<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 September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from ........................ to ........................
Commission file number 1-7067
UNITED COMPANIES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Louisiana 71-0430414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 Essen Lane 70809
Baton Rouge, Louisiana
(Address of principal executive office) (Zip Code)
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 November 1, 1996 was 28,640,453, excluding 1,159,682 treasury shares.
================================================================================
<PAGE> 2
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Financial Statements: PAGE
<S> <C>
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months and nine months ended September 30, 1996 and 1995 . . . . . . 3
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1995 . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 5-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 9-15
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . 16
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
<PAGE> 3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
1996 December 31,
Assets (Unaudited) 1995
- ------ --------------- -------------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 824 $ 5,284
Temporary investments - reserve accounts . . . . . . . . . . . . . . . . 208,053 155,254
Investment securities
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,603 -
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . 17,987 219
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,251 74,877
Capitalized excess servicing income . . . . . . . . . . . . . . . . . . . 379,417 280,985
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . 51,649 36,897
Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,106 15,239
Net assets of discontinued operations . . . . . . . . . . . . . . . . . . - 163,293
Capitalized mortgage servicing rights . . . . . . . . . . . . . . . . . . 17,551 5,813
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,226 22,323
--------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 866,667 $ 760,184
=============== =============
Liabilities and Stockholders' Equity
- ------------------------------------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 302,010 $ 265,756
Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . 46,340 41,692
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . 70,647 51,454
Managed cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . 6,831 27,052
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,613 21,756
--------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 465,441 407,710
--------------- --------------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 1,955,000 shares of 6 3/4% PRIDES(SM) ($44 per share
liquidation preference) . . . . . . . . . . . . . . . . . . . 3,910 3,910
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 29,566,152 and 29,302,246 shares . . . . . . . . . . . . 59,132 58,604
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 183,809 179,848
Net unrealized gain on securities . . . . . . . . . . . . . . . . . . 32 37
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 170,262 122,816
Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . . . . (15,919) (12,741)
---------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 401,226 352,474
---------------- -------------
Total liabilities and stockholders' equity . . . . . . . . . . $ 866,667 $ 760,184
=============== =============
</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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Loan sale gains . . . . . . . . . . . . . . . $ 53,637 $ 42,033 $ 143,325 $ 102,664
Finance income, fees earned and other
loan income . . . . . . . . . . . . . . . 39,909 25,582 102,497 77,388
Investment income . . . . . . . . . . . . . . 3,920 2,104 9,472 5,227
Other . . . . . . . . . . . . . . . . . . . . 1,358 1,555 3,651 4,196
------------ ------------ ----------- ------------
Total . . . . . . . . . . . . . . . . 98,824 71,274 258,945 189,475
------------ ------------ ----------- ------------
Expenses:
Personnel . . . . . . . . . . . . . . . . . . 27,004 17,941 70,774 50,735
Interest . . . . . . . . . . . . . . . . . . . 10,767 6,519 27,586 18,762
Loan loss provision . . . . . . . . . . . . . 3,067 3,004 9,572 9,308
Other operating . . . . . . . . . . . . . . . 19,989 12,411 53,068 37,076
------------ ------------ ----------- ------------
Total . . . . . . . . . . . . . . . . 60,827 39,875 161,000 115,881
------------ ------------ ----------- ------------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 37,997 31,399 97,945 73,594
Provision for income taxes . . . . . . . . . . . 13,869 11,667 35,761 27,128
------------ ------------ ----------- ------------
Income from continuing operations . . . . . . . . 24,128 19,732 62,184 46,466
Income (loss) from discontinued operations:
Income from discontinued operations, net of
income tax expense of $821
$1,651 and $2,632, respectively . . . . . - 1,516 3,199 5,548
Loss on disposal, net of income tax
benefit of $868
and $1,791, respectively . . . . . . . . . - - (7,731) (1,645)
------------ ------------ ----------- ------------
Total . . . . . . . . . . . . . . . . - 1,516 (4,532) 3,903
------------ ------------ ----------- ------------
Net income . . . . . . . . . . . . . . . . . . . $ 24,128 $ 21,248 $ 57,652 $ 50,369
============ ============ =========== ============
Per share data:
Income from continuing operations . . . . . . $ .74 $ .60 $ 1.90 $ 1.54
Income (loss) from discontinued operations . . - .05 (.14) .13
------------ ------------ ----------- ------------
Net income . . . . . . . . . . . . . . . . . . $ .74 $ .65 $ 1.76 $ 1.67
============ ============ =========== ============
</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>
Nine Months Ended September 30,
------------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . $ 62,184 $ 46,466
Adjustments to reconcile income from continuing operations
to net cash used by continuing operating activities:
Increase in accrued interest receivable . . . . . . . . . . . . . . . . . (14,752) (9,961)
Decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . 4,096 6,306
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . 19,762 5,573
Increase in capitalized excess servicing income . . . . . . . . . . . . . (187,362) (135,394)
Amortization of capitalized excess servicing income . . . . . . . . . . . 89,377 56,868
Increase in capitalized mortgage servicing rights . . . . . . . . . . . . (13,428) (2,761)
Amortization of capitalized mortgage servicing rights . . . . . . . . . . 1,690 11
Investment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 56
Loan loss provision on owned and serviced loans . . . . . . . . . . . . . 30,184 22,518
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . 3,017 2,002
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 4,648 23,525
Proceeds from sales and principal collections of loans
held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,726,381 2,000,932
Originations and purchases of loans held for sale . . . . . . . . . . . . (1,765,280) (2,043,787)
Net cash flows from trading securities . . . . . . . . . . . . . . . . . . (15,603) -
-------------- ---------------
Net cash used by continuing operating activities . . . . . . . . (55,086) (27,646)
-------------- ---------------
Cash flows used by discontinued operations . . . . . . . . . . . . . . . . . . . - (1,359)
-------------- ---------------
Cash flows from investing activities:
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . . . (52,799) (48,249)
Purchase of available-for-sale securities . . . . . . . . . . . . . . (87) (76)
Proceeds from sales of available-for-sale securities . . . . . . . . . - 95
Proceeds from disposition of insurance subsidiaries . . . . . . . . . 106,870 -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (7,253) (7,877)
-------------- ---------------
Net cash used by investing activities . . . . . . . . . . . . . . 46,731 (56,107)
-------------- ---------------
Cash flows from financing activities:
Proceeds from mortgage loan . . . . . . . . . . . . . . . . . . . . . 2,122 3,358
Decrease in revolving credit debt . . . . . . . . . . . . . . . . . . - (72,163)
Increase (decrease) in debt with maturities of three months or less . 30,550 (13,856)
Increase in warehouse loan facility . . . . . . . . . . . . . . . . . 404 -
Proceeds from ESOP debt . . . . . . . . . . . . . . . . . . . . . . . 4,000
Payments on ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . (822) (41)
Proceeds from senior debt . . . . . . . . . . . . . . . . . . . . . . - 99,500
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (10,207) (5,833)
Decrease in managed cash overdraft . . . . . . . . . . . . . . . . . . (20,221) (2,544)
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . - 83,254
Increase in unearned ESOP compensation . . . . . . . . . . . . . . . . (3,178) (682)
Proceeds from exercise of stock options and warrants . . . . . . . . . 1,247 3,079
-------------- ---------------
Net cash provided by financing activities . . . . . . . . . . . . 3,895 94,072
-------------- ---------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . (4,460) 8,960
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 5,284 1,695
-------------- ---------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 824 $ 10,655
============== ===============
</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 on Form 10-K for the year ended December 31,
1995, as amended, filed with the United States Securities and Exchange
Commission.
