<PAGE> 1
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, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period from to
Commission file number 1-7067
UNITED COMPANIES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Louisiana 71-0430414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 Essen Lane 70809
Baton Rouge, Louisiana (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code (504) 924-6007
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares of $2.00 par value common stock issued and
outstanding as of April 28, 1994 was 12,408,363, excluding 515,877 treasury
shares.
<PAGE> 2
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
March 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Three months ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 5-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-22
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
<PAGE> 3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
1994 December 31
(Unaudited) 1993
----------- ---------------
<S> <C> <C>
Assets
- - ------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 29,579 $ 45,530
Temporary investments - reserve accounts. . . . . . . . . . . . . . . . 35,542 27,672
Bonds and stocks - net
Available-for-sale (amortized cost at March 31, 1994, $885,888) . 872,062 -
Held-to-maturity (fair value at March 31, 1994, $66,852) . . . . 66,998 932,697
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,546 26,698
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519,313 542,633
Less: Allowance for loan losses . . . . . . . . . . . . . . . . (21,184) (21,017)
Unearned loan charges . . . . . . . . . . . . . . . . . . (1,652) (1,982)
----------- -----------
Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,477 519,634
Capitalized excess servicing income . . . . . . . . . . . . . . . . . . 131,611 113,192
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . 83,584 83,495
Due from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . 36,020 36,558
Accrued interest and accounts receivable . . . . . . . . . . . . . . . 29,528 30,266
Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,995 28,988
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,458 19,633
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,621 6,577
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 1,866,021 $ 1,817,544
=========== ===========
Liabilities and Stockholders' Equity
- - ------------------------------------
Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,317,879 $ 1,294,983
Notes payable:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,950 500
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 155,000
Policy benefit reserves . . . . . . . . . . . . . . . . . . . . . . . . 123,061 125,340
Allowance for loss on loans serviced . . . . . . . . . . . . . . . . . 16,393 12,938
Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . . . 8,876 10,260
Repurchase agreement . . . . . . . . . . . . . . . . . . . . . . . . . 5,032 30,000
Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . (534) 5,468
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,703 29,687
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . 1,704,360 1,664,176
----------- -----------
Stockholders' equity:
Common stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 12,879,902 and 12,684,858 shares . . . . . . . . . 25,760 25,370
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 80,817 76,312
Net unrealized loss on securities . . . . . . . . . . . . . . . . (8,985) -
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 72,464 59,988
Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . . (8,395) (8,302)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 161,661 153,368
----------- -----------
Total liabilities and stockholders' equity . . . . . $ 1,866,021 $ 1,817,544
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------
1994 1993
----------- ----------
<S> <C> <C>
Revenues:
Interest, charges and fees on loans . . . . . . . . . . . . . . . . . . $ 27,171 $ 20,079
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,441 17,826
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,554 9,882
Net insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . 11,981 10,187
Loan servicing income . . . . . . . . . . . . . . . . . . . . . . . . . 3,689 2,698
Investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . (60) 261
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,776 60,933
----------- ----------
Expenses:
Interest on annuity policies . . . . . . . . . . . . . . . . . . . . . 17,793 19,046
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,763 9,998
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . 11,185 7,285
Insurance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 3,182 4,365
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . . . . 3,996 3,633
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,425 2,709
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,240 13,022
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,584 60,058
----------- ----------
Income from continuing operations before income taxes . . . . . . . . . . 21,192 875
Provision for income taxes (benefit):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,646 (564)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,164) 870
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,482 306
----------- ----------
Income from continuing operations . . . . . . . . . . . . . . . . . . . . 13,710 569
Loss from discontinued operations:
Loss from discontinued operations net of income tax benefit of $782 . . - (1,519)
Loss on disposal, including estimated operating losses during
phaseout (less income tax benefit of $8,326) . . . . . . . . . . . . . - (16,066)
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (17,585)
----------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,710 $ (17,016)
=========== ==========
Per share data:
Income from continuing operations . . . . . . . . . . . . . . . . . . . $ 1.05 $ .06
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . - (1.95)
----------- ----------
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.05 $ (1.89)
=========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . $ 13,710 $ 569
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operating activities:
Increase in deferred policy acquisition costs . . . . . . . . . . (89) (2,008)
Decrease in due from reinsurers . . . . . . . . . . . . . . . . . 538 495
Decrease in policy loans . . . . . . . . . . . . . . . . . . . . 175 869
Decrease (increase) in accrued interest and accounts receivable . 738 (959)
Increase in other assets . . . . . . . . . . . . . . . . . . . . (1,103) (1,061)
Decrease in policy benefit reserves . . . . . . . . . . . . . . . (1,231) (1,494)
Interest on annuity policies . . . . . . . . . . . . . . . . . . 17,793 19,046
Decrease in unearned premium reserves . . . . . . . . . . . . . . (1,384) (271)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (1,164) 870
Increase in other liabilities . . . . . . . . . . . . . . . . . . 6,121 (50)
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . 3,996 3,633
Amortization and depreciation . . . . . . . . . . . . . . . . . . 709 958
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . (22,554) (9,882)
Amortization of prior loan sale gains . . . . . . . . . . . . . . 8,181 3,921
Investment losses (gains) . . . . . . . . . . . . . . . . . . . . 60 (261)
----------- -----------
Net cash provided by continuing operating activities . . . . . 24,496 14,375
----------- -----------
Cash flows from discontinued operating activities . . . . . . . . . . . . . . . . . - 1,432
----------- -----------
Cash flows from investing activities:
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . 198,332 67,169
Principal collected on loans . . . . . . . . . . . . . . . . . . . . . . 22,172 24,898
Loan originations and acquisitions . . . . . . . . . . . . . . . . . . . (202,041) (101,369)
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . . . . (7,869) (3,289)
Proceeds from sales of investments . . . . . . . . . . . . . . . . . . . - 6,169
Proceeds from maturities or calls of investments . . . . . . . . . . . . 33,449 9,881
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . (108,551) (62,036)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (863) (293)
----------- -----------
Net cash used by investing activities . . . . . . . . . . . . . (65,371) (58,870)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in revolving credit debt . . . . . . . . . . . . . . 20,000 (5,000)
Increase (decrease) in debt with maturities of three months or less . . . 5,450 (600)
Decrease in repurchase agreement . . . . . . . . . . . . . . . . . . . . (24,968) -
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . - (80)
Increase in managed cash overdraft . . . . . . . . . . . . . . . . . . . 16,871 -
Deposits received from annuities and interest sensitive products . . . . 45,029 58,349
Payments on annuities and interest sensitive products . . . . . . . . . . (40,975) (35,271)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,234) (677)
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . . . 4,544 -
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . 207 8
----------- -----------
Net cash provided by financing activities . . . . . . . . . 24,924 16,729
----------- -----------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . (15,951) (26,334)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . 45,530 54,707
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $ 29,579 $ 28,373
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION.
In the opinion of the Company's management, the accompanying
unaudited consolidated financial statements contain all adjustments,
consisting of only normal accruals, except for discontinued
operations, necessary to present fairly the financial position, the
results of operations and the cash flows for the interim periods
presented.
