1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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 4, 1998 was 28,802,771, excluding 1,180,117 treasury
shares.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
PAGE
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997......................................................... 2
Consolidated Statements of Income
Three months ended March 31, 1998 and 1997................................................... 3
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997................................................... 4
Notes to Consolidated Financial Statements...................................................... 5-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 10-20
Review by Independent Accountants............................................................... 21
Independent Accountants' Review Report.......................................................... 22
PART II - OTHER INFORMATION
Exhibits and Reports on Form 8-K................................................................ 23
Signatures...................................................................................... 24
Index to Exhibits............................................................................... 25
3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31,
1998 December 31,
Assets (Unaudited) 1997
------------- -------------
Cash and cash equivalents ................................................. $ 561 $ 582
Interest-only and residual certificates-- net ............................. 906,153 882,116
Loans - net ............................................................... 245,055 206,598
Investment securities
Held-to-maturity ...................................................... 2,070 --
Available-for-sale .................................................... 15,525 16,853
Accrued interest receivable ............................................... 85,559 85,373
Property - net ............................................................ 69,918 64,754
Capitalized mortgage servicing rights ..................................... 52,635 48,760
Other assets .............................................................. 33,052 32,172
------------- -------------
Total assets ..................................................... $ 1,410,528 $ 1,337,208
============= =============
Liabilities and Stockholders' Equity
Notes payable ............................................................. $ 756,197 $ 691,826
Deferred income taxes payable ............................................. 97,947 97,093
Managed cash overdraft .................................................... 16,867 11,363
Other liabilities ......................................................... 56,088 56,297
------------- -------------
Total liabilities ................................................ 927,099 856,579
------------- -------------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 1,898,070 shares of 6 3/4% PRIDES(sm) ($44 per share
liquidation preference) ........................................ 3,796 3,796
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 29,982,888 and 29,971,356 shares ......................... 59,966 59,943
Additional paid-in capital ............................................ 187,382 187,418
Net unrealized gain on securities ..................................... 114 98
Retained earnings ..................................................... 252,764 250,429
Treasury stock ........................................................ (7,409) (7,409)
ESOP debt ............................................................. (13,184) (13,646)
------------- -------------
Total stockholders' equity .......................................... 483,429 480,629
------------- -------------
Total liabilities and stockholders' equity ....................... $ 1,410,528 $ 1,337,208
============= =============
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,
-----------------------
1998 1997
---------- ----------
Revenues:
Loan sale gains ......................................... $ 55,093 $ 47,196
Finance income, fees earned and other
loan income ........................................ 36,453 38,997
Investment income ....................................... 8,846 4,748
Other ................................................... 1,295 1,481
---------- ----------
Total ........................................... 101,687 92,422
---------- ----------
Expenses:
Personnel ............................................... 38,102 26,749
Interest ................................................ 18,599 12,230
Other operating ......................................... 35,459 21,946
---------- ----------
Total ........................................... 92,160 60,925
---------- ----------
Income before income taxes ................................. 9,527 31,497
Provision for income taxes ................................. 3,525 11,339
---------- ----------
Net income ................................................. $ 6,002 $ 20,158
========== ==========
Basic earnings per share ................................... $ .19 $ .65
========== ==========
Diluted earnings per share ................................. $ .19 $ .62
========== ==========
See notes to consolidated financial statements.
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5
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
-----------------------------
1998 1997
------------ -------------
Cash flows from operating activities:
Net income .............................................................. $ 6,002 $ 20,158
Adjustments to reconcile income from continuing operations
to net cash used by continuing operating activities:
Increase in accrued interest receivable ............................ (186) (1,402)
Increase in other assets ........................................... (880) (24,001)
Increase (decrease) in other liabilities ........................... (235) 6,043
Increase in interest-only and residual certificates ................ (24,037) (62,183)
Increase in capitalized mortgage servicing rights .................. (7,418) (5,610)
Amortization of capitalized mortgage servicing rights .............. 3,543 1,674
Loan loss provision on owned loans ................................. 1,389 874
Amortization and depreciation ...................................... 1,907 1,070
Deferred income taxes .............................................. 846 7,581
Proceeds from sales and principal collections of loans
held for sale ................................................... 805,305 624,716
Originations and purchases of loans held for sale .................. (845,151) (626,651)
Decrease in trading securities ..................................... -- 17,418
--------- ---------
Net cash used by operating activities ........................ (58,915) (40,313)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities ............... 1,393 395
Purchase of available-for-sale securities .......................... (42) --
Proceeds from maturity of held-to-maturity securities .............. 1,996 --
Purchase of held-to-maturity securities ............................ (4,066) --
Capital expenditures ............................................... (7,119) (5,665)
--------- ---------
Net cash used by investing activities ........................ (7,838) (5,270)
--------- ---------
Cash flows from financing activities:
Increase in revolving credit facilities ............................ 65,500 --
Proceeds from construction loan .................................... -- 1,833
Increase in debt with maturities of three months or less ........... -- 23,450
Decrease in warehouse loan facility ................................ (750) (4,429)
Proceeds from ESOP debt ............................................ -- 850
Payments on ESOP debt .............................................. (379) (379)
Cash dividends paid ................................................ (3,666) (3,694)
Increase in managed cash overdraft ................................. 5,504 16,075
Decrease (increase) in unearned ESOP compensation .................. 462 (1,592)
Proceeds from exercise of stock options ............................ 61 24
--------- ---------
Net cash provided by financing activities .................... 66,732 32,138
--------- ---------
Decrease in cash and cash equivalents ................................... (21) (13,445)
Cash and cash equivalents at beginning of period ........................ 582 14,064
--------- ---------
Cash and cash equivalents at end of period .............................. $ 561 $ 619
========= =========
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 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,
1997, filed with the United States Securities and Exchange Commission ("the
Commission").