The consolidated results of operations for the nine months ended September
30, 1996 are not necessarily indicative of the results to be expected for
the full year. Certain 1995 amounts have been reclassified to conform with
the current year presentations. Such reclassifications had no effect on
net income.
2. DISCONTINUED OPERATIONS.
United Companies Life Insurance Company. On February 2, 1996, the Company
signed an agreement to sell all of the outstanding capital stock of its
wholly-owned life insurance subsidiary, United Companies Life Insurance
Company ("UCLIC"), subject to approval by the Company's shareholders,
regulatory authorities and the satisfaction of certain other conditions.
In June, 1996, the Company's shareholders approved the sale, and in July,
1996, regulatory approval was obtained and the remaining conditions to
closing the transaction were satisfied. The sale was concluded on July 24,
1996. The sales price of $167.6 million was comprised of approximately
$110 million in cash (including a $10 million dividend paid by UCLIC
immediately prior to the closing) and UCLIC real estate and other assets
which were distributed to the Company prior to the closing. The assets
were transferred at their cost basis and included real estate of $22.3
million, investment securities of $17.7 million, and foreclosed properties
of $11.5 million. The real estate distributed includes portions of the
United Plaza office park, including the Company's home office. In
addition, the Company purchased a convertible promissory note from PennCorp
Financial Group, Inc. ("PennCorp"), the parent of the purchaser, for $15
million in cash and converted the note into 483,839 shares of the common
stock of PennCorp. The Company recorded a net loss of $6.8 million on the
disposition. As a result of the sale, the assets (including the assets
transferred to the Company by UCLIC immediately prior to the closing) and
the operations of UCLIC have been classified as discontinued operations at
December 31, 1995.
Subsequent to the closing, the Company received notification from the
purchaser alleging that it is entitled to a $2.2 million reduction in the
sales price. The Company denies that the purchaser is entitled to any
reduction.
In connection with the sale of UCLIC, the Company entered into an agreement
with UCLIC which will provide a facility for the purchase of up to $300
million in first mortgage residential loans. The agreement provides that
the Company shall have the right for a limited time to repurchase certain
loans which are eligible for securitization. The agreement also has a
sublimit of up to $150 million for loans that are not eligible for
securitization.
United General Title Insurance Company. On April 10, 1995, the Company
made a decision to dispose of its investment in United General Title
Insurance Company ("UGTIC"), a wholly owned subsidiary of the Company, and,
on May 1, 1995, approved a formal plan of disposal. The decision to
dispose of UGTIC was independent of the consummation of the sale thereof
pursuant to the definitive stock sale agreement signed on
5
<PAGE> 7
August 11, 1995. As a result, the operations of UGTIC have been classified
as discontinued operations. The sale was concluded on February 29, 1996 at
a sales price of approximately $5.1 million.
The definitive stock sale agreement provided for the sale of 100% of the
stock of UGTIC and contains a provision making the Company liable to UGTIC
for claims from defalcations and fraud losses incurred by UGTIC which are
unknown and occur prior to closing and are discovered within 24 months
thereafter. The Company is also liable, up to $4.2 million, for policy
claims paid over a ten year period after closing that exceed certain
specified levels. The Company recorded a loss from discontinued operations
(net of income tax benefit) of $1.1 million and $3.1 million for the nine
months ended September 30, 1996 and 1995, respectively, in connection with
the sale of UGTIC.
Foster Mortgage Corporation. On May 7, 1993, the Company decided to divest
its subsidiary Foster Mortgage Corporation ("FMC"). As of November 30,
1993, the servicing rights owned by FMC, which constituted substantially
all of its assets, were sold. On December 21, 1993, the institutional
lenders under FMC's primary credit facility (the "FMC Institutional
Lenders") filed a petition in the U.S. bankruptcy court to cause the
remaining affairs of FMC to be concluded under the supervision of the
bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy
court approved a plan of liquidation for FMC providing for the appointment
of a trustee selected by the FMC Institutional Lenders. The FMC
Institutional Lenders allege that FMC has certain claims against the
Company, including a claim with respect to the Company's alleged failure to
remit all sums due FMC regarding federal income taxes under a tax agreement
among the Company and its subsidiaries, including FMC, estimated by the FMC
Institutional Lenders to range from $2 million to $29 million. FMC and the
Company executed, subject to the approval of the bankruptcy court, a
settlement agreement relating to payments between FMC and the Company in
connection with the federal income tax benefits resulting from FMC's losses
and to certain prior intercompany payments between FMC and the Company.