These notes reflect only the major changes from those disclosures
contained in the Company's Annual Report, as amended, to the United
States Securities and Exchange Commission (Form 10-K) for the year
ended December 31, 1993 and are not intended to represent complete
disclosures required by generally accepted accounting principles.
The consolidated results of operations for the three months ended
March 31, 1994 and 1993 are not necessarily indicative of the results
to be expected for the full year. Certain 1993 amounts have been
reclassified to conform with the current year presentations. Such
reclassifications had no effect on net income.
2. DISCONTINUED OPERATIONS.
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As a result of this decision, the
operations of FMC have been classified as discontinued operations,
and, accordingly, the consolidated financial statements and the
related notes of the Company segregate continuing and discontinued
operations. In connection with the decision to dispose of FMC, the
Company recorded a $17.6 million after tax loss in its financial
statements as of and for the quarter ended March 31, 1993, reflecting
the operating loss of FMC for the quarter ended March 31, 1993 of
$1.5 million, net of tax benefit and the estimated loss from disposal
of FMC of $16.1 million, net of tax benefit. The Company does not
believe that further operating losses of FMC will be reflected in the
Company's financial statements.
As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December
21, 1993, the institutional lenders under FMC's primary credit
facility filed a petition in the U.S. bankruptcy court. FMC, as
debtor in possession in the bankruptcy proceeding, intends to file a
plan of liquidation providing for the disposal of FMC's remaining
assets and distributions to FMC's creditors. In connection with such
bankruptcy proceedings, certain payments previously received from FMC
by the Company may be determined to be preferential, thereby
requiring the refund of such payments. In addition, certain amounts
now owed by FMC to its creditors, including the Company, may be
reduced. If the Company were required to refund such amounts or is
unable to collect such amounts owed to it, the Company has estimated
that the potential additional loss could range up to $2.7 million,
net of income taxes. Further, the group of institutional lenders
under FMC's primary credit facility has questioned the Company's
computation and allocation between FMC and the Company of the income
tax benefits relating to FMC's losses. FMC recorded a tax benefit of
approximately $3.6 million equal to the refund of previously paid
income taxes computed on a separate company income tax return basis.
The Company has recorded a tax benefit of approximately $5 million
from the disposal of its investment in the preferred stock of FMC.
These institutional lenders have not yet specified the manner in
which they contend the tax benefits should be computed and allocated.
Management of the Company believes that its computation and
allocation of the tax benefit is proper and that no additional amount
is owed by the Company to FMC in this regard.
FMC is in payment default under its primary credit facility and the
outstanding principal balance as of March 31, 1994 of approximately
$43.7 million is due. The Company has not guaranteed any debt of FMC
and believes, based upon advice of its counsel, that it has no
responsibility for the obligations of
5
<PAGE> 7
FMC under such credit facility or (excluding potential consequences
of the bankruptcy filing or potential additional payment for tax
benefits as discussed above) for any other liabilities to FMC's
lenders.
Revenues for FMC for the three months ending March 31, 1994 and 1993
totaled $.2 million and $9.4 million, respectively. At March 31,
1994 assets of FMC were $16.5 million and liabilities were $52.5
million consisting principally of accounts payable and $45.2 million
of notes payable.
3. CASH PAID FOR INTEREST AND INCOME TAXES.
During the three months ended March 31, 1994 and 1993, the Company
paid interest on notes payable in the amount of $2.5 million and $2.7
million and income taxes in the amount of $7.7 million and $1.9
million, respectively.
4. BONDS AND STOCKS - NET.
During the first quarter of 1994, the Company implemented the
provisions of Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 115, which revised the
method of accounting for certain of the Company's investments. Prior
to adoption of SFAS No. 115, the Company reported its investments in
fixed income investments at amortized cost, adjusted for declines in
value considered to be other than temporary. SFAS No. 115 requires
the classification of securities in one of three categories:
"available-for-sale", "held-to-maturity" or "trading securities".
Securities classified as held-to-maturity are carried at amortized
cost, whereas securities classified as trading securities or
available-for-sale are recorded at market value. Effective with the
adoption of SFAS No. 115, the Company determined the appropriate
classification of its investments and, if necessary, adjusted the
carrying value of such securities accordingly as if the unrealized
gains or losses had been realized. The adjustment, net of applicable
income taxes, for investments classified as available-for-sale is
recorded in "Net unrealized loss on securities" and is included in
stockholders' equity.
At March 31, 1994, the Company's portfolio of bonds and stocks
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Market
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
Debt securities
Corporate . . . . . . . . . . . $ 243,768 $ 5,956 $ 3,360 $ 246,364
U.S.Treasury . . . . . . . . . . 10,719 289 - 11,008
Mortgage-backed . . . . . . . . 611,745 1,736 19,200 594,281
Foreign governments . . . . . . 18,498 1,050 196 19,352
Other . . . . . . . . . . . . . 425 31 - 456
--------- ------- -------- ---------
Total . . . . . . . . . . . 885,155 9,062 22,756 871,461
--------- ------- -------- ---------
Equity securities . . . . . . . . 733 30 162 601
--------- ------- -------- ---------
Total . . . . . . . . . . . $ 885,888 $ 9,092 $ 22,918 $ 872,062
========= ======= ======== =========
Held-to-maturity
Debt securities
Corporate . . . . . . . . . . . $ 11,967 $ 11,967
U.S.Treasury . . . . . . . . . . 3,759 $ 81 $ 74 3,766
Mortgage-backed . . . . . . . . 51,122 - 161 50,961
Other . . . . . . . . . . . . . 150 8 - 158
---------- ------- -------- ---------
Total . . . . . . . . . . . $ 66,998 $ 89 $ 235 $ 66,852
========= ======= ======== =========
Other
Investment in limited
partnership . . . . . . . . . $ 28,546 $ 28,546
========= =========
</TABLE>
6
<PAGE> 8
Net unrealized losses on securities included in stockholders' equity
at March 31, 1994 is as follows:
<TABLE>
<S> <C>
Gross unrealized gains . . . . . $ 9,092
Gross unrealized losses . . . . (22,918)
Deferred income taxes . . . . . 4,841
---------
Total . . . . . . . . . . . $ (8,985)
=========
</TABLE>
During the first quarter of 1994, net realized investment losses of
approximately $60,000 resulted from investment gains of $95,000
offset by investment losses of $155,000, including a $150,000
addition to the allowance for bond losses.
5. OTHER LIABILITIES.
At March 31, 1994, other liabilities included approximately $16.9
million representing a managed cash overdraft in the book balances of
the Company's primary disbursement accounts.
6. ACCOUNTING STANDARDS.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114 ("SFAS 114") which addresses the accounting by
creditors for impairment of loans and specifies how allowances for
credit losses related to certain loans should be determined. SFAS
114 also addresses the accounting by creditors for all loans that are
restructured in a troubled debt restructuring involving modification
of terms of a receivable. SFAS 114 is effective for financial
statements for fiscal years beginning after December 15, 1994. The
Company is reviewing the provisions of this pronouncement but has not
yet determined the effect of its implementation on the Company's
financial condition or results of operations.
7
<PAGE> 9
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.