The consolidated results of operations for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for the
full year. Certain 1997 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 -- NET.
A summary analysis of the changes in the Company's Interest-only and
residual certificates for the periods indicated is as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1998 1997
------------------ ------------
(IN THOUSANDS)
Balance, beginning of period .................................... $ 882,116 $ 604,474
Interest-only and residual certificates on loans sold ........... 79,034 355,743
Net increase in allowance for losses on loans sold .............. (6,223) (33,462)
Net increase in reserve accounts ................................ 10,033 138,070
Amortization of Interest-only and residual certificates ......... (58,807) (182,709)
------------------ ------------
Balance, end of period .......................................... $ 906,153 $ 882,116
================== ============
The following table sets forth the components of the Interest-only and
residual certificates owned by the Company, which are recorded at fair
value, at March 31, 1998 and December 31, 1997.
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
Certificated interests ........................... $ 619,653 $ 599,426
Temporary investments - reserve accounts ......... 399,286 389,253
Allowance for losses on loans serviced ........... (112,786) (106,563)
--------- ---------
Total .................................. $ 906,153 $ 882,116
========= =========
Certificated interests at March 31, 1998 and December 31, 1997 includes
$13.1 million and $5.6 million, respectively, of subordinated securities
retained by the Company in connection with manufactured housing contract
securitizations.
During the first quarter of 1998, the Company entered into a $1.0 billion
interest rate cap transaction for hybrid home equity loans sold in
securitization transactions prior to 1998 to mitigate its exposure during
the initial two or three year period following the date of sale when the
coupon rates on the loans are fixed and the rates on the asset backed
securities backed by such loans are floating.
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7
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"). As a result of the implementation of SFAS No. 125, net income for
the first quarter of 1997 was increased by $4.5 million or $.14 per share
on a diluted basis.
3. LOANS -- NET
Loans Owned. The following schedule sets forth the components of Loans --
net owned by the Company at March 31, 1998 and December 31, 1997.
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
(IN THOUSANDS)
Loans held for sale .............................. $ 182,523 $ 150,848
Other loans ...................................... 60,574 54,067
------------- -------------
Total .................................... 243,097 204,915
Real estate owned:
Home equity ................................. 6,134 6,365
Commercial and other ........................ 2,694 3,173
Manufactured housing contracts .............. 159 89
Nonrefundable loan fees .......................... (3,443) (2,852)
Other ............................................ 12 (1,401)
------------- -------------
Total .................................... 248,653 210,289
------------- -------------
Less:
Allowance for loan losses ................... (3,598) (3,691)
------------- -------------
$ 245,055 $ 206,598
============= =============
Included in Other loans at March 31, 1998 and December 31, 1997 were
nonaccrual loans totaling $9.5 million and $10.1 million, respectively.
Loans Serviced. The following table sets forth the loans serviced by the
Company for third parties at March 31, 1998 and December 31, 1997, by type
of loan. Substantially all of these loans were originated by the Company:
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
Home equity ...................................... $ 5,467,976 $ 5,353,429
Manufactured housing contracts(1) ................ 502,695 295,012
Other ............................................ 30,241 33,319
------------ ------------
Total .................................. $ 6,000,912 $ 5,681,760
============ ============
(1) At December 31, 1997, approximately $135.9 million land-and-home contracts
were included in home equity loans that are classified as manufactured
housing contracts at March 31, 1998.
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4. NOTES PAYABLE
Notes payable consisted of the following at the dates indicated:
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
Senior debt
7% Senior unsecured notes due July, 1998 ................ $ 100,000 $ 100,000
9.35% Senior unsecured notes due November, 1999 ......... 125,000 125,000
7.7% Senior unsecured notes due January, 2004 .......... 100,000 100,000
Revolving credit facility ............................... 258,050 192,550
Warehouse facilities .................................... 3,915 4,665
ESOP debt ............................................... 10,087 10,466
------------ ------------
Total Senior debt ................................ 597,052 532,681
------------ ------------
Subordinated debt
8.375% Subordinated unsecured notes due July, 2005 ...... 149,145 149,145
Subordinated debentures ................................. 10,000 10,000
------------ ------------
Total ............................................ $ 756,197 $ 691,826
============ ============
5. CASH PAID FOR INTEREST AND INCOME TAXES.
During the three months ended March 31, 1998 and 1997, the Company paid
interest on notes payable in the amount of $9.6 million and $8.8 million,
respectively. During the three months ended March 31, 1998 and 1997, the
Company paid income taxes in the amount of $87,000 and $3.0 million,
respectively.
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6. EARNINGS PER SHARE.
The following table sets forth the computations of basic and diluted
earnings per share for the periods indicated:
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic Earnings Per Share
Income available to common shareholders:
Net income ............................................ $ 6,002 $ 20,158
============== ==============
Weighted average number of common and
common equivalent shares:
Average common shares outstanding ..................... 28,076 28,004
Add: Dilutive effect of preferred stock
after application of "if converted" method ..... 3,136 3,230
-------------- --------------
Total ................................................. 31,212 31,234
============== ==============
Earnings per share:
Net income ............................................ $ .19 $ .65
============== ==============
Diluted Earnings Per Share
Income available to common shareholders:
Net income ............................................ $ 6,002 $ 20,158
============== ==============
Weighted average number of common and
all dilutive shares:
Average common shares outstanding ..................... 28,076 28,004
Add: Dilutive effect of stock options after
application of treasury stock method ........... 438 639
Dilutive effect of preferred stock
after application of "if converted" method ..... 3,796 3,910
-------------- --------------
Total ................................................. 32,310 32,553
============== ==============
Earnings per share:
Net income ............................................ $ .19 $ .62
============== ==============
The weighted average anti-dilutive shares that were excluded from the
computation of diluted earnings per share were 1,554,194 and 311,240 for
the three months ended March 31, 1998 and 1997, respectively.