The settlement agreement included a release by FMC in favor of the Company
of any and all claims relating to federal income taxes. The FMC
Institutional Lenders opposed the proposed settlement agreement. At the
conclusion of a hearing on the proposed settlement on August 18, 1994, the
bankruptcy court approved the portion of the settlement providing for a net
payment by the Company of $1.65 million to FMC in satisfaction of the
federal income tax benefits resulting from FMC's losses and the release of
any claims regarding federal income taxes. The bankruptcy court declined
to approve the other portion of the proposed settlement relating to
payments received by the Company from FMC within twelve months of the
bankruptcy filing. If the Company were required to refund such payments,
the Company has estimated the potential additional loss to be $1.9 million,
net of tax benefits. The decision of the bankruptcy court on the
settlement was appealed by the FMC Institutional Lenders to the U.S.
District Court which affirmed the bankruptcy court's decision. The FMC
Institutional Lenders then appealed this decision to the U.S. Fifth Circuit
Court of Appeals. In a decision rendered on November 9, 1995, the U.S.
Fifth Circuit Court of Appeals reversed the district court, vacated the
settlement between FMC and the Company and remanded the matter for further
proceedings. The trustee under the plan of liquidation has filed an
adversary proceeding in the bankruptcy proceedings against the Company
seeking avoidance of alleged preferential payments totaling $3.72 million
and has also instituted a suit in federal court against the Company
alleging claims under the tax agreement estimated by the trustee to range
from $2 million to $29 million. Management of the Company does not believe
that any additional amounts are owed by the Company to FMC or the trustee
and is vigorously contesting the claims which have been brought against it
for such amounts by the trustee. The Company did not guarantee any debt of
FMC.
3. CASH PAID FOR INTEREST AND INCOME TAXES.
During the nine months ended September 30, 1996 and 1995, the Company paid
interest on notes payable in the amount of $25.2 million and $15.0 million,
respectively. During the nine months ended September 30, 1996 and 1995,
the Company paid income taxes in the amount of $18.3 million and $4.5
million, respectively.
6
<PAGE> 8
4. LOANS
The following schedule sets forth the components of Loans owned by the
Company at September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
<S> <C> <C>
Home equity . . . . . . . . . . . . . . . . . . . . . . $ 89,877 $ 67,673
Manufactured homes . . . . . . . . . . . . . . . . . . 4,831 234
Other . . . . . . . . . . . . . . . . . . . . . . . . . 1,313 819
Foreclosed properties . . . . . . . . . . . . . . . . . 21,052 11,451
Nonrefundable loan fees . . . . . . . . . . . . . . . . (2,645) (4,950)
Unearned discount . . . . . . . . . . . . . . . . . . . (177) (350)
------------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 114,251 $ 74,877
============= ============
</TABLE>
Included in Loans owned at September 30, 1996 and December 31, 1995 were
nonaccrual loans totaling $5.9 million and $5.7 million, respectively.
5. INVESTMENT SECURITIES.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), the Company classifies securities in one of
three categories: "available-for-sale", "held-to-maturity" or "trading".
Securities classified as held-to-maturity are carried at amortized cost,
whereas securities classified as trading securities or available-for-sale
are recorded at fair value. The adjustment, net of applicable income
taxes, for investments classified as available-for-sale is recorded in "Net
unrealized gain (loss) on securities" and is included in Stockholders'
equity on the consolidated balance sheets and the adjustment for
investments classified as trading is recorded in "Investment income" in the
statements of income.
At September 30, 1996, the Company's investment securities consisted of
common stock classified as trading securities with a cost of $15.0 million
and a carrying value of $15.6 million. The Company's available-for-sale
portfolio included an investment in a limited partnership and other
securities with a cost of $17.9 million and a carrying value of $18.0
million.
6. OTHER ASSETS AND OTHER LIABILITIES.
At December 31, 1995, Other assets included $13.5 million in federal income
tax receivable, whereas, at September 30, 1996, Other liabilities included
$3.8 million of federal income tax payable.
Other liabilities at September 30, 1996 and December 31, 1995 included $8.0
million and $7.0 million in escrow balances and $7.9 million and $5.5
million in accrued interest payable, respectively.
7
<PAGE> 9
7. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- -------------
(in thousands)
<S> <C> <C>
9.35% Senior unsecured notes due 11/1/99 . . . . . . . $ 125,000 $ 125,000
7% Senior unsecured notes due 7/15/98 . . . . . . . . . 100,000 100,000
Warehouse facilities . . . . . . . . . . . . . . . . . 19,725 19,321
Guaranteed bank loan to ESOP . . . . . . . . . . . . . 9,140 5,962
Mortgage loans . . . . . . . . . . . . . . . . . . . . 7,595 5,473
Subordinated debenture . . . . . . . . . . . . . . . . 10,000 10,000
Short-term borrowings . . . . . . . . . . . . . . . . . 30,550 -
--------------- -------------
$ 302,010 $ 265,756
=============== =============
</TABLE>
8. COMMITMENTS AND CONTINGENCIES.
The Company has certain contingencies in connection with the sale of its
investments in UGTIC and UCLIC and the divestiture of FMC. For information
regarding these contingencies see Note 2 of the Notes to Consolidated
Financial Statements.
The Company used a prefunding feature in connection with its securitization
transactions during the third quarter of 1996. At September 30, 1996,
approximately $42.5 million was held in a prefunding account for the
purchase of the Company's home equity loans during the fourth quarter of
1996. Pursuant to this commitment, home equity loans with a remaining
principal balance of approximately $42.5 million were delivered in October,
1996. In addition, at September 30, 1996, approximately $11.4 million was
held in a prefunding account for purchase of the Company's manufactured
housing contracts during the fourth quarter of 1996. Pursuant to this
commitment, manufactured housing contracts with a remaining principal
balance of approximately $11.4 million will be delivered in November, 1996.
9. OTHER EVENTS.
On October 15, 1996, the Company announced that it had signed a non-binding
letter of intent to acquire Empire Funding Corp. ("Empire Funding").
Headquartered in Austin, Texas, Empire Funding is a privately held lender
that specializes in originating and servicing FHA Title I and conventional
home improvement loans. It has approximately 340 employees and operates in
46 states through 16 branch offices and 180 direct correspondents. For the
twelve months ended September 30, 1996, Empire Funding originated
approximately $256 million in loans.