OVERVIEW
The table below sets forth income from continuing operations before
income taxes for each of the Company's business segments and certain home
equity loan data for the indicated periods:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1994 1993
---------- -----------
(dollars in thousands)
<S> <C> <C>
Mortgage operations
UC Lending . . . . . . . . . . . . . . . . . . . . . $ 20,619 $ 2,225
Insurance operations
UC Life . . . . . . . . . . . . . . . . . . . . . . . 1,579 (493)
UG Title . . . . . . . . . . . . . . . . . . . . . . 360 260
Other operations . . . . . . . . . . . . . . . . . . . (240) 29
Corporate and eliminations . . . . . . . . . . . . . . (1,126) (1,146)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 21,192 $ 875
=========== ===========
Home equity loan originations . . . . . . . . . . . . . $ 197,357 $ 89,395
Home equity loans sold . . . . . . . . . . . . . . . . 198,332 66,872
Interest spread retained on home equity
loans sold . . . . . . . . . . . . . . . . . . . . . 5.61% 5.11%
</TABLE>
MORTGAGE OPERATIONS.
In 1993, the Company began selling its home equity loans in public
securitization transactions through its own shelf registration statement. The
Company believes loan securitizations improve its access to funding and thereby
provides a distribution outlet sufficient to meet the Company's expanding home
equity loan production. Mortgage operations are conducted through United
Companies Lending Corporation ("UC Lending"). Home equity loan production for
the first quarter of 1994 increased to $197.3 million compared to $89.4 million
for the first quarter of 1993. The Company's strategy for increasing home
equity loan production includes continued geographic expansion, introduction of
new loan products and wholesale loan originations, including those from
financial institutions through a program initiated in 1993. During the first
quarter of 1994, the Company opened ten new offices in seven additional states
thereby expanding its retail operations to 30 states. In addition, 220 brokers
and correspondents were added to the Company's wholesale loan network, which
currently has 540 representatives in 16 states.
Income from operations of the mortgage division for the first quarter
were $20.6 million, an increase of approximately $18.4 million compared to the
same period of 1993, primarily as the result of a $131 million increase in the
amount of loans sold and an increase in the interest spread retained on such
sales and in loan fees recognized at the time of sale.
8
<PAGE> 10
INSURANCE OPERATIONS.
Life and annuity products. Income from operations of United
Companies Life Insurance Company ("UC Life") for the first quarter of 1994
increased approximately $2.1 million compared to the same period of 1993
primarily as the result of the positive effect of an increase in the interest
margin on the Company's annuity products, which rose from 1.80% for the first
quarter of 1993 to 2.61% for the same period of 1994. The positive effect on
income of this factor was partially offset by a $.7 million increase in the
provision for loan losses during the first quarter of 1994 when compared to the
same period of 1993. In addition, during the first quarter of 1993, earnings
of UC Life were reduced by approximately $1.4 million as the result of an
estimated loss in connection with the termination of an agreement with a
third-party administrator of credit life insurance underwritten by UC Life.
Title insurance products. The Company's title insurance unit,
United General Title Insurance Company ("UG Title"), expanded its operations
into Kansas during the first quarter of 1994 and increased its premium volume
approximately $5.0 million compared to the first quarter of 1993. UG Title
underwrites title insurance in 27 states, operating through a network of
approximately 700 independent agents.
RESULTS OF OPERATIONS
The Company's financial statements present Foster Mortgage Corporation
as discontinued operations (see note 2 to consolidated financial statements).
Discussed below are results of continuing operations for the periods presented
and certain financial data by business segment for such periods.
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1994 1993
----------- ----------
(in thousands)
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . $ 83,776 $ 60,933
Total expenses . . . . . . . . . . . . . . . . . . 62,584 60,058
Income from continuing operations
before income taxes . . . . . . . . . . . . . . 21,192 875
Income from continuing operations . . . . . . . . 13,710 569
</TABLE>
9
<PAGE> 11
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the three months ended March 31, 1994
and 1993.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1994 1993
----------- -----------
(in thousands)
<S> <C> <C>
Interest, charges and fees on loans . . . . . . . $ 27,171 $ 20,079
Investment income . . . . . . . . . . . . . . . . 18,441 17,826
Loan sale gains . . . . . . . . . . . . . . . . . 22,554 9,882
Net insurance premiums . . . . . . . . . . . . . . 11,981 10,187
Loan servicing income . . . . . . . . . . . . . . 3,689 2,698
Investment gains . . . . . . . . . . . . . . . . . (60) 261
----------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ 83,776 $ 60,933
=========== =========
</TABLE>
Interest, charges and fees on loans increased $7.1 million for the
first three months of 1994. This line item includes interest on mortgage loans
owned by the mortgage and insurance divisions and loan origination fees earned
by the mortgage division. Loan origination fees in excess of direct
origination costs on loans held by the Company are recognized over the life of
the loan and are recognized at the time of sale on loans sold to third parties.
During the three months ended March 31, 1994 and 1993, the Company sold
approximately $198 million and $67 million, respectively, in home equity loans
and recognized approximately $7.0 million and $2.8 million, respectively, in
net loan origination fees in connection with these sales. Other loan income
includes primarily prepayment fees, late charges, and insurance commissions.
The following table presents the composition of interest, charges and
fees on loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1994 1993
--------- ---------
(in thousands)
<S> <C> <C>
Mortgage loan interest . . . . . . . . . . . . . . $ 12,027 $ 12,309
Loan origination fees . . . . . . . . . . . . . . 12,465 5,959
Other loan income . . . . . . . . . . . . . . . . 2,679 1,811
---------- ----------
Total interest, charges and fees on loans . . . $ 27,171 $ 20,079
========== ==========
</TABLE>
The Company estimates that non-accrual loans reduced mortgage loan
interest for the first three months of 1994 and 1993 by approximately $2.5
million and $2.3 million, respectively. During the three months ended March
31, 1994 the average amount of non- accrual loans owned by the Company was
$28.7 million compared to approximately $34.3 million during the same period of
1993. In addition, the average balance of loans serviced for third parties
which were on a non-accrual basis or in foreclosure was $50.8 million and $39.3
million during the first three months of 1994 and 1993, respectively,
representing 4.5% and 4.4%, respectively, of the average amount of loans
serviced for third parties. The Company is generally obligated to advance
interest on delinquent loans to the investor or holder of the mortgage-backed
security, as the case may be, at the pass-through rate until satisfaction of
the note, liquidation of the collateral or charge off of the delinquent loan.
At March 31, 1994, the Company owned approximately $8.2 million of commercial
loans which were on an accrual status, but which the Company considers as
potential problem loans, compared to $9.4 million at March 31, 1993. The
Company evaluates each of these commercial loans to estimate its risk of loss
in the investment and provides for such loss through a charge to earnings.
Investment income totaled $18.4 million on average investments of
approximately $989 million for the first three months of 1994 compared to
investment income of $17.8 million on average investments of approximately $802
million during the same period of 1993. The impact on revenue of the increased
asset base in 1994 was offset
10
<PAGE> 12
by lower weighted average investment yields than experienced during the first
quarter of 1993. At March 31, 1994 the amortized cost of the fixed income
portfolio totaled $952 million and was comprised principally of $663 million in
investment grade mortgage-backed securities and $274 million in investment
grade bonds. At March 31, 1994, the weighted average rating of the publicly
traded bond portfolio according to nationally recognized rating agencies was
"AA".