7. COMMITMENTS AND CONTINGENCIES.
As discussed in Notes 12 and 13 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, the Company has certain contingencies
in connection with the sale, during 1996, of its investment in United
General Title Insurance Company. There were no material changes in these
contingencies in the first quarter of 1998.
The Company used a prefunding feature in connection with its securitization
transactions during the first quarter of 1998. At March 31, 1998,
approximately $21.0 million was held in a prefunding account for the
purchase of the Company's home equity loans during the second quarter of
1998. In addition, at March 31, 1998, approximately $16.9 million was held
in a prefunding account for purchase of the Company's manufactured
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housing contracts during the second quarter of 1998. Such home equity loans
were delivered in April, 1998 and it is anticipated that such manufactured
housing contracts will be delivered in May, 1998.
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 court has ruled
that 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 Company strenuously
disagrees with the trial court's holding 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 court's holding could result in a liability for the
Company's subsidiary presently estimated by the Company to be approximately
$15 million. 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.
8. ACCOUNTING STANDARDS.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes disclosure
standards for reporting comprehensive income in a full set of general
purpose financial statements. Comprehensive income (in thousands) for the
three months ended March 31, 1998 and 1997 was $6,018 and $20,148 (net of
income taxes), respectively.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits -- an amendment of FASB Statements Nos. 87, 88 and
106" ("SFAS No. 132") which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 132 establishes standards for disclosures about
pension and other postretirement benefit plans and does not change the
current methods of measurement or recognition of those plans. The adoption
of this standard is not expected to have a material impact on the Company's
financial statement presentation and related disclosures.
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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 FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The Company's operations primarily consist of the production (by
origination or purchase), sale and servicing of first mortgage,
non-conventional, home equity loans ("loans") and manufactured housing loan
contracts ("contracts"). The principal home equity loan products are fixed rate,
adjustable rate ("ARM") and hybrid (i.e., the rate is fixed for a specified
period and becomes adjustable thereafter). Fundamental to the profitability and
funding of the Company's operations is the sale of loans and contracts with
servicing rights retained. The majority of the Company's revenue is derived from
the gain recognized on the sale of loans and the recognition of net loan fees at
the time of sale of the loans. Net loan fees on loans owned by the Company are
recognized over the lives of the loans as an adjustment to yield using the
interest method.
The Company sells substantially all of its loan production in public
securitization transactions through shelf registration statements of its
subsidiaries. During the first quarter of 1998 and 1997, the Company sold $698
million and $517 million, respectively, of its home equity loans and $86 million
and $71 million, respectively, of its manufactured housing contracts.
The weighted average interest spread on home equity loans sold to third
parties (the difference between the stated rate on the loan and the rate paid to
purchasers, less recurring fees) was 4.67% and 4.65% in the first quarter of
1998 and 1997, respectively. The weighted average interest spread on loans sold
is determined without regard to credit losses, which are provided for separately
by the Company.
Net income for the three months ended March 31, 1998 was $6.0 million
($.19 per share based on 32.3 million weighted average shares outstanding)
compared to $20.2 million for the same period of 1997 ($.62 per share based on
32.6 million weighted average shares outstanding). The decrease in net income
in the first quarter of 1998 resulted primarily from increased expenses related
to continued expansion of the Company's retail infrastructure and increased
amortization of the Company's interest-only and residual certificates. In
addition, net income for the first quarter of 1997 was increased by $4.5
million as the result of the implementation by the Company of Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125").
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the periods indicated:
Three Months Ended March 31,
-------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS)
Loan sale gains ....................................... $ 55,093 $ 47,196
Finance income, fees earned and other loan income ..... 36,453 38,997
Investment income ..................................... 8,846 4,748
Other ................................................. 1,295 1,481
-------------- --------------
Total ....................................... $ 101,687 $ 92,422
============== ==============
The Company sells substantially all loans which it originates or purchases
and generally retains the servicing rights on loans sold. Under the
sales/servicing agreements, the buyer receives the principal collected on the
loan and an agreed upon rate on the outstanding principal balance, and the
Company retains the excess of the interest at the contractual rate over the sum
of the rate paid to the buyer (the "investor" rate), a normal servicing fee and,
where applicable, the trustee fee and surety bond fee. At the time of sale, the
Company allocates a portion of its
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basis in the loans to mortgage servicing rights which is recorded as an asset
(Capitalized mortgage servicing rights), records as an asset the fair value of
the excess interest retained by it (Interest-only and residual certificates),
makes a provision for an allowance for losses on the loans sold for which it
retains the servicing, and recognizes the resulting loan sale gain as revenue.
The fair value of the Company's Interest-only and residual certificates, which
is net of the allowance for loan losses on serviced loans, is determined at the
time of sale by the Company by computing the present value of the cash flows of
the excess interest retained by the Company expected to be received by it (using
the expected dates that such interest is to be released from the related reserve
accounts), discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on a
financial instrument comprised of such cash flows. These amounts are calculated
using prepayment and default assumptions based on the actual experience of the
Company's owned and serviced portfolio for home equity loans and comparable
industry prepayment statistics for manufactured housing contracts. On a
quarterly basis, the Company reviews the fair value of the Interest-only and
residual certificates by analyzing its prepayment and other assumptions in
relation to its actual experience, and, if necessary, adjusts the carrying value
of the Interest-only and residual certificates to such fair value through a
charge or credit to earnings. The prepayment assumptions used by the Company as
of March 31, 1998 in computing loan sale gains for its home equity products are
the same as those used by the Company as of December 31, 1997, and which are
described in Item 7 of the Company's Annual Report on Form 10-K for the year
ending December 31, 1997.
