<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, 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 May 7, 1996 was 28,180,898, excluding 1,159,682 treasury
shares.
===============================================================================
<PAGE> 2
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months ended March 31, 1996 and 1995 . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Three months ended March 31, 1996 and 1995 . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . 5-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 11-21
Review by Independent Accountants . . . . . . . . . . . . . . . . . 22
Independent Accountants' Report . . . . . . . . . . . . . . . . . . 23
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE> 3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
1996 December 31,
Assets (Unaudited) 1995
- ------ ----------- -------------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 56,099 $ 28,087
Temporary investments - reserve accounts . . . . . . . . . . . . . . 179,037 155,254
Investment securities
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949 752
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . 1,092,664 1,140,421
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . 51,553 51,586
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,393 25,594
Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,164 413,574
Capitalized excess servicing income . . . . . . . . . . . . . . . . . 304,088 283,454
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . 89,375 90,703
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . 54,327 53,265
Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,167 38,659
Net assets of discontinued operations . . . . . . . . . . . . . . . . - 6,245
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,120 79,292
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 2,387,936 $ 2,366,886
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,390,495 $ 1,417,803
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,883 255,756
Insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . 111,416 113,002
Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . 62,333 64,461
Allowance for loss on loans serviced . . . . . . . . . . . . . . . . 48,490 44,970
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . 28,178 40,857
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 44,681 48,086
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 2,012,476 1,984,935
------------ ------------
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 - 29,365,662 and 29,302,246 shares . . . . . . . . . . 58,731 58,604
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 180,813 179,848
Net unrealized gain on securities . . . . . . . . . . . . . . . . 9,240 29,514
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 137,259 122,816
Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . . (14,493) (12,741)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 375,460 381,951
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . $ 2,387,936 $ 2,366,886
============ ============
</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,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Interest, charges and fees on loans . . . . . . . . . . . . . . . . . . . . $ 34,614 $ 29,438
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,809 25,450
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,505 25,011
Loan servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,233 4,834
Net insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,618 2,102
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,779 86,835
---------- ----------
Expenses:
Interest on annuity policies . . . . . . . . . . . . . . . . . . . . . . . 18,549 19,526
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,011 17,071
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,683 5,894
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,578 4,064
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,425 3,548
Insurance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,776 2,429
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,205 14,754
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,227 67,286
---------- ----------
Income from continuing operations before income taxes . . . . . . . . . . . . 29,552 19,549
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 10,594 6,725
----------- ----------
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . 18,958 12,824
Loss from discontinued operations:
Loss from discontinued operations net of income taxes benefit of
$180 and $201, respectively . . . . . . . . . . . . . . . . . . . . . . (153) (373)
(Loss) gain on disposal, including estimated operating losses during
phaseout (including income tax benefit of $393 and $1,045,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (966) 245
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,119) (128)
---------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,839 $ 12,696
========== ==========
Per share data:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . $ .58 $ .46
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . (.03) (.01)
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .55 $ .45
========== ==========
</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,
--------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . $ 18,958 $ 12,824
Adjustments to reconcile income from continuing operations
to net cash provided (used) by continuing operating activities:
Increase (decrease) in deferred policy acquisition costs . . . . . . . . . 1,328 (887)
Increase in accrued interest receivable . . . . . . . . . . . . . . . . . (1,062) (2,901)
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . (10,298) 7,189
Decrease in insurance reserves . . . . . . . . . . . . . . . . . . . . . (1,586) (3,042)
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . 21,489 1,386
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,057) (27,420)
Amortization of capitalized excess servicing income . . . . . . . . . . . 25,158 13,467
Investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (85)
Interest on annuity policies . . . . . . . . . . . . . . . . . . . . . . 18,549 19,526
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,578 4,064
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . 1,303 945
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 8,789 5,868
Proceeds from sales and principal collections of loans
held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421,588 282,341
Originations and purchases of loans held for sale . . . . . . . . . . . . (422,810) (321,427)
Net cash flows from trading investment securities . . . . . . . . . . . . (197) (84)
---------- ----------
Net cash provided (used) by continuing operating activities . . . 39,687 (8,236)
---------- ----------
Cash flows from investing activities:
Principal collected on loans held for investment . . . . . . . . . . . . . 14,682 15,047
Originations and acquisition of loans held for investment. . . . . . . . . (6,842) (4,839)
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . . . . . (23,783) (15,841)
Proceeds from sales of available-for-sale securities . . . . . . . . . . - 17,606
Proceeds from maturities or calls of investment securities . . . . . . . . 17,002 5,584
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . (157) (81,553)
Proceeds from disposition of subsidiary . . . . . . . . . . . . . . . . . 5,126 -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,281) (1,853)
---------- ----------
Net cash provided (used) by investing activities . . . . . . . . 4,747 (65,849)
---------- ----------
Cash flows from financing activities:
Proceeds from mortgage loan . . . . . . . . . . . . . . . . . . . . . . . - 1,194
Increase in revolving credit debt . . . . . . . . . . . . . . . . . . . . - 35,000
Decrease in repurchase agreement . . . . . . . . . . . . . . . . . . . . . (12,679) -
Increase (decrease) in debt with maturities of three months or less . . . 78,150 (11,150)
Decrease in warehouse loan facility . . . . . . . . . . . . . . . . . . . (8,773) -
Proceeds from ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 -
Payments on ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . . . (249) -
Deposits received from annuities . . . . . . . . . . . . . . . . . . . . . 22,487 48,563
Payments on annuities . . . . . . . . . . . . . . . . . . . . . . . . . . (68,345) (53,829)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,397) (1,407)
(Decrease) increase in managed cash overdraft . . . . . . . . . . . . . . (24,024) 10,092
Increase in unearned ESOP compensation . . . . . . . . . . . . . . . . . . (1,751) (682)
Proceeds from exercise of stock options and warrants . . . . . . . . . . . 159 1,536
---------- ----------
Net cash provided (used) by financing activities . . . . . . . . (16,422) 29,317
---------- ----------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 28,012 (44,768)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . 28,087 56,359
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . $ 56,099 $ 11,591
========== ==========
</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 by Form 10-K/A-1, filed with the United States Securities
and Exchange Commission.