Net insurance premiums increased $1.8 million for the first three
months of 1994 compared with the same period of 1993. Net insurance premiums
reflect revenues associated primarily with sales of title insurance policies
underwritten by UG Title and credit insurance underwritten by UC Life. The
increase in premium income is primarily the result of an increase of $5.0
million in title insurance premiums offset by a reduction in premiums earned on
credit insurance products reflecting the impact of UC Life's decision to
discontinue sales of credit insurance products.
Loan sale gains recognized by the Company's mortgage unit increased
$12.7 million during the first three months of 1994 over the same period in
1993. Loan sale gains approximate the present value over the estimated lives
of the loans of the excess of the contractual rates on the loans sold, over the
sum of the pass through rate paid to the buyer, a normal servicing fee, a
trustee fee, a surety bond fee, if any, in mortgage-backed securitization
transactions, and an estimate of future credit losses. The increase in the
amount of loan sale gains was due primarily to a $131 million increase in the
amount of loans sold and to an increase in excess servicing income retained by
the Company (i.e., the stated interest rate on the loan less the pass through
rate and the normal servicing fee and other applicable recurring fees).
Interest spread retained by the Company on loans sold includes the normal
servicing fee. The following table presents information regarding home equity
loan sale transactions for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1994 1993
----------- -----------
(dollars in thousands)
<S> <C> <C>
Home equity loans sold . . . . . . . . . . . . . . $ 198,332 $ 66,872
Average coupon on home equity loans sold . . . . . 11.67% 12.90%
Interest spread retained on home equity loans sold 5.61% 5.11%
Home equity loan sale gains . . . . . . . . . . . $ 22,554 $ 9,882
</TABLE>
Historically, the Company originated and sold portfolios of home equity
loans on a whole loan basis (or participation therein) to institutional
investors or government-sponsored mortgage agencies or conduits and, during
1992, with the participation of one of these investors, securitized and
publicly sold home equity loan pass-through certificates. In the second
quarter of 1993, the Company began selling its loans in public securitization
transactions through its own shelf registration statement. The Company
realized an increase in the interest spread retained on home equity loans sold
from 5.11% in the three months ended March 31, 1993, to 5.61% in the three
months ended March 31, 1994. Fluctuations in and the level of market interest
rates will impact the interest spread retained by the Company on loans sold,
and, potentially, the amount of its loan sale gains. An increase in the level
of these interest rates could adversely affect the interest spread on loans
sold, whereas such interest spread generally widens during a declining interest
rate environment. Although strategic actions can be 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 action will generally lag behind the impact
of market rate fluctuations. As the result of recent increases in the level of
interest rates, the interest spread retained by the Company on loan sales
during the first quarter of 1994 declined to 5.61% from 6.06% retained on loan
sales during the fourth quarter of 1993. If the current level of market
interest rates is sustained or if such rates continue to increase during the
second quarter of 1994, the interest spread retained on home equity loans sold
during the second quarter of 1994 may be narrower than that received on sales
during the three months ended March 31, 1994.
11
<PAGE> 13
Loan servicing income increased $1.0 million for the three months
ending March 31, 1994 compared to the same period of 1993, reflecting the
impact of an increased amount of home equity loans serviced for third parties
offset by an increase in the amortization of prior loan sale gains. The
following table reflects the components of loan servicing income for the
periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1994 1993
----------- ------------
(in thousands)
<S> <C> <C>
Servicing fees earned . . . . . . . . . . . . . . $ 11,870 $ 6,619
Amortization of loan sale gains . . . . . . . . . (8,181) (3,921)
----------- ----------
Loan servicing income . . . . . . . . . . . . . . $ 3,689 $ 2,698
=========== ==========
</TABLE>
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1994 1993
----------- ------------
(dollars in thousands)
<S> <C> <C>
Interest on annuity policies . . . . . . . . . . . $ 17,793 $ 19,046
Personnel . . . . . . . . . . . . . . . . . . . . 13,763 9,998
Insurance commissions . . . . . . . . . . . . . . 11,185 7,285
Insurance benefits . . . . . . . . . . . . . . . . 3,182 4,365
Loan loss provision . . . . . . . . . . . . . . . 3,996 3,633
Interest . . . . . . . . . . . . . . . . . . . . . 2,425 2,709
Other operating . . . . . . . . . . . . . . . . . 10,240 13,022
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ 62,584 $ 60,058
========== =========
</TABLE>
Interest on annuity policies declined $1.3 million for the first three
months of 1994 when compared to the same period of 1993 as the result of a
reduction in the average interest crediting rate on the Company's annuity
policies offset by the impact of an increase in annuity reserves. Average
annuity reserves were $1.3 billion during the first quarter of 1994, an
increase of approximately $137 million from the same period of 1993.
Personnel expenses increased approximately $3.8 million primarily
because of costs associated with the geographic expansion of the Company's
mortgage subsidiary and an increase in the cost of the Company's employee
benefit and incentive plans.
Insurance commissions for the first three months of 1994 increased by
approximately $3.9 million over commissions for the same period of 1993
primarily as the result of commissions associated with the increase in title
policies written. Commissions paid on issuance of the Company's single premium
deferred annuity products are generally capitalized as deferred policy
acquisition costs ("DPAC") and amortized over the estimated life of the policy.
During the three months ended March 31, 1994, the Company capitalized
approximately $3.5 million in commissions paid on sales of annuities compared
to $3.7 million during the same period of 1993. Amortization of commission
expense on annuities capitalized in prior periods was $2.2 million during the
three months ended March 31, 1994, compared to $1.4 million during the same
period of 1993.
The Company's loan loss provision was $4.0 million and $3.6 million for
the three months ended March 31, 1994 and 1993, respectively. The increase in
the provision resulted primarily from an increase by UC Life in the provision
for losses on commercial real estate mortgage loans.
12
<PAGE> 14
Interest expense for the first three months of 1994 declined $.3
million from the same period of 1993 primarily as the result of a $20 million
decrease in average debt outstanding.
Other operating expenses for the three months ended March 31, 1994
declined approximately $2.8 million when compared to the same period of 1993.
Other operating expenses in the first quarter of 1993 included a $2.3 million
accrual for the estimated cost of a legal settlement and $1.4 million in
estimated losses in connection with termination of a third party administrative
contract for credit insurance.