The following table provides life-to-date prepayment rates and pool factors
as of March 31, 1998, with respect to the Company's home equity loan
securitizations by year of securitization for the years indicated:
Fixed ARM Hybrid
------------------------------ ------------------------------- ----------------------------------
Life- Life- Life-
Year of Original to-Date Pool Original to-Date Pool Original to-Date Pool
Securitization Balance CPR Factor(1) Balance CPR Factor (1) Balance CPR Factor (1)
- -------------- ----------- --------- -------- --------- --------- --------- ----------- -------- -----------
(dollars in thousands)
1993 $ 415,525 27% 20.86% $ 34,990 36% 12.91% -- -- --
1994 935,568 25% 32.77% 74,987 36% 20.53% -- -- --
1995 1,030,698 25% 44.09% 391,652 30% 41.13% -- -- --
1996 1,350,058 23% 64.40% 732,762 32% 56.83% $ 142,308 23% 64.17%
1997 1,224,997 18% 88.09% 479,294 25% 85.70% 1,020,708 16% 92.56%
(1) Pool Factor - Percentage of the securitization remaining outstanding at
March 31, 1998.
The following table provides life-to-date prepayment rates and pool factors
as of March 31, 1998, with respect to the Company's manufactured housing
contract securitizations by year of securitization for the years indicated:
Real Estate Chattel
-------------------------------------------- --------------------------------------------
Year of Original Life-to-Date Pool Original Life-to-Date Pool
Securitization Balance CPR Factor (1) Balance CPR Factor (1)
- --------------- ------------ ------------ ------------- ------------ -------------- -----------
(dollars in thousands)
1996 $ 55,031 20% 72.29% $ 109,968 6% 89.83%
1997 100,403 15% 91.50% 204,573 6% 96.14%
(1) Pool Factor - Percentage of the securitization remaining outstanding at
March 31, 1998.
Loan sale gains constitute the largest component of the Company's revenues.
Loan sale gains for the three months ended March 31, 1998 and 1997 were reduced
by $16.1 million and $12.4 million, respectively, to provide for estimated
future losses on loans sold. The increase in the amount of loan sale gains in
the first quarter of 1998 compared to the same period of 1997 was due primarily
to a $181 million increase in the amount of home equity loans sold. Loan sale
gains for the first quarter of 1998 also include $1.5 million as the result of
the sale of
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approximately $86 million in manufactured housing contracts compared to $6.4
million recognized in the first quarter of 1997 resulting from the sale of
approximately $71 million in manufactured housing contracts. The decline in loan
sale gain recognized on the sale of manufactured housing contracts during the
first quarter of 1998 compared to the same period in 1997 resulted from a
decrease in the interest spread retained on contracts sold. Loan sale gains are
reduced by estimated future credit losses on loans sold, transaction expenses
and loan acquisition premiums. Loan sale gains in the first quarter of 1998
include the capitalization of mortgage servicing rights in the amount of $7.4
million compared to $5.6 million for the same period of 1997.
The following table presents information regarding loan sale transactions
for the periods indicated:
HOME EQUITY LOANS MANUFACTURED HOUSING CONTRACTS
------------------------------ ------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Loans sold ............................. $ 698,322 $ 517,391 $ 85,960 $ 70,803
Average coupon ......................... 10.63% 11.20% 9.23% 10.97%
Interest spread retained ............... 4.67% 4.65% 2.27% 3.54%
Loan sale gains ........................ $ 53,594 $ 40,765 $ 1,499 $ 6,431
The Company has securitized certain home equity loans that have a fixed
coupon rate for two or three years then convert into an adjustable rate for the
remaining lives of the loans ("hybrid loans") of which $1.25 billion is
outstanding as of March 31, 1998. The investor rate on the asset-backed
securities backed by these hybrid loans is based on a floating interest rate and
is calculated monthly by reference to the London interbank offered rate for
one-month U.S. dollar deposits ("1-month LIBOR"). During the first quarter of
1998, the Company entered into a $1.0 billion interest rate cap transaction for
loans securitized prior to 1998 to mitigate its exposure during the initial two
or three year period when the coupon rates are fixed and the investor rates are
floating. In addition, certain classes of the asset-backed securities of the
Company's 1996, 1997 and 1998 securitizations backed by fixed rate home equity
loans provide for floating investor rates based on 1-month LIBOR. These
securitizations were structured so that the maturity of these floating investor
rate securities is anticipated to be approximately one year. As of March 31,
1998, $10 million of such 1996 securities, $246 million of such 1997 securities
and $131 million of such 1998 securities remain outstanding.
Fluctuations in and the level of market interest rates will impact the
interest spread retained by the Company on loans sold (which includes for
purposes hereof manufactured housing contracts) and, potentially, the amount of
its loan sale gains. As reflected in the table above, the average coupon on
loans and contracts originated during the respective periods has declined, which
decline the Company believes resulted from a lower interest rate environment and
increased competition in the sub-prime lending industry.
In connection with loan securitization transactions, the Company has used a
prefunding feature which "locks in" the rate that the Company will pay to the
investor on a predetermined amount of loans for future delivery. The Company is
obligated for the difference between the earnings on the prefunded amount and
the interest at the investor rate paid to the investor 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 1998, approximately $21.0 million was held in
prefunding accounts for purchase of the Company's home equity loans and $16.9
million for the purchase of manufactured housing contracts during the second
quarter of 1998. Such home equity loans were delivered in April, 1998 and it is
anticipated that such manufactured housing contracts will be delivered during
May, 1998.