As of October 15, 1996, the transaction was valued at $89 million and the
Company anticipates that the acquisition will be accounted for as a
purchase. Under the terms of the letter of intent, the aggregate
consideration for the purchase will be comprised of approximately $45
million in cash and approximately 1.3 million shares of the Company's common
stock in exchange for all of the outstanding common stock of Empire Funding.
The number of shares to be issued is subject to adjustment in the event that
the Company's common stock trades above $40.11 per share or less than $33.24
per share immediately prior to the closing of the transaction. Completion
of the acquisition is subject to the favorable outcome of a due-diligence
investigation, execution of a definitive agreement, approval by the board of
directors of each company and necessary regulatory approvals.
10. ACCOUNTING STANDARDS.
In June, 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125"). SFAS No. 125 focuses on control of the financial asset and provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. SFAS No. 125 provides
certain conditions that must be met to determine that control of the
financial asset has been surrendered. SFAS 125 requires that servicing
assets and other retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values at the date
of transfer. Implementation of SFAS No. 125 will require the Company to
change the method of calculating the gain on sale of loans, which the
Company estimates will reduce the amount of gain recognized on loan sales by
approximately 5% to 10% and, conversely, decrease the amortization of loan
sale gain in future periods. The statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities after
December 31, 1996, and is to be applied prospectively. Earlier or
retroactive application is not permitted.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the Company's
consolidated financial statements and accompanying notes presented elsewhere
herein.
RESULTS OF OPERATIONS
The Company's consolidated financial statements present United Companies
Life Insurance Company ("UCLIC") and United General Title Insurance Company
("UGTIC") as discontinued operations (see Note 2 of the Notes to Consolidated
Financial Statements). Discussed below are results of continuing operations
for the periods presented.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Income from continuing operations for the first nine months of 1996 was
$62.2 million ($1.90 per share based on 32.7 million weighted average shares
outstanding) compared to $46.5 million ($1.54 per share based on 30.1 million
weighted average shares outstanding) for the same period of 1995. In
comparison to the 1995 period, the increase in income in 1996 was primarily the
result of a $516 million increase in the amount of home equity loans sold and
the recognition of loan sale gains and loan fees in connection with such sales.
In addition, during the third quarter of 1996 the Company sold approximately
$104 million of manufactured housing contracts, primarily originated by United
Companies Funding, Inc., the Company's manufactured housing lender which began
operations in November, 1995. The sales of such loans and contracts were
accomplished through securitization transactions under shelf registration
statements of subsidiaries of the Company.
Loan sale gains increased $40.7 million during the first nine months of
1996 over the same period in 1995. Loan sale gains approximate the present
value for the estimated lives of the loans (which includes for purposes hereof
manufactured housing contracts) of the excess of the contractual rates on the
loans sold over the sum of the pass-through rate paid to the buyer, a normal
servicing fee, a trustee fee, and a surety bond fee, if any, in securitization
transactions and an estimate of future credit losses. Loan sale gains for the
nine months ended September 30, 1996 and 1995 was reduced by $33.3 million and
$20.2 million, respectively, to provide for estimated future credit losses on
the loans sold. The increase in the amount of loan sale gains was due
primarily to a $516 million increase in the amount of home equity loans sold,
which increase was partially offset by a decrease in the interest spread
retained by the Company and an increase in the constant prepayment rate used in
the computation of loan sale gains during the third quarter of 1996. In
addition, loan sale gains in 1996 was increased by $6.3 million as the result
of the sale in a securitization of approximately $104 million in manufactured
housing contracts. Loan sale gains for the three months and nine months ended
September 30, 1996 also includes the capitalization of mortgage servicing
rights in the amount of $4.5 million and $13.4 million, respectively, compared
to $2.8 million for three months and nine months ended September 30, 1995.
Interest spread retained by the Company on loans sold includes the normal
servicing fee.
The following table presents information regarding loan sale transactions
for the periods indicated:
<TABLE>
<CAPTION>
Home Equity Loans Manufactured Housing Contracts
------------------------------- -------------------------------
Nine months ended September 30, Nine months ended September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
----------- -------------- ----------- -----------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Loans sold . . . . . . . . . . . . . $ 1,562,205 $ 1,046,535 $ 103,556 -
Average coupon . . . . . . . . . . . 11.25% 11.96% 11.00% -
Interest spread retained . . . . . . 4.71% 4.99% 3.25% -
Loan sale gains . . . . . . . . . . . $ 137,060 $ 102,664 $ 6,264 -
</TABLE>
9
<PAGE> 11
Fluctuations in and the level of market interest rates will impact the
interest spread retained by the Company on loans sold (which include for
purposes hereof manufactured housing contracts), and, potentially, the amount
of its loan sale gains. An increase in the level of market interest rates will
generally adversely affect the interest spread on loans sold, whereas such
interest spread generally widens during a declining interest rate environment.
Although actions have been taken by the Company during a rising interest rate
environment to mitigate the impact on earnings of fluctuations in market rates,
such as increasing the coupon rate charged on its loan products, the effect of
such actions will generally lag the impact of market rate fluctuations. In
connection with its securitization transactions, the Company has used a
prefunding feature which "locks in" the pass-through rate that the Company will
pay to the investors on a prefunded amount which will be used to acquire loans
at a future date. The Company is obligated for the difference between the
earnings on such prefunded amount and the pass-through interest paid to the
investors during the period from the date of the closing of the securitization
transaction until the date of delivery of the loans. In connection with the
securitization transactions which closed in the third quarter of 1996,
approximately $42.5 million and $11.4 million were held in prefunding accounts
for purchase of the Company's home equity loans and manufactured housing
contracts, respectively, during the fourth quarter of 1996.