FINANCIAL INFORMATION ON BUSINESS SEGMENTS
The following tables reflect income from continuing operations before
income taxes for each of the Company's business segments for the three months
ended March 31, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1994
----------------------------------------------------------------------
Corporate,
Life Title Other Operations,
Mortgage Insurance Insurance & Eliminations Total
-------- --------- --------- -------------- -----
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans . $ 14,661 $ 11,577 $ 933 $ 27,171
Loan sale gains . . . . . . . . . . . 22,554 22,554
Investment income . . . . . . . . . . 266 18,373 $ 161 (359) 18,441
Net insurance premiums . . . . . . . 3,068 8,913 11,981
Loan servicing income . . . . . . . . 4,977 (44) (1,244) 3,689
Investment gains (losses) . . . . . . (60) (60)
--------- --------- --------- --------- ---------
Total . . . . . . . . . . . . . . 42,458 32,914 9,074 (670) 83,776
--------- --------- --------- --------- ---------
Expenses:
Interest on annuity policies . . . . 17,793 17,793
Personnel . . . . . . . . . . . . . . 10,392 1,340 256 1,775 13,763
Insurance commissions . . . . . . . . 3,360 7,675 150 11,185
Loan loss provision . . . . . . . . . 2,664 1,332 3,996
Insurance benefits . . . . . . . . . 3,008 174 3,182
Interest . . . . . . . . . . . . . . 1,216 248 961 2,425
Other operating . . . . . . . . . . . 7,567 4,254 609 (2,190) 10,240
--------- --------- --------- --------- ---------
Total . . . . . . . . . . . . . . 21,839 31,335 8,714 696 62,584
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes . . . . . . . . $ 20,619 $ 1,579 $ 360 $ (1,366) $ 21,192
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended March 31, 1993
-----------------------------------------------------------------------
Corporate,
Life Title Other Operations,
Mortgage Insurance Insurance & Eliminations Total
-------- --------- --------- -------------- -----
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans . $ 7,712 $ 11,053 $ 1,314 $ 20,079
Investment income . . . . . . . . . . 170 17,761 125 (230) 17,826
Net insurance premiums . . . . . . . 6,264 3,923 10,187
Loan sale gains . . . . . . . . . . . 9,662 220 9,882
Loan servicing income . . . . . . . . 4,020 115 (1,437) 2,698
Investment gains (losses) . . . . . . 266 (5) 261
-------- --------- ---------- --------- ----------
Total . . . . . . . . . . . . . . 21,564 35,459 4,048 (138) 60,933
-------- --------- ---------- --------- ----------
Expenses:
Interest on annuity policies . . . . 19,046 19,046
Personnel . . . . . . . . . . . . . . 7,200 1,124 147 1,527 9,998
Insurance commissions . . . . . . . . 4,187 3,291 (193) 7,285
Insurance benefits . . . . . . . . . 4,259 106 4,365
Loan loss provision . . . . . . . . . 3,012 621 3,633
Interest . . . . . . . . . . . . . . 1,035 266 1,408 2,709
Other operating . . . . . . . . . . . 8,092 6,449 244 (1,763) 13,022
-------- --------- ---------- --------- ----------
Total . . . . . . . . . . . . . . 19,339 35,952 3,788 979 60,058
-------- --------- ---------- --------- ----------
Income (loss) from continuing operations
before income taxes . . . . . . . . $ 2,225 $ (493) $ 260 $ (1,117) $ 875
======== ========= ========== ========= ==========
</TABLE>
MORTGAGE OPERATIONS
The following tables reflect results of operations and selected
financial data for the indicated periods for the Company's mortgage operations.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1994 1993
------ -------
(in thousands)
<S> <C> <C>
Revenues:
Loan sale gains . . . . . . . . . . . . . . . . . . . $ 22,554 $ 9,662
Loan fees . . . . . . . . . . . . . . . . . . . . . . 12,465 5,959
Loan servicing income . . . . . . . . . . . . . . . . 4,997 4,020
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,442 1,923
-------- --------
Total . . . . . . . . . . . . . . . . . . . . 42,458 21,564
-------- --------
Expenses . . . . . . . . . . . . . . . . . . . . . . 21,839 19,339
-------- --------
Income from operations before taxes . . . . . . . . . $ 20,619 $ 2,225
======== ========
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1994 1993
-------- --------
(dollars in thousands)
<S> <C> <C>
Selected Mortgage Financial Data
Home Equity Originations:
Loan originations . . . . . . . . . . . . . . . . . . $ 197,357 $ 89,395
Number of loans originated . . . . . . . . . . . . . 4,537 2,633
Average loan origination amount . . . . . . . . . . . $ 43 $ 34
Home Equity Loan Sales:
Loan sales . . . . . . . . . . . . . . . . . . . . . $ 198,332 $ 66,872
Loan sale gains . . . . . . . . . . . . . . . . . . . 22,554 9,662
Interest spread retained on loans sold . . . . . . . 5.61% 5.11%
Loan Servicing:
Total home equity portfolio (period end) . . . . . . $ 1,248,424 $ 859,374
Total loan portfolio (period end) . . . . . . . . . . 1,668,714 1,387,318
Loans 30+ days past due (period end) . . . . . . . . 118,656 109,850
Loan servicing income . . . . . . . . . . . . . . . . 4,977 4,020
</TABLE>
INSURANCE OPERATIONS
The following tables reflect results of operations and selected
financial data for the respective periods for the Company's insurance
operations.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
Revenues:
Investment income . . . . . . . . . . . . . . . . . . $ 18,533 $ 17,886
Interest on loans . . . . . . . . . . . . . . . . . . 11,470 11,053
Title insurance premiums . . . . . . . . . . . . . . 8,913 3,923
Life insurance premiums . . . . . . . . . . . . . . . 3,068 6,264
Other . . . . . . . . . . . . . . . . . . . . . . . . 4 381
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . 41,988 39,507
----------- ------------
Expenses . . . . . . . . . . . . . . . . . . . . . . 40,049 39,740
----------- ------------
Income (loss) from operations
before income taxes . . . . . . . . . . . . . . . $ 1,939 $ (233)
=========== ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1994 1993
-------- --------
(dollars in thousands)
<S> <C> <C>
Selected Insurance Financial Data
Annuities:
Annuity sales . . . . . . . . . . . . . . . . . . . . $ 45,029 $ 58,349
Annuity reserves . . . . . . . . . . . . . . . . . . 1,317,879 1,190,345
Average interest margin on annuities . . . . . . . . 2.61% 1.80%
</TABLE>
ASSET QUALITY AND RESERVES
The quality of the Company's loan and bond portfolios and of the loan
portfolio serviced for third parties significantly affects the profitability of
the Company. The values of and markets for these assets are dependent on a
number of factors, including general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors, which become more
pronounced in periods of economic decline, may affect the
15
<PAGE> 17
quality of these assets and the Company's resulting ability to sell these
assets for acceptable prices. General economic deterioration can result in
increased delinquencies on existing loans, reductions in collateral values and
declines in the value of investments resulting from a reduced capacity of
issuers to repay the bonds.