12
14
Finance income, fees earned and other loan income, which constitutes the
second largest component of the Company's revenues, was comprised of the
following items for the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
(in thousands)
Servicing fees and excess interest collected ............... $ 58,813 $ 45,346
Loan origination fees ...................................... 34,878 21,488
Loan interest .............................................. 5,390 4,358
Other loan income .......................................... 4,876 2,350
Amortization of interest-only certificates ................. (58,807) (32,410)
Amortization of mortgage servicing rights .................. (3,544) (1,674)
Provision for losses on serviced loans ..................... (5,153) (461)
------------ ------------
Total ............................................ $ 36,453 $ 38,997
============ ============
The increase in servicing fees and excess interest collected reflects the
growth in the portfolio of loans serviced for third party investors. The average
portfolio of loans serviced for third party investors was $5.8 billion and $4.2
billion for the three months ended March 31, 1998 and 1997, respectively.
Loan origination fees in excess of direct origination costs on each loan
originated by the Company are recognized over the life of the loan or earlier at
the time of sale of the loan to a third party. During the first quarter of 1998
and 1997, the Company sold approximately $698 million and $517 million,
respectively, in home equity loans and recognized approximately $28.8 million
and $19.4 million, respectively, in loan origination fees (which relate
primarily to fixed rate retail production) in connection with these sales.
The increase in servicing fees earned and loan origination fees for the
first quarter of 1998 was offset by a $26.4 million increase in amortization of
interest-only and residual certificates and a $1.9 million increase in
amortization of mortgage servicing rights, primarily as the result of an
increase in the amount of loans refinanced or prepaid. In addition, during the
first quarter of 1997, amortization of interest-only and residual certificates
was positively effected by the implementation of SFAS No. 125 which increased
finance income by $8.9 million.
The Company estimates that nonaccrual loans reduced finance income for the
first quarter of 1998 and 1997 by approximately $13.4 million, and $8.2 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 first quarter of 1998, the average amount of nonaccrual loans owned and/or
serviced by the Company was approximately $403.1 million compared to $249.0
million in the same period of 1997.
Investment income totaled $8.8 million for the first quarter of 1998
compared to investment income of $4.7 million during the same period of 1997.
Investment income is primarily related to interest earned on temporary
investments in reserve accounts established in connection with loan sales in
securitization transactions.
Other income relates to income earned by the Company's telecommunications
business and property management with respect to its office park.
13
15
Expenses. The following table presents the components of the Company's
expenses for the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------- ------------
(IN THOUSANDS)
Personnel ....................................................... $ 38,102 $ 26,749
Interest ........................................................ 18,599 12,230
Other operating ................................................. 35,459 21,946
------------ ------------
Total ................................................. $ 92,160 $ 60,925
============ ============
The increase in personnel costs are primarily associated with the continued
expansion of the Company's lending operations. The remaining increase is
primarily related to incentive compensation related to an increase in home
equity loan production.
Interest expense for the first quarter of 1998 increased approximately $6.4
million compared to the same period of 1997 principally due to an increase in
the average amount of debt outstanding.
Other operating expenses increased approximately $13.5 million during the
first quarter of 1998 compared to the same period of 1997 primarily as the
result of costs associated with the expansion of the Company's lending
operations. During the three months ended March 31, 1998 and 1997, advertising
expense totaled $11.8 million and $2.8 million and occupancy and equipment
expenses were $8.2 million and $5.5 million, respectively.
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 without
limitation 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 ("asset-backed securities")
are offered and sold, with servicing rights retained. The purchasers of the
asset-backed securities receive a security which is credit enhanced, in part, in
home equity loan securitizations and one manufactured housing contract
securitization, through a guaranty provided by a third party insurer or, in
connection with the other manufactured housing contract securitizations, through
a senior/subordinated structure. Credit enhancement for the home equity
asset-backed securities is also provided by subordinating a cash deposit and the
excess interest spread retained by the Company, up to a specified amount (the
"Subordinated Amount"), to the payment of scheduled principal and interest on
the securities. 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 generally 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 Subordinated Amount, a
third party insurer is obligated to pay any further losses experienced by the
owners of the asset-backed securities. Except for one manufactured housing
contract securitization in which credit enhancement is provided by a third party
insurer and subordination of the retained excess interest spread, such losses
are borne first by the subordinated asset-backed securities in the Company's
manufactured housing contract securitizations. The Company has retained some of
the subordinated securities in such securitizations.