Finance income fees earned and other loan income increased $25.1 million
for the first nine months of 1996 compared to the same period of 1995 primarily
due to the growth in the portfolio of loans warehoused pending loan sales, a
$1.1 billion increase in the average serviced portfolio, the recognition of
loan fees at the time of sale of the loans and the impact of finance income
earned from the manufactured housing unit. The following table presents the
composition of finance income, fees earned and other loan income for the
periods indicated:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1996 1995
---------- -----------
(in thousands)
<S> <C> <C>
Servicing fees earned . . . . . . . . . . . . . . . . . $ 96,259 $ 62,936
Loan origination fees . . . . . . . . . . . . . . . . . 63,377 51,416
Loan interest . . . . . . . . . . . . . . . . . . . . . 14,847 6,396
Other loan income . . . . . . . . . . . . . . . . . . . 6,770 6,489
Amortization . . . . . . . . . . . . . . . . . . . . . (78,756) (49,849)
---------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 102,497 $ 77,388
========== ===========
</TABLE>
The Company estimates that non-accrual loans reduced mortgage loan interest
for the first nine months of 1996 and 1995 by approximately $14.9 million and
$9.4 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 nine months ended September 30, 1996 the average
amount of non-accrual loans owned and/or serviced by the Company was $153
million compared to approximately $99 million during the same period of 1995.
Loan origination fees in excess of direct origination costs on loans held
by the Company are recognized over the lives of the loans and are recognized at
the time of sale on loans sold to third parties. During the nine months ended
September 30, 1996 and 1995, the Company sold approximately $1.6 billion and
$1.0 billion, respectively, in home equity loans and recognized approximately
$33.6 million and $27.3 million, respectively, in net loan origination fees in
connection with these sales.
Investment income totaled $9.5 million for the first nine months of 1996
compared to investment income of $5.2 million during the same period of 1995.
Investment income is primarily related to interest earned on temporary
investments-reserve accounts. Investment income during the first nine months
of 1996 also includes approximately $.6 million in unrealized gains on common
stock classified as trading account securities.
10
<PAGE> 12
Other income includes overhead reimbursement from discontinued operations
prior to their disposition and income earned by the Company's telecommunication
and property management services with respect to its office park.
Personnel expenses increased approximately $20.0 million primarily because
of costs associated with the expansion of the Company's lending operations.
Approximately 23% of the increase in personnel costs is related to the startup
of the Company's manufactured housing lending operations. The remaining
increase is primarily related to expansion of the Company's mortgage
distribution network and incentive compensation related to an increase in home
equity loan production.
Interest expense for the first nine months of 1996 increased $8.8 million
from the same period of 1995 primarily as the result of an increase of $55
million in the average amount of corporate debt outstanding and a $95 million
increase in the average amount of borrowings under the Company's warehouse
facilities.
Other operating expenses for the nine months ended September 30, 1996
increased approximately $16.0 million when compared to the same period of 1995
primarily as the result of expansion of the Company's lending operations
including a $6.0 million increase in occupancy and general office expenses, a
$2.5 million increase in advertising expense and a $2.9 million increase in
professional and legal expenses.
ASSET QUALITY AND RESERVES
The quality of the loans owned and those serviced for third parties
significantly affects the profitability of the Company. The values of and
markets for these assets are dependent on a number of factors, including
general economic conditions, interest rates and governmental regulations.
Adverse changes in such factors, which become more pronounced in periods of
economic decline, may affect the quality of these assets and the Company's
resulting ability to sell these assets for acceptable prices. General economic
deterioration can result in increased delinquencies on existing loans and
reductions in collateral values.
Substantially all of the home equity loans and manufactured housing
contracts produced by the Company are sold in securitization transactions in
which securities backed by these loans and contracts ("pass-through
certificates") are publicly offered and sold, with servicing rights retained.
The purchasers of the pass-through certificates receive a credit enhanced
security which is provided in part in home equity loan securitizations through
a guaranty provided by a third party insurer and, in the initial manufactured
housing contract securitization, which closed in September 1996, through a
senior/subordinated structure. Credit enhancement for the pass-through
certificates is also provided by subordinating a cash deposit and the excess
interest spread retained by the Company to the payment of scheduled principal
and interest on the certificates. The subordination of the cash deposit and
the excess interest spread retained by the Company relates to credit losses
which may occur after the sale of the loans and contracts and continues until
the earlier of the payment in full of the loans or termination of the agreement
pursuant to which the loans and contracts were sold. If cumulative payment
defaults exceed the amount subordinated, a third party insurer in the home
equity securitizations is obligated to pay any further losses experienced by
the owners of the pass-through certificates. Such losses are borne first by
the subordinated pass-through certificates in the initial manufactured housing
contract securitization.
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 estimated amount of credit losses at the time of sale,
and records such amount on its balance sheet in the allowance for loan losses.
Estimated losses on the owned portfolio are also provided for by an increase in
the allowance for loan losses through a charge to current operating income. At
September 30, 1996, the allowance for loan losses was $70.6 million. The
maximum recourse
11
<PAGE> 13
associated with sales of home equity loans and manufactured housing contracts
according to terms of the sale agreements totaled approximately $726 million,
of which amount approximately $716 million relates to the subordinated cash and
excess interest spread. Should credit losses on loans and contracts sold
materially exceed the Company's estimates for such losses, such consequence
will have a material adverse impact on the Company's operations.
At September 30, 1996, the contractual balance of home equity loans
serviced was approximately $3.5 billion, substantially all of which are owned
by and serviced for third party investors. The portfolio is geographically
diversified. Although the Company services loans in 48 states, at September
30, 1996 a substantial portion of the loans serviced were originated in Ohio
(8.8%), Louisiana (8.2%) and Florida (8.0%), respectively, and no other state
accounted for more than 7.0% of the serviced portfolio. In addition, at
September 30, 1996, the Company serviced approximately $104 million
manufactured housing contracts, 45% of which were originated in Texas and 11%
of which were originated in each of the states of Georgia, North Carolina and
South 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.
During the third quarter of 1996, the Company completed the first
securitization of its manufactured housing contracts in which $108.7 million of
pass-through certificates were sold in a senior/subordinated structure. An
additional class of subordinated certificates totaling approximately $6.3
million provided limited credit support for the other certificates and was not
offered publicly. In addition, the transaction included a prefunding feature
in which approximately $11.4 million will be held in a prefunding account for
the purchase of manufactured housing contracts during the fourth quarter of
1996.
