computation of
earnings per share
- (15) Letter of Deloitte & Touche LLP
- (27) Financial Data Schedule
(b) Reports on Form 8-K
None.
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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: May 12, 1997 By: /s/ J. Terrell Brown
------------- -----------------------------------------
J. Terrell Brown
Chairman and Chief Executive Officer
Date: May 12, 1997 By: /s/ Dale E. Redman
------------- ------------------------------------------
Dale E. Redman
Executive Vice President and Chief Financial Officer
19
21
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NO.
11 Statement re computation of earnings per share
15 Letter of Deloitte & Touche LLP
27 Financial Data Schedule
20