14
16
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 records a
provision for the estimated amount of credit losses at the time of sale, and
records such amount on its balance sheet in the allowance for loan losses as a
reduction of Interest-only and residual certificates. 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 March 31, 1998, the
allowance for loan losses on loans serviced was $112.8 million and $3.6 million
on loans owned by the Company. The maximum recourse associated with sales of
home equity loans and manufactured housing contracts according to terms of the
sale agreements totaled approximately $1.4 billion at March 31, 1998,
substantially all of which 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, 1998, the contractual balance of home equity loans serviced
was approximately $5.7 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 and the District of Columbia,
at March 31, 1998 a substantial portion of the home equity loans serviced were
originated in California (9.8%), Louisiana (7.9%), Florida (7.1%), Ohio (6.4%)
and North Carolina (5.2%), respectively, and no other state accounted for more
than 4.7% of the serviced portfolio. In addition, at March 31, 1998, the Company
serviced approximately $534 million of manufactured housing contracts, 18.2% of
which were originated in Texas, 16.4% in South Carolina and 13.9% of which were
originated in North Carolina. 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 two tables set forth information relating to certain
contractual delinquency, default and loss experience for home equity loans
serviced as of the dates indicated in the first table and for the periods
indicated in the second table, including loans owned by the Company and loans
serviced for others:
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------- -------------------------- ----------------------------
% OF % OF % OF
CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL
BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE
------------- ------------ ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
Home equity loans
serviced ......... $ 5,661,229 $ 5,528,923 $ 4,040,138
=========== =========== ===========
Delinquency
30-59 days ....... $ 140,943 2.49% $ 176,882 3.20% $ 136,976 3.39%
60-89 days ....... 69,218 1.22 57,975 1.05 53,124 1.31
90+ days ......... 91,290 1.61 46,873 0.85 28,663 0.71
----------- ----------- ----------- ----------- ----------- -----------
301,451 5.32 281,730 5.10 218,763 5.41
----------- ----------- ----------- ----------- ----------- -----------
Defaults
Foreclosures in
process ....... 149,737 2.65 189,801 3.43 135,779 3.36
Bankruptcy ....... 131,864 2.33 115,856 2.10 73,887 1.83
----------- ----------- ----------- ----------- ----------- -----------
281,601 4.98 305,657 5.53 209,666 5.19
----------- ----------- ----------- ----------- ----------- -----------
Total delinquency
and defaults .... $ 583,052 10.30% $ 587,387 10.63% $ 428,429 10.60%
=========== =========== =========== =========== =========== ===========
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THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
1998 1997 1997 1996
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Average dollar amount of home equity loans
outstanding during period ........................... $ 5,595,076 $ 4,170,923 $ 4,784,531 $ 3,370,810
Net losses
Gross Losses(1) ..................................... $ 12,047 $ 7,474 $ 32,984 $ 19,484
Recoveries(2) ....................................... (563) (449) (1,937) (2,371)
------------- ------------- ------------- -------------
Net Losses .......................................... $ 11,484 $ 7,025 $ 31,047 $ 17,113
============= ============= ============= =============
Net losses for the last four quarters as a
percentage of average amount outstanding............. 0.71% 0.58% 0.65% 0.51%
(1) "Gross Losses" are amounts which have been determined to be uncollectible
relating to home equity loans for each respective period.
(2) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
The contractual balances exclude home equity real estate owned and/or
serviced which totaled $107.6 million and $98.9 million at March 31, 1998 and
December 31, 1997, respectively. The Company believes that the decrease in
total delinquencies and defaults at March 31, 1998 compared to December 31, 1997
is not attributable to any single factor, but rather reflects a combination of
factors, including the seasonal nature of delinquencies inherent in the
portfolio.
The following tables provide 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, 1998
-----------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY ------------------------------- TOTAL
CONTRACTUAL ------------------------------ FORECLOSURES BANK- DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS RUPTCY TOTAL & DEFAULTS
- ------------------- ----------- ------- ------- ------- ------ ------------ ------ ------ -----------
(DOLLARS IN THOUSANDS)
1992 & prior ...... $ 106,581 3.66% 1.37% 2.77% 7.80% 3.57% 5.76% 9.33% 17.13%
1993 .............. 122,229 3.34% 1.23% 1.93% 6.50% 3.77% 5.78% 9.55% 16.05%
1994 .............. 276,031 3.39% 1.37% 2.58% 7.34% 5.03% 6.94% 11.97% 19.31%
1995 .............. 638,746 3.87% 1.87% 3.01% 8.75% 6.48% 6.66% 13.14% 21.89%
1996 .............. 1,336,377 3.78% 1.88% 2.64% 8.30% 4.69% 3.17% 7.86% 16.16%
1997 .............. 2,448,994 1.96% 1.03% 0.99% 3.98% 0.96% 0.60% 1.56% 5.54%
1998 .............. 732,271 0.04% 0.00% 0.00% 0.04% 0.00% 0.00% 0.00% 0.04%
-----------
Total.......... $ 5,661,229 2.49% 1.22% 1.61% 5.32% 2.65% 2.33% 4.98% 10.30%
===========
DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY ------------------------------- TOTAL
CONTRACTUAL ------------------------------ FORECLOSURES BANK- DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS RUPTCY TOTAL & DEFAULTS
- ------------------- ----------- ------- ------- ------- ------ ------------ ------ ------ -----------
(DOLLARS IN THOUSANDS)
1991 & prior ...... $ 75,114 4.79% 1.06% 1.56% 7.41% 4.92% 5.72% 10.64% 18.05%
1992 .............. 43,134 5.21% 1.72% 2.28% 9.21% 4.82% 5.23% 10.05% 19.26%
1993 .............. 135,399 4.59% 1.12% 1.01% 6.72% 4.79% 5.30% 10.09% 16.81%
1994 .............. 302,819 4.95% 1.54% 1.47% 7.96% 6.17% 6.79% 12.96% 20.92%
1995 .............. 710,685 5.04% 1.59% 1.46% 8.09% 7.80% 5.66% 13.46% 21.55%
1996 .............. 1,544,278 4.54% 1.50% 1.22% 7.26% 5.39% 2.28% 7.67% 14.93%
1997 .............. 2,717,494 1.62% 0.58% 0.35% 2.55% 0.74% 0.23% 0.97% 3.52%
-----------
Total ......... $ 5,528,923 3.20% 1.05% 0.85% 5.10% 3.43% 2.10% 5.53% 10.63%
===========
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The following table provides certain pool factors and cumulative losses
with respect to the Company's home equity loans by year of production for the
periods indicated:
CUMULATIVE
YEAR HOME-EQUITY NET LOSSES AS
OF LOAN POOL % OF
PRODUCTION PRODUCTION FACTOR(1) PRODUCTION
- --------------- -------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
FIXED
1993 $ 500,900 22.95% 2.10%
1994 $ 837,901 31.68% 2.33%
1995 $ 1,130,715 42.54% 1.42%
1996 $ 1,383,714 61.30% 0.19%
1997 $ 1,373,984 80.79% 0.00%
1998 $ 356,618 99.47% 0.00%
ARM
1993 $ 38,968 18.69% 1.77%
1994 $ 70,920 14.93% 0.64%
1995 $ 410,922 38.40% 0.79%
1996 $ 860,744 56.72% 0.10%
1997 $ 1,513,667 88.46% 0.00%
1998 $ 385,606 97.91% 0.00%
(1) Pool Factor - Percentage of the year's production remaining outstanding
at March 31, 1998.