The following table provides a summary of loans owned and/or serviced which
are past due 30 days or more, foreclosed properties and loans charged off as of
the dates indicated:
<TABLE>
<CAPTION>
Foreclosed Properties
---------------------
Serviced
Contractual Delinquencies % of Owned for % of
Balance Contractual Contractual by the Third Party Net Loans Average
Period Ended of Loans Balance Balance Company Investors Charged Off Loans*
- ------------ ----------- ------------- ----------- ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended September 30, 1996 (dollars in thousands)
- ------------------------------------
Home equity . . . . . . . $ 3,546,287 $ 350,354 9.88% $ 6,220 $ 38,928 $ 12,036 0.51%
Manufactured housing . . 85,917 295 0.34% 253 - 6 -
Other . . . . . . . . . . 48,904 2,836 5.80% 14,579** 2,343 1,190 2.93%
----------- ------------- --------- ----------- -------------
Total . . . . . . . $ 3,681,108 $ 353,485 9.60% $ 21,052 $ 41,271 $ 13,232
=========== ============== ========== =========== =============
Year Ended December 31, 1995
- ----------------------------
Home equity . . . . . . . $ 2,701,481 $ 220,145 8.15% $ 8,469 $ 21,604 $ 12,221 0.56%
Manufactured housing . . 888 - - - - - -
Other . . . . . . . . . . 59,033 2,734 4.63% 2,982 - 51 0.08%
----------- -------------- ---------- ----------- -------------
Total . . . . . . . $ 2,761,402 $ 222,879 8.07% $ 11,451 $ 21,604 $ 12,272
=========== ============== ========== =========== =============
Year Ended December 31, 1994
- ----------------------------
Home equity . . . . . . . $ 1,683,698 $ 129,203 7.67% $ 8,791 $ 11,837 $ 11,694 0.84%
Other . . . . . . . . . . 74,775 2,672 3.57% 2,943 35 92 0.11%
----------- -------------- ---------- ----------- -------------
Total . . . . . . . $ 1,758,473 $ 131,875 7.50% $ 11,734 $ 11,872 $ 11,786
----------- ============== ========== =========== =============
</TABLE>
*Annualized for the nine months ended September 30, 1996.
**Includes $10.2 million in foreclosed properties acquired in connection with
the disposition of UCLIC - see Note 2 of the Notes to Consolidated Financial
Statements.
12
<PAGE> 14
The percentage of home equity loans thirty days or more delinquent was
9.88% at September 30, 1996 compared to 7.98% at June 30, 1996. This increase
in delinquency was generally due to the seasoning of the substantial volume of
loans produced in the last three years, a shift in the mix of business toward
longer maturity loans and a general seasonality in the third quarter. Net
charge-offs on home equity loans were $12.0 million for the nine months ended
September 30, 1996 compared with $8.7 for the nine months ended September 30,
1995. The annualized charge-off rate on the average home equity loans for the
nine months ended September 30, 1996 and 1995 was .51% and .57%, respectively.
In connection with the sale of UCLIC discussed in Note 2 of the Notes to
Consolidated Financial Statements, the servicing of substantially all of the
commercial real estate mortgage loans and commercial pass-through certificates
was transferred to UCLIC. The table above excludes these loans and pass-
through certificates which, prior to this transfer of servicing, were serviced
without recourse.
The above delinquency and loan loss experience represents the Company's
recent experience. However, the delinquency, foreclosure and net loss
percentages may be affected by the increase in the size and relative lack of
seasoning of a substantial portion of the portfolio. In addition, the Company
can neither quantify the impact of property value declines, if any, on the home
equity loans 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, foreclosures and losses on the home equity loans and
manufactured housing contracts could be higher than those theretofore
experienced in the mortgage lending industry in general. Adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the home equity loans and manufactured housing contracts and, accordingly, the
actual rates of delinquencies, foreclosures and losses. As a result, the
information in the above tables should not be considered as the only basis for
assessing the likelihood, amount or severity of delinquencies or losses in the
future and no assurance can be given that the delinquency and loss experience
presented in the tables will be indicative of such experience.
A summary analysis of the changes in the Company's allowance for loan
losses for the indicated periods is as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . .$ 51,454 $ 34,478
Loans charged to allowance
Home equity . . . . . . . . . . . . . . . . . . . . . . (14,047) (10,070)
Manufactured housing . . . . . . . . . . . . . . . . . . (6) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . (1,231) -
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . (15,284) (10,070)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . . . . . . . . . 2,052 1,324
--------- ---------
Net loans charged off . . . . . . . . . . . . . . . . . . . . (13,232) (8,746)
Loan loss provision on owned and serviced loans . . . . . . . 30,184 22,518
Reserve reclassification . . . . . . . . . . . . . . . . . . 2,241 (891)
--------- ---------
Balance at end of period . . . . . . . . . . . . . . . . . .$ 70,647 $ 47,359
========= =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The principal cash requirements of the Company's lending operations arise
from loan originations, deposits to reserve accounts, repayments of inter-
company debt borrowed under the Company's senior notes and short-term
13
<PAGE> 15
borrowings, payments of operating and interest expenses, and income taxes
related to loan sale transactions. Loan production is funded principally
through proceeds of warehouse facilities pending loan sales. At September 30,
1996, the Company had three secured warehouse facilities available for its home
equity loan product: (i) a warehouse facility provided by a syndicate of
commercial banks (the "Commercial Bank Warehouse"), (ii) a warehouse facility
provided by the investment bank which acted as lead underwriter for the
Company's third quarter home equity loan securitization (the "Investment Bank
Warehouse"), and (iii) a warehouse facility provided by UCLIC (the "UCLIC
Warehouse"). In June, 1996, the Commercial Bank Warehouse was increased from
$150 million to $350 million and the lender's commitment was extended from May,
1997 to May, 1998. As of September 30, 1996 $1.9 million was outstanding under
the Commercial Bank Warehouse. The Investment Bank Warehouse was directly
related to the third quarter home equity loan securitization, initially
provided for funding up to $300 million of eligible home equity loans for such
securitization and terminated upon the closing of the last delivery of loans
under the prefunding accounts relative to this securitization. As of September
30, 1996, $150 million was available and no amounts were outstanding under the
Investment Bank Warehouse. The UCLIC Warehouse, which was established upon the
sale of UCLIC, provides for the purchase of up to $300 million in first
mortgage residential loans and has a maturity of July, 1999. The Company has
the right for a limited time to repurchase certain loans which are eligible for
securitization and as of September 30, 1996, $17.8 million in loans eligible
for securitization were funded under this facility. In addition, the Company
had a manufactured housing contract warehouse which was directly related to the
third quarter manufactured housing securitization and was provided by the
investment bank which acted as lead underwriter for such securitization
(the "Manufactured Housing Warehouse"). The Manufactured Housing Warehouse
initially provided for funding up to $150 million of eligible manufactured
housing contracts and terminated upon the closing of the last delivery of
contracts under the prefunding accounts relative to this securitization. As of
September 30, 1996, $11.4 million was available and no amounts were outstanding
under the Manufactured Housing Warehouse.