Loans. Substantially all of the loans owned by the Company were
originated by UC Lending through its branch (i.e, retail) network or wholesale
loan program. The Company's loan portfolio at March 31, 1994 was comprised
primarily of $302 million in home equity loans and $184 million in commercial
loans. In connection with its origination of home equity loans, the Company
relies on thorough underwriting and credit review procedures by UC Lending, a
mortgage on the borrower's residence and, in some cases, other security, and,
in its retail origination program, close personal contact with borrowers
through its branch office system to manage credit risk on its loans. In
addition to servicing the loans owned by the Company, UC Lending serviced
approximately $1.2 billion in loans for third parties at March 31, 1994. The
Company is subject to risk of loss on loans in its owned portfolio and for
loans sold under loan sale agreements that provide limited recourse against, or
subordination of cash and excess interest spread relating to the sold loans
owned by, the Company. Such recourse and subordination relate to credit losses
which may occur after the sale of the loans and continues until the earlier of
the payment in full of the loans or termination of the agreement pursuant to
which the loans were sold. The Company is also obligated to repurchase or
replace loans which may be determined after the sale to violate representations
and warranties relating to them and which are made by the Company at the time
of the sale. The Company regularly evaluates the quality of the loan portfolio
and estimates its risk of loss based upon historical loss experience,
prevailing economic conditions, estimated collateral value and such other
factors which, in management's judgment, are relevant in estimating the credit
risk in owned and/or serviced loans. Estimated losses on the owned portfolio
are provided for by an increase in the allowance for loan losses through a
charge to current operating income. For loans sold with limited recours or
subordination of certain cash and excess interest spread relating to the sold
loans, the Company reduces the amount of gain recognized on the sale by the
estimated amount of credit losses, subject to the recourse limitation or
maximum subordination amount of the related loan sale agreements, and records
such amount on its balance sheet in the allowance for loss on loans serviced.
At March 31, 1994, the maximum recourse associated with sales of home equity
loans according to terms of the loan sale agreements totaled approximately
$148.6 million, of which amount approximately $132.2 million relates to the
subordinated cash and excess interest spread. However, the Company's estimate
of its losses, based on historical loan loss experience, was approximately
$16.4 million at March 31, 1994, and is recorded in the Company's allowance for
loss on loans serviced. Should credit losses on loans sold with limited
recourse or subordination of certain cash and excess interest spread materially
exceed the Company's estimates for such losses, such consequence will have a
material adverse impact on the Company's operations.
16
<PAGE> 18
At March 31, 1994, the contractual balance of loans serviced by UC
Lending was approximately $1.7 billion comprised of approximately $480 million
serviced for the Company and approximately $1.2 billion serviced for investors.
The geographic distribution of this portfolio by state and by loan category was
as follows at March 31, 1994:
<TABLE>
<CAPTION>
Percent
State Home Equity Commercial Conventional Consumer Total of Total
----- ----------- ---------- ------------ -------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Florida . . . . . . . . $ 175,704 $ 94,073 $ 9,620 $ 18 $ 279,415 16.7%
Louisiana . . . . . . . . 126,220 13,629 44,376 24 184,249 11.0
Ohio . . . . . . . . . . 152,512 6,137 1,992 - 160,641 9.6
Tennessee . . . . . . . . 105,052 22,804 5,731 8 133,595 8.0
Alabama . . . . . . . . . 108,268 12,613 5,653 3 126,537 7.6
North Carolina . . . . . 108,345 16,742 1,964 - 127,051 7.6
Georgia . . . . . . . . . 68,630 51,942 3,012 12 123,596 7.4
Virginia . . . . . . . . 47,400 22,375 3,101 - 72,876 4.4
Indiana . . . . . . . . . 60,759 3,489 1,325 - 65,573 3.9
South Carolina . . . . . 58,926 1,274 1,425 - 61,625 3.7
Mississippi . . . . . . . 30,781 7,714 967 13 39,475 2.4
Other States . . . . . . 205,828 78,406 9,846 1 294,081 17.7
------------ ---------- --------- ----- ----------- ------
Total . . . . . . . . $ 1,248,425 $ 331,198 $ 89,012 $ 79 $ 1,668,714 100.0%
============ ========== ========= ===== =========== ======
</TABLE>
17
<PAGE> 19
The following table provides a summary of loans owned and/or serviced
by UC Lending which are past due 30 days or more, foreclosed properties and
loans charged off as of the dates indicated.
<TABLE>
<CAPTION>
Foreclosed Properties
-----------------------
Contractual Delinquencies Owned Serviced for % of
Balance Contractual % of by the Third Party Net Loans Average
Period Ended of Loans Balance Amount Company Investors Charged Off Loans*
- - ------------ -----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Three months ended March 31, 1994
- - ---------------------------------
Home equity . . . $ 1,248,424 $ 100,211 8.03% $ 14,199 $ 7,846 $ 3,879 1.32%
Commercial . . . 331,198 14,858 4.49% 23,328 10,286 (112)
-
Conventional . . 89,013 3,572 4.01% 30 - 14 .04%
Consumer . . . . 79 15 - - - (13)
----------- ---------- ---------- --------- ---------
Total . . . $ 1,668,714 $ 118,656 7.11% $ 37,557 $ 18,132 $ 3,768
=========== ========== ========== ========= =========
Year ended December 31, 1993
- - ----------------------------
Home equity . . . $ 1,125,139 $ 92,974 8.26% $ 17,014 $ 8,355 $ 8,548 0.88%
Commercial . . . 345,365 19,292 5.59% 20,871 9,275 3,579 0.95%
Conventional . . 98,189 3,730 3.80% 148 - 112 0.09%
Consumer . . . . 88 17 - - - (35) -
----------- ---------- ---------- --------- ---------
Total . . . $ 1,568,781 $ 116,013 7.40% $ 38,033 $ 17,630 $ 12,204
=========== ========== ========== ========= =========
Year ended December 31, 1992
- - ----------------------------
Home equity . . . $ 819,448 $ 71,762 8.76% $ 13,092 $ 7,244 $ 4,498 .59%
Commercial . . . 404,857 29,954 7.40% 20,976 7,338 4,805 1.14%
Conventional . . 143,311 2,933 2.05% 291 - 4 -
Consumer . . . . 206 64 - - - 82 2.86%
----------- ---------- ---------- --------- ---------
Total . . . $ 1,367,822 $ 104,713 7.66% $ 34,359 $ 14,582 $ 9,389
=========== ========== ========== ========= =========
</TABLE>
*Annualized for the three months ended March 31, 1994
Management continues to focus on reducing the level of non-earning
assets owned and/or serviced by focusing on expediting the foreclosure process.
As the result of both being more aggressive in liquidating foreclosed property
and incurring a higher incidence of loss on properties sold, the Company's net
charge-offs in the three months ended March 31, 1994 increased to $3.8 million
compared to $2.6 million during the same period of 1993. During the first
quarter of 1994, the balance of home equity loans owned by the Company was
reduced by $2.8 million. The Company will continue to focus resources on
further reductions in the level of foreclosed properties.
The above delinquency and loan loss experience represents the
Company's recent experience. However, the delinquency, foreclosure and net
loss percentages may be affected by the increase in the size and relative lack
of seasoning of the portfolio. As a result, the information in the above
tables should not be considered as a basis for assessing the likelihood, amount
or severity of delinquencies or losses in the future on loans and no assurance
can be given that the delinquency and loss experience presented in the tables
will be indicative of such experience on loans.
18
<PAGE> 20
A summary analysis of the changes in the Company's allowance for loan
losses for the indicated periods is as follows.