The following two tables provide certain contractual delinquency, default
and loss experience information for manufactured housing contracts serviced as
of the dates indicated in the first table and for the periods indicated in the
second table, including manufactured housing contracts owned by the Company and
contracts serviced for others.
MARCH 31, DECEMBER 31,
------------------------ -------------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
Number of manufactured
housing contracts ..................... 15,510 7,451 13,816 5,412
Delinquency period (1)(2)(3)
30-59 days ....................... 2.09% 1.56% 3.13% 1.88%
60-89 days ....................... 1.02 .38 1.11 .57
90 days and over ................. 1.47 .57 1.49 .16
---------- ---------- ---------- ----------
4.58% 2.51% 5.73% 2.61%
========== ========== ========== ==========
Dollar amount (in thousands) of
manufactured housing contracts in
repossession at the end of period(3)... $ 7,459 $ 1,261 $ 4,797 $ 725
(1) As a percentage of the number of manufactured housing contracts as of
the date indicated and excluding contracts already in repossession.
(2) The delinquency period is based on the number of days payments are
contractually past due (assuming 30-day months). Therefore, a
manufactured housing contract with a payment due on the first day of a
month is not 30 days delinquent until the first day of the next month.
The information includes as current those manufactured housing
contracts whose borrowers have entered bankruptcy proceedings, had
their scheduled payment changed under a bankruptcy payment plan,
provided that the borrowers are current under their bankruptcy payment
plan.
(3) Manufactured housing contracts in the process of foreclosure but not
yet repossessed have been included in the appropriate delinquency
period.
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THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------------- ---------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Dollar amount of manufactured housing
contracts outstanding at end of period ........... $ 534,316 $ 254,584 $ 456,937 $ 170,869
Net Losses
Gross Losses (1) ............................. $ 747 $ 95 $ 866 $ 32
Recoveries (2) ............................... (18) (1) (7) (10)
----------- ----------- ----------- -----------
Net Losses ................................... $ 729 $ 94 $ 859 $ 22
=========== =========== =========== ===========
Net Losses for the last four quarters as a
percentage of average amount outstanding ......... 0.39% 0.19% 0.27% 0.03%
(1) "Gross Losses" are amounts which have been determined to be uncollectible
relating to manufactured housing contracts for each respective period.
(2) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
The following tables reflect, 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, 1998
-------------------------------------------
OWNED SERVICED TOTAL
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning of period ..... $ 3,691 $ 106,563 $ 110,254
Provision for loan losses .......................... 1,389 17,036 18,425
Net loans charged off .............................. (1,482) (10,813) (12,295)
------------ ------------ ------------
Allowance for loan losses, end of period ........... $ 3,598 $ 112,786 $ 116,384
============ ============ ============
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 .......................... 1,061 12,914 13,975
Net loans charged off .............................. (967) (6,434) (7,401)
------------ ------------ ------------
Allowance for loan losses, end of period ........... $ 4,235 $ 79,582 $ 83,817
============ ============ ============
The above delinquency, default and loan loss experience represents the
Company's experience for the periods reported. However, the delinquency, default
and loss percentages may be affected by the increase in the size and aging 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,
defaults and losses on the home equity loans and manufactured housing contracts
could be higher than those theretofore experienced in the sub-prime residential
mortgage lending and manufactured housing industries 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, defaults 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,
defaults or losses in the future and no assurance can be given that the
delinquency, default and loss experience presented in the tables will be
indicative of such experience.
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20
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements arise from loan originations,
deposits to reserve accounts, repayments of debt borrowed under the Company's
senior and subordinated notes and credit facilities, payments of operating and
interest expenses, and income taxes. The Company uses the proceeds of its $800
million revolving credit facility (the "Credit Facility") as the primary source
of funding of loan production pending sales in securitizations. The Company's
borrowings are in turn repaid with cash proceeds received from selling such
loans through securitizations. The Credit Facility is provided by a group of 22
banks, matures in April 2000, and provides for revolving loans and letters of
credit. Proceeds of the Credit Facility may be used for general corporate
purposes, including the interim funding of loan originations, and to refinance
existing debt. During 1997 and the first quarter of 1998, the Credit Facility
was primarily used to fund the origination of home equity loans and manufactured
housing contracts. These borrowings were repaid upon the delivery of the loans
and contracts into the securitization transactions. As a result of the recent
downgrade by Standard and Poor's, a division of McGraw-Hill Companies, Inc.