Substantially all of the home equity loans and manufactured housing
contracts originated or acquired by the Company are sold. Net cash from
operating activities of the Company in the first nine months of 1996 and 1995
reflects approximately $1.8 billion and $2.0 billion, respectively, in cash
used for loan originations and acquisitions of home equity loans and
manufactured housing contracts. The primary source of funding for loan
originations is derived from the reinvestment of proceeds from the ultimate
sale of these products in the secondary market which totaled approximately $1.7
billion and $2.0 billion in the nine months ended September 30, 1996 and 1995,
respectively. In connection with the sale transactions in the secondary
market, third-party surety bonds (in the case of home equity loan sales) and
cash deposits by the Company as credit enhancements have been provided. The
loan sale transactions have required the subordination of certain cash flows
payable to the Company to the payment of principal and interest due to
certificate holders. In connection with these transactions, the Company has
been required, in some instances, to fund an initial deposit, and thereafter,
in each transaction, a portion of the amounts receivable by the Company from
the excess interest spread has been required to be placed and maintained in a
reserve account to the extent of the subordination requirements. The
subordination requirements generally provide that the excess interest spread is
payable to a reserve account until a specified level of cash, which is less
than the maximum subordination amount, is accumulated therein. The 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
and contracts underlying the pass-through certificates issued until the total
of the Company's deposits into the reserve account equal the maximum
subordination amount. After the Company's deposits into the reserve account
equal the maximum subordination amount for a transaction, the subordination of
the related excess interest spread (including the guarantee fee payable
therefrom) for these purposes is terminated. The excess interest spread
required to be deposited and maintained in the respective reserve accounts will
not be available to support the cash flow requirements of the Company until
such amount exceeds the maximum subordinated amount (other than amounts, if
any, in excess of the specified levels required to be maintained in the reserve
accounts, which may be distributed periodically to the Company). At September
30, 1996, the amounts on deposit in such reserve accounts totaled $208 million.
In April, 1996, a subsidiary of the Company entered into a letter of credit and
reimbursement agreement with the domestic branch of an international bank
pursuant to which the bank issued a letter of credit to replace a substantial
portion of the cash previously required to be maintained in the reserve
accounts for five loan securitization transactions consummated in 1993 and
1994. As a consequence, $40 million was released from the related reserve
accounts to the Company, and these proceeds, net of transaction costs, were
used to pay down outstanding debt of the Company in April, 1996.
RATINGS.
In July, 1996, Moody's Investor Services, Inc. raised its rating on the
Company's senior unsecured debt to Ba1 from Ba2.
ACCOUNTING STANDARDS.
In June, 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). SFAS
No. 125 focuses on control of the financial asset and provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125
14
<PAGE> 16
provides certain conditions that must be met to determine that control of the
financial asset has been surrendered. SFAS 125 requires that servicing assets
and other retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values at the date of
transfer. Implementation of SFAS No. 125 will require the Company to change
the method of calculating the gain on sale of loans, which the Company
estimates will reduce the amount of gain recognized on loan sales by
approximately 5% to 10% and, conversely, decrease the amortization of loan sale
gain in future periods. The statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities after December 31, 1996,
and is to be applied prospectively. Earlier or retroactive application is not
permitted.
OTHER EVENTS.
On October 15, 1996, the Company announced that it had signed a non-binding
letter of intent to acquire Empire Funding Corp. ("Empire Funding").
Headquartered in Austin, Texas, Empire Funding is a privately held lender that
specializes in originating and servicing FHA Title I and conventional home
improvement loans. It has approximately 340 employees and operates in 46
states through 16 branch offices and 180 direct correspondents. For the twelve
months ended September 30, 1996, Empire Funding originated approximately $256
million in loans.
As of October 15, 1996, the transaction was valued at $89 million and the
Company anticipates that the acquisition will be accounted for as a purchase.
Under the terms of the letter of intent, the aggregate consideration for the
purchase will be comprised of approximately $45 million in cash and
approximately 1.3 million shares of the Company's common stock in exchange for
all of the outstanding common stock of Empire Funding. The number of shares to
be issued is subject to adjustment in the event that the Company's common stock
trades above $40.11 per share or less than $33.24 per share immediately prior
to the closing of the transaction. Completion of the acquisition is subject to
the favorable outcome of a due-diligence investigation, execution of a
definitive agreement, approval by the board of directors of each company and
necessary regulatory approvals.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q contains forward-looking statements that reflect the Company's current
views with respect to future events and financial performance. These forward-
looking statements are subject to certain risks and uncertainties, including
those identified below, which could cause actual results to differ materially
from historical results or those anticipated. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of their dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The following non-exclusive factors could cause
actual results to differ materially from historical results or those
anticipated: (1) changes in the performance of the financial markets, in the
demand for and market acceptance of the Company's products, and in general
economic conditions, including interest rates; (2) the presence of competitors
with greater financial resources and the impact of competitive products and
pricing; (3) the effect of the Company's policies; and (4) the continued
availability to the Company of adequate funding sources.
15
<PAGE> 17
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Deloitte & Touche LLP, have performed a
review of the accompanying unaudited consolidated balance sheet as of September
30, 1996 and the related consolidated statements of income and cash flows for
the nine months ended September 30, 1996 and 1995, and previously audited and
expressed an unqualified opinion dated February 29, 1996 (July 24, 1996 as to
Notes 3.4, 6 and 11) on the consolidated financial statements of the Company
and its subsidiaries as of December 31, 1995, from which the consolidated
balance sheet as of this date is derived.