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1994 1993
----------- -------------
(in thousands)
<S> <C> <C>
Balance at beginning of period . . . . . . . $ 21,017 $ 15,842
Loans charged to allowance
Home equity . . . . . . . . . . . . . . . (4,029) (2,590)
Commercial . . . . . . . . . . . . . . . . - (116)
Conventional . . . . . . . . . . . . . . . (14) -
Consumer . . . . . . . . . . . . . . . . . (1) (6)
------------ -----------
Total . . . . . . . . . . . . . . . . (4,044) (2,712)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . 276 157
------------ -----------
Net loans charged off . . . . . . . . . . . . (3,768) (2,555)
Loan loss provision . . . . . . . . . . . . 3,996 3,633
Reserve reclassification . . . . . . . . . . (61) (18)
------------ -----------
Balance at end of period . . . . . . . . . . $ 21,184 $ 16,902
============ ===========
Specific reserves . . . . . . . . . . . . . . $ 8,429 $ 7,750
Unallocated reserves . . . . . . . . . . . . 12,755 9,152
------------ -----------
Total reserves . . . . . . . . . . . . . . . $ 21,184 $ 16,902
============ ===========
</TABLE>
Specific reserves are provided for foreclosures in which the carrying
value of the loan exceeds the market value of the collateral. Unallocated
reserves are provided for loans not in foreclosure and are calculated primarily
using objective measurement techniques. Unallocated reserves also include
reserves for active loans which have been modified or indicate potential
problems as well as reserves for a $32.5 million subordinated position the
Company acquired in connection with the securitization and sale of
approximately $230 million in commercial real estate mortgage loans in 1990.
At March 31, 1994, the Company owned $37.6 million of property acquired in
settlement of loans, excluding the specific reserves attributed to these
properties. These balances are included in the loans owned by the Company.
The specific reserve in the table above is provided to reduce the carrying
value of these properties to their market value.
A summary of the amounts provided by the Company for future credit
losses on loans and foreclosed properties owned by the Company and loans sold
with recourse (including for purposes hereof loans sold with subordination of
cash and excess interest spread owned by the Company) as of the dates indicated
is as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1994 1993 1993
---------- ------------ ---------
(in thousands)
<S> <C> <C> <C>
Allowance for loan losses
(Applicable to loans and foreclosed properties
owned by the Company) . . . . . . . . . . $ 21,184 $ 21,017 $ 16,902
Allowance for loss on loans serviced
(Applicable to loans
sold with recourse) . . . . . . . . . . . 16,393 12,938 8,081
--------- ---------- ----------
Total . . . . . . . . . . . . . . . $ 37,577 $ 33,955 $ 24,983
========= ========== ==========
</TABLE>
As of March 31, 1994, approximately $920 million of home equity loans
sold were serviced by UC Lending under agreements which provide limited
recourse, or subordination of cash and excess interest spread owned by the
Company, for credit losses ("loans sold with recourse"). The Company's
estimate of its losses,
19
<PAGE> 21
based on historical loan loss experience, was approximately $16.4 million at
March 31, 1994 and is recorded in the Company's allowance for loss on loans
serviced. Should credit losses on loans sold with limited recourse, or
subordination of cash and excess interest spread owned by the Company,
materially exceed the Company's estimate for such losses, such consequence will
have a material adverse impact on the Company's operations.
Bonds. Investment purchases are made with the intention of holding
fixed income securities until maturity. Prior to January 1, 1994 securities
were generally carried at cost adjusted for discount accretion and premium
amortization. At March 31, 1994, the amortized cost of the Company's bond
portfolio was $952 million consisting primarily of $663 million in
mortgage-backed securities and $256 million in corporate bonds. In connection
with the adoption of SFAS 115 (see note 4 to the consolidated financial
statements ) bonds with an amortized cost of approximately $885 million or 93%
of the Company's bond portfolio were classified in an available-for-sale
category and the carrying value adjusted to market value by means of an
adjustment to stockholders' equity. The remainder of the portfolio, consisting
primarily of private placements made either directly or through an investment
partnership, continues to be classified as held-to-maturity and valued at cost.
At March 31, 1994, the Company did not own any securities classified as trading
securities. The unrealized loss in the bond portfolio (cost over market value)
at March 31, 1994 was $13.8 compared to an unrealized gain of $31.5 million at
December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding loan
originations in its mortgage operations and the payment of policyholder claims
and surrenders incurred in its insurance operations. The Company's mortgage
operations require continued access to short and long-term sources of debt
financing, the sale of loans to UC Life and the sale of loans and asset-backed
securities in the secondary market; whereas liquidity requirements for the
Company's insurance operations are generally met by funds provided from the
sale of annuities and cash flow from its investment in fixed income securities
and mortgage loans.
The following discussion reflects the primary sources of liquidity and
capital for each of the Company's primary operating divisions.
UC Lending. The principal cash requirements of the Company's mortgage
operations arise from loan originations, repayments of inter-company debt
borrowed by the Company under its $200 million revolving credit facility,
payments of operating and interest expenses and deposits to reserve accounts
related to loan sale transactions. Loan originations are initially funded
principally through the Company's $200 million revolving credit facility and
short-term bank facilities pending loan sales to UC Life and in the secondary
market. Substantially all of the loans originated by UC Lending are sold. Net
cash used by investing activities of the Company in the three months ended
March 31, 1994 and 1993, respectively, reflects approximately $202 million and
$101 million, respectively, in cash used for loan originations. The primary
source of funding for loan originations is derived from the reinvestment of
proceeds from the ultimate sale of loans in the secondary market which totaled
approximately $198 million and $67 million in the first three months of 1994
and 1993, respectively. In connection with the loan sale transactions in the
secondary market, surety bonds and cash deposits were provided by the Company
as credit enhancements. The loan sale transactions required the subordination
of certain cash flows payable to UC Lending to the payment of scheduled
principal and interest due to certificate holders. In connection with these
transaction, UC Lending was required, in some instances, to fund an initial
deposit, and thereafter, in each transaction, a portion of the amounts
receivable by UC Lending and its subsidiary from the excess interest spread is
required to be placed and maintained in a reserve account to the extent of the
subordination requirements. The subordination requirements generally provide
that the excess interest spread is payable to the reserve account until a
specified level of cash, which is less than the maximum subordination amount,
is accumulated therein. The capitalized excess servicing income of the Company
is subject to being utilized first to replenish cash paid from the reserve
account to fund shortfalls in collections from borrowers who default on the
payment of principal or interest on the loans underlying the pass-through
certificates
20
<PAGE> 22
issued until the total of the Company's deposits into the reserve account equal
the maximum subordination amount. In connection with the issuance and sale of
approximately $988 million of pass-through certificates through March 31, 1994,
the aggregate subordination amounts were initially set at approximately $132.2
million. After the Company's deposits into the reserve account equal the
maximum subordination amount for a transaction, the subordination of the
related excess interest spread 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, 1994, the amounts on deposit in such reserve
accounts totaled $35.5 million.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market and to UC Life,
are essential for the continuation of the Company's loan origination
operations. The Company's $200 million revolving credit facility has a
committed term to December 31, 1995. The interest rate on such credit facility
is based upon various floating rate indices as may be selected by the Company
from time to time. There can be no assurance that the Company's present credit
facilities will be available in the future on terms which the Company would
consider favorable.