("S&P") and Fitch IBCA, Inc. ("Fitch") of their ratings of the Company's
long-term unsecured debt, the rate of interest payable by the Company under the
terms of the Credit Facility has increased. See "Ratings" below. At March 31,
1998, letters of credit in the aggregate maximum amount of $100 million (of
which the available draw amount at March 31, 1998 was $40.2 million) were
outstanding under the Credit Facility for the Company's account and were
deposited in 1997 in lieu of cash into the related reserve accounts established
in connection with the Company's 1997 third and fourth quarter home equity loan
securitization transactions. In addition to the Credit Facility, the Company
maintains two sources of financing for its home equity loan originations: a
warehouse facility provided by the investment banker which acted as lead
underwriter for the Company's 1998 first quarter home equity loan securitization
(the "Investment Bank Warehouse"), and a warehouse facility provided by United
Companies Life Insurance Company ("UCLIC"). The Investment Bank Warehouse was
directly related to the 1998 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 related prefunding accounts of this securitization. As of March
31, 1998, $150 million was available and no amounts were outstanding under the
Investment Bank Warehouse. The UCLIC warehouse facility which was established
upon the sale of UCLIC in 1996, provides for the purchase of up to $150 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, 1998, $3.9 million in loans
eligible for securitization were funded under this facility. The Company has
issued $100 million, $125 million and $100 million of senior unsecured notes
which mature in 1998, 1999 and 2004, respectively, and in June 1997 sold $150
million of unsecured subordinated notes maturing in 2005.
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 1998 and 1997
reflects approximately $845 million and $627 million, 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 $805 million and
$625 million in the first quarter of 1998 and 1997, respectively. In connection
with the home equity loan and one manufactured housing contract transactions in
the secondary market, third-party surety bonds and subordination of cash
deposits and excess interest retained by the Company have been provided as
credit enhancements. The loan sale transactions have required the subordination
of certain cash flows retained by the Company from the loans sold to the payment
of principal and interest due to holders of the asset-backed securities. 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 excess spread retained by 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 and contracts underlying the asset-backed securities
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,
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21
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). In
certain home equity loan securitizations, the excess interest spread on the
fixed rate loans included therein is utilized initially to cover current losses,
and then to pay down the principal of the related asset-backed securities until
a specified level of overcollateralization is reached, and thus is unavailable
to the Company until such time. With respect to five home equity loan
securitization transactions which closed in 1994 and 1995 for which the
aggregate unpaid principal balance as of March 31, 1998 of the loans sold
thereby was approximately $655 million, the delinquency and loss experiences of
such loans, pursuant to levels thereof set forth in the related pooling and
servicing agreements, have resulted in an increase in the required amount of
excess interest spread to be maintained in the related reserve accounts. As a
result, the Company's cash flow has been negatively affected by the increased
minimum reserve account requirements. At March 31, 1998, the amounts on deposit
in reserve accounts totaled $399.3 million, exclusive of the letters of credit
issued under the Credit Facility in the amount of $100 million discussed above.
RATINGS.
On March 10, 1998, S&P lowered its rating of the Company's senior
unsecured notes, which aggregate $325 million, to "BB+" from "BBB-", the
Company's $150 million subordinated notes to "BB-" from "BB+" and on the
Company's preferred stock from "BB" to "B+". In addition, on April 17, 1998,
Fitch lowered its rating of the Company's senior unsecured notes to "BBB-" from
"BBB" and the Company's subordinated notes from "BBB-" to "BB+".
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements contained herein
that are not historical facts are forward-looking statements based on the
Company's current expectations and beliefs concerning future developments and
their potential effects on the Company. There can be no assurance that future
developments affecting the Company will be those anticipated by the Company.
Actual results may differ from those projected in the forward-looking
statements. These forward-looking statements involve significant risks and
uncertainties (some of which are beyond the control of the Company) and are
subject to change based upon various factors, including but not limited to the
following risks and uncertainties: changes in the asset securitization industry
and 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; the presence of competitors with greater financial
resources and the impact of competitive products and pricing; the effect of the
Company's policies, including the amount and rate of growth of Company expenses;
the continued availability to the Company of adequate funding sources; actual
prepayment rates and credit losses on loans sold as compared to prepayment rates
and credit losses assumed by the Company at the time of sale for purposes of its
gain on sale computations; the effect of changes in market interest rates on the
spread between the coupon rate on loans sold and the rate on the asset-backed
securities backed by such loans issued by the Company in securitization
transactions and on the discount rate assumed by the Company in its gain on sale
computations; timing of loan sales; the quality of the Company's owned and
serviced loan portfolio including levels of delinquencies, customer bankruptcies
and charge-offs; ratings; and various legal, regulatory and litigation risks.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as the result of new information, future
events or otherwise. For a more detailed discussion of some of the foregoing
risks and uncertainties, see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Investment Considerations", in
the Company's Annual Report on Form 10-K for the year ending December 31, 1997
and other Company filings with the Securities and Exchange Commission.
20
22
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,
1998 and the related consolidated statements of income and cash flows for the
three months ended March 31, 1998 and 1997, and previously audited and expressed
an unqualified opinion dated March 4, 1998 on the consolidated financial
statements of the Company and its subsidiaries as of December 31, 1997, from
which the consolidated balance sheet as of this date is derived.
21
23
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, 1998 and the related
consolidated statements of income and cash flows for the three month period
ended March 31, 1998 and 1997. 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, 1997, 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 March 4, 1998,
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, 1997 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 8, 1998
22
24
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
On January 27, 1998, the Company filed a Current
Report on Form 8-K to report expected earnings for
the fourth quarter of 1997 and forecasts of future
loan production and earnings.
23
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED COMPANIES FINANCIAL CORPORATION
Date: 5/11/98 By: /s/ J. Terrell Brown
--------- -----------------------------------------------------
J. Terrell Brown
Chairman and Chief Executive Officer
Date: 5/11/98 By: /s/ Dale E. Redman
---------- -----------------------------------------------------
Dale E. Redman
Executive Vice President and Chief Financial Officer
26
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
25