16
<PAGE> 18
INDEPENDENT ACCOUNTANTS' REPORT
United Companies Financial Corporation:
We have reviewed the accompanying consolidated balance sheet of United
Companies Financial Corporation and subsidiaries as of September 30, 1996, and
the related consolidated statements of income and cash flows for the three
month and nine month periods ended September 30, 1996 and 1995. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Companies Financial
Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 29,
1996 (July 24, 1996 as to Notes 3.4, 6 and 11), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1995 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
November 8, 1996
17
<PAGE> 19
PART II
OTHER INFORMATION
Items 1 through 5. Inapplicable
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) Exhibits - (2)Amended and Restated
Stock Purchase Agreement dated as of July 24, 1996, between United Companies
Financial Corporation and Pacific Life and Accident Insurance Company.
Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K filed on August 8, 1996.
- (11) Statement re computation of earnings per share
- (15) Letter of Deloitte & Touche LLP
- (27) Financial Data Schedule
(b) Reports on Form 8-K
On August 8, 1996, the Company filed a Current Report on Form 8-K to report the
sale of its wholly-owned subsidiary, United Companies Life Insurance Company.
</TABLE>
18
<PAGE> 20
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: 11/13/96 By: /s/ J. Terrell Brown
------------------------- ---------------------------------
J. Terrell Brown
Chairman and Chief Executive
Officer
Date: 11/13/96 By: /s/ Dale E. Redman
--------------------------- ---------------------------------
Dale E. Redman
Executive Vice President and
Chief Financial Officer
19
<PAGE> 21
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NO.
2 Amended and Restated Stock Purchase Agreement dated as of
July 24, 1996, between United Companies Financial
Corporation and Pacific Life and Accident Insurance
Company. Incorporated herein by reference to the
designated Exhibit of the Company's Current Report on Form
8-K filed on August 8, 1996.
11 Statement re computation of earnings per share
15 Letter of Deloitte & Touche LLP
27 Financial Data Schedule
20
<PAGE> 1
EXHIBIT 11
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ----------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Primary Earnings Per Share
- --------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . . . . $ 24,128 $ 19,732 $ 62,184 $ 46,466
Less: Income (loss) from discontinued operations . . . - 1,516 (4,532) 3,903
---------- ---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,128 $ 21,248 $ 57,652 $ 50,369
========== ========== ========= =========
Weighted average number of common and
common equivalent shares:
-------------------------------------
Average common shares outstanding . . . . . . . . . . . 27,955 27,750 27,890 27,499
Add: Dilutive effect of stock options after
application of treasury stock method . . . . . 866 908 879 896
Dilutive effect of preferred stock
after application of "if converted" method . . 3,230 3,230 3,230 1,254
---------- ---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 32,051 31,888 31,999 29,649
========== ========== ========= =========
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . . . . $ .75 $ .62 $ 1.94 $ 1.57
Income (loss) from discontinued operations . . . . . . - .05 (.14) .13
---------- ---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ .75 $ .67 $ 1.80 $ 1.70
========== ========== ========= =========
Fully Diluted Earnings Per Share
- --------------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . . . . $ 24,128 $ 19,732 $ 62,184 $ 46,466
Less: Income (loss) from discontinued operations . . . - 1,516 (4,532) 3,903
---------- ---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,128 $ 21,248 $ 57,652 $ 50,369
========== ========== ========= =========
Weighted average number of common and
all dilutive contingent shares:
-------------------------------------
Average common shares outstanding . . . . . . . . . . . 27,955 27,750 27,890 27,499
Add: Dilutive effect of stock options after
application of treasury stock method . . . . . 867 960 912 1,067
Dilutive effect of preferred stock
after application of "if converted" method . . 3,910 3,910 3,910 1,518
---------- ---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 32,732 32,620 32,712 30,084
========== ========== ========= =========
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . . . . $ .74 $ .60 $ 1.90 $ 1.54
Income (loss) from discontinued operations . . . . . . - .05 (.14) .13
---------- ---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ .74 $ .65 $ 1.76 $ 1.67
========== ========== ========= =========
</TABLE>
21
<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 September 30, 1996 and 1995, as
indicated in our report dated November 8, 1996; 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 September 30, 1996, is
being incorporated by reference in the following: Registration Statement No.
33-17366 on Form S-8 pertaining to the United Companies Financial Corporation
Employees' Savings Plan and Trust, 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, Registration Statement No. 33-54955 on Form S-8
pertaining to the 1993 Stock Incentive Plan and the 1993 Non-Employee Director
Stock Option Plan, Registration Statement No. 33-68626 on Form S-3 pertaining
to the registration of 1,951,204 shares of United Companies Financial
Corporation Common Stock, Registration Statement No. 33-60367 on Form S-3
pertaining to the registration of $200 million of United Companies Financial
Corporation Debt Securities and Preferred Stock, Registration Statement No. 33-
52739 on Form S-3 pertaining to the registration of 200,000 shares of United
Companies Financial Corporation Common Stock, and Registration Statement No.
33-63069 on Form S-8 pertaining to the United Companies Financial Corporation
Management Incentive Plan.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, 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 LLP
Baton Rouge, Louisiana
November 12, 1996
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 824
<SECURITIES> 33,590
<RECEIVABLES> 114,251
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,106
<DEPRECIATION> 0
<TOTAL-ASSETS> 866,667
<CURRENT-LIABILITIES> 0
<BONDS> 302,010
0
3,910
<COMMON> 59,132
<OTHER-SE> 338,184
<TOTAL-LIABILITY-AND-EQUITY> 866,667
<SALES> 0
<TOTAL-REVENUES> 258,945
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 123,842
<LOSS-PROVISION> 9,572
<INTEREST-EXPENSE> 27,586
<INCOME-PRETAX> 97,945
<INCOME-TAX> 35,761
<INCOME-CONTINUING> 62,184
<DISCONTINUED> (4,532)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,652
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.76
</TABLE>