UC Life. The principal cash requirements of UC Life consist of
contractual obligations to policyholders, principally through policy claims and
surrenders. The primary sources of funding these obligations, in addition to
cash flow from investments, are the sale of annuities. Net cash flow from
underwriting operations is used to build an investment portfolio, which in turn
produces future cash flows from investment income and provides a secondary
source of liquidity for this division. Net cash provided by operating
activities of the insurance division in the three months ended March 31, 1994
and 1993 was approximately $20 million and $18 million, respectively, resulting
primarily from cash earnings on investments. The Company monitors available
cash and cash equivalents to maintain adequate balances for current payments
while maximizing cash available for longer term investment activities. The
Company's financing activities during the first quarter of 1994 and 1993
reflect approximately $45 million and $58 million, respectively, in cash
received from sales by UC Life of its annuity and interest sensitive products.
As reflected in the net cash used by investing activities during the same
periods, investment purchases were approximately $108 million and $62 million,
respectively, reflecting the investment of these funds and the reinvestment of
proceeds from maturities of investments. Cash used by financing activities
also reflects payments of $41 million and $37 million on annuities and interest
sensitive products resulting from policyholder surrenders and claims. In
response to the decline in interest rates in 1992 and 1993, the Company reduced
the crediting rates on its annuity policies. At March 31, 1994, the interest
margin on the Company's annuity liabilities was 2.61% compared to 2.46% at
December 31, 1993 and 1.80% at March 31, 1993. Notwithstanding reductions in
renewal crediting rates on these policies, the percentages of annuities
surrendered has generally remained stable. UC Life's investments at March 31,
1994, included approximately $425 million in residential and commercial
mortgage loans, $324 million in corporate and government bonds and private debt
placements and $661 million in mortgage-backed securities. The investment
portfolio is also managed to provide a secondary source of liquidity as
investments can be sold, if necessary, to fund abnormal levels of policy
surrenders, claims and expenses. An unanticipated increase in surrenders would
impact the Company's liquidity, potentially requiring the sale of certain
assets, such as bonds and loans prior to their maturities, which may be at a
loss.
As a Louisiana domiciled insurance company, UC Life is subject to
certain regulatory restrictions on the payment of dividends. UC Life has the
capacity at March 31, 1994 to pay dividends of $8.5 million. UC Life did not
pay any dividends to the Company during 1991, 1992 and 1993 or in the first
quarter of 1994 in order to retain capital in UC Life.
UG Title. Liquidity requirements for the Company's title insurance
business are generally met from funds provided by the sale of title insurance
policies and cash flow from its investment portfolio. UG Title's investments
at March 31, 1994 included approximately $1.8 million in residential mortgage
loans, $5.9 million in U.S. government and agency securities and $5.9 million
in temporary investments, primarily certificates of deposit. An unanticipated
increase in policy claims would impact UG Title's liquidity, potentially
requiring the
21
<PAGE> 23
sale of its investments prior to their maturities, which may be at a loss. The
principal liability of UG Title is the loss reserve established for title
policy claims.
ACCOUNTING STANDARDS
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114 ("SFAS 114") which addresses the accounting by creditors for
impairment of loans and specifies how allowances for credit losses related to
certain loans should be determined. SFAS 114 also addresses the accounting by
creditors for all loans that are restructured in a troubled debt restructuring
involving modification of terms of a receivable. SFAS 114 is effective for
financial statements for fiscal years beginning after December 15, 1994. The
Company is reviewing the provisions of this pronouncement but has not yet
determined the effect of its implementation on the Company's financial
condition or results of operations.
22
<PAGE> 24
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Deloitte & Touche, have performed a
review of the accompanying unaudited consolidated balance sheet as of March 31,
1994 and the related consolidated statements of income and cash flows for the
three months ended March 31, 1994 and 1993 and previously audited and expressed
an unqualified opinion dated February 18, 1994 on the consolidated financial
statements of the Company and its subsidiaries as of December 31, 1993, from
which the consolidated balance sheet as of this date is derived.
23
<PAGE> 25
INDEPENDENT ACCOUNTANTS' REPORT
United Companies Financial Corporation:
We have made a review of the accompanying consolidated balance sheet of United
Companies Financial Corporation and subsidiaries as of March 31, 1994, and the
related consolidated statements of income and cash flows for the three-month
periods ended March 31, 1994 and 1993, in accordance with standards established
by the American Institute of Certified Public Accountants.
A review of interim financial information consists principally of obtaining an
understanding of the system for the preparation of interim financial
information, applying analytical review procedures to financial data, and
making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit 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, 1993 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 18,
1994, 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, 1993, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ DELOITTE & TOUCHE
Baton Rouge, Louisiana
April 28, 1994
24
<PAGE> 26
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) Consent of Deloitte & Touche
(b) Reports of Form 8-K - None
25
<PAGE> 27
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 4, 1994 By: /s/ J. Terrell Brown
J. Terrell Brown
President and Chief
Executive Officer
Date: May 4, 1994 By: /s/ Dale E. Redman
Dale E. Redman
Executive Vice President
and Chief Financial Officer
26
<PAGE> 28
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Page No.
----------- --------
<S> <C> <C>
11 Statement re computation of 28
earnings per share
15 Consent of Deloitte & Touche 29
</TABLE>
27
<PAGE> 1
EXHIBIT 11
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1994 1993
----------- ------------
(in thousands, except per share amounts)
<S> <C> <C>
Primary Earnings Per Share
- - --------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . $ 13,710 $ 569
Less: Loss from discontinued operations . . . . . - (17,585)
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 13,710 $ (17,016)
=========== ============
Weighted average number of common and
common equivalent shares:
--------------------------------------------
Average common shares outstanding . . . . . . . . 12,322 9,024
Add: Dilutive effect of stock options after
application of treasury stock method . . . 773 -
----------- ------------
13,095 9,024
=========== ============
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . $ 1.05 $ .06
Loss from discontinued operations . . . . . . . . - (1.95)
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 1.05 $ (1.89)
=========== ============
Fully Diluted Earnings Per Share
- - --------------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . $ 13,710 $ 569
Less: Loss from discontinued operations . . . . . - (17,585)
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 13,710 $ (17,016)
=========== ============
Weighted average number of common and
all dilutive contingent shares:
-----------------------------------------------
Average common shares outstanding . . . . . . . . 12,322 9,024
Add: Dilutive effect of stock options after
application of treasury stock method . . . 773 -
----------- ------------
13,095 9,024
=========== ============
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . $ 1.05 $ .06
Loss from discontinued operations . . . . . . . . - (1.95)
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 1.05 $ (1.89)
=========== ============
</TABLE>
28
<PAGE> 1
EXHIBIT 15
United Companies Financial Corporation:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim
consolidated financial information of United Companies Financial Corporation
and subsidiaries for the periods ended March 31, 1994 and 1993, as indicated in
our report dated April 28, 1994; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is being
incorporated by reference in the following: Registration Statement No.
33-15326 on Form S-8 pertaining to the United Companies Financial Corporation
1986 Employee Incentive Stock Option Plan, Registration Statement No. 33-17366
on Form S-8 pertaining to the United Companies Financial Corporation Employees'
Savings Plan and Trust, and Registration Statement No. 33-29994 on Form S-8
pertaining to the 1989 Stock Incentive Plan and the 1989 Non-Employee Director
Stock Option Plan.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act, is not considered a part of the Registration Statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of the Act.
/s/ DELOITTE & TOUCHE
Baton Rouge, Louisiana
May 2, 1994
29