The consolidated results of operations for the three months ended March 31,
1996 and 1995 are not necessarily indicative of the results to be expected
for the full year. Certain 1995 amounts have been reclassified to conform
with the current year presentations. Such reclassifications had no effect
on net income.
2. DISCONTINUED OPERATIONS.
United General Title Insurance Company. On April 10, 1995, the Company
made a decision to dispose of its investment in United General Title
Insurance Company ("UGTIC"), a wholly owned subsidiary of the Company, and,
on May 1, 1995, approved a formal plan of disposal. The decision to
dispose of UGTIC was independent of the consummation of the sale thereof
pursuant to the definitive stock sale agreement signed on August 11, 1995.
As a result, the operations of UGTIC have been classified as discontinued
operations. The sale was concluded on February 29, 1996 at a sales price
of approximately $5.1 million.
The definitive stock sale agreement provided for the sale of 100% of the
stock of UGTIC and contains a provision making the Company liable to UGTIC
for claims from defalcations and fraud losses incurred by UGTIC which are
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 $.1 million for the three
months ended March 31, 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
5
<PAGE> 7
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 three months ended March 31, 1996 and 1995, the Company paid
interest on notes payable in the amount of $7.0 million and $2.6 million,
respectively. During the three months ended March 31, 1996, the Company
paid income taxes in the amount of $42,000. There were no payments made
for income taxes during the three months ended March 31, 1995.
6
<PAGE> 8
4. INVESTMENT SECURITIES.
At March 31, 1996, the Company's investment securities consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Trading
Common stock $ 626 $ 324 $ 1 $ 949
=========== =========== =========== ===========
Available-for-sale
Debt securities
Corporate . . . . . . . . . . . . . . . $ 322,601 $ 12,267 $ 1,973 $ 332,895
U.S. Treasury . . . . . . . . . . . . . 11,655 180 3 11,832
Mortgage-backed . . . . . . . . . . . . 722,771 8,960 5,981 725,750
Foreign governments . . . . . . . . . . 20,368 1,143 38 21,473
Other . . . . . . . . . . . . . . . . . 425 17 - 442
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . 1,077,820 22,567 7,995 1,092,392
----------- ----------- ----------- -----------
Equity securities . . . . . . . . . . . . . 629 50 407 272
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 1,078,449 $ 22,617 $ 8,402 $ 1,092,664
=========== =========== =========== ===========
Held-to-maturity
Debt securities
Corporate . . . . . . . . . . . . . . . $ 6,535 $ 475 $ - $ 7,010
Mortgage-backed . . . . . . . . . . . . 45,018 1,253 5,108 41,163
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 51,553 $ 1,728 $ 5,108 $ 48,173
=========== =========== =========== ===========
Other
Investment in limited
partnerships . . . . . . . . . . . . . $ 25,393 $ 25,393
=========== ===========
</TABLE>
Net unrealized gains on available-for-sale securities in stockholders'
equity at March 31, 1996 are presented net of deferred income taxes of $5.0
million. Realized investment gains for the three months ended March 31,
1996 and 1995 were $166,000 and $85,000, respectively, and are included in
investment income.
7
<PAGE> 9
5. LOANS - NET
The following schedule sets forth the components of Loans owned by the
Company at March 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- --------------
(in thousands)
<S> <C> <C>
Home equity . . . . . . . . . . . . $ 210,169 $ 236,987
Commercial . . . . . . . . . . . . 172,685 169,990
Conventional . . . . . . . . . . . 1,174 1,340
Foreclosed properties . . . . . . . 24,200 25,017
Nonrefundable loan fees . . . . . . (4,669) (4,950)
Manufactured homes . . . . . . . . 15,773 -
Consumer and other . . . . . . . . 1,641 732
------------- -------------
Total . . . . . . . . . . . . $ 420,973 $ 429,116
============= =============
</TABLE>
Included in owned loans at March 31, 1996 and December 31, 1995 were
nonaccrual loans totaling $20.2 million and $20.8 million, respectively.
The following schedule summarizes the composition of Loans - net at March
31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -------------
(in thousands)
<S> <C> <C>
Loans . . . . . . . . . . . . . . . $ 420,973 $ 429,116
Allowance for loan losses . . . . . (14,241) (14,891)
Unearned discount . . . . . . . . . (568) (651)
------------- -------------
Loans - net . . . . . . . . . $ 406,164 $ 413,574
============= =============
</TABLE>
6. OTHER ASSETS AND OTHER LIABILITIES.
At March 31, 1996 other assets included amounts due from reinsurers of
$33.2 million and policy loans of $20.5 million compared to $33.6 million
and $20.3 million, respectively, at December 31, 1995.
Other liabilities at December 31, 1995 included a $24.0 million managed
cash overdraft.
8
<PAGE> 10
7. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
March 31, 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 facility . . . . . . . . . . . . . . . . . . 10,547 19,321
Guaranteed bank loan to ESOP . . . . . . . . . . . . . 7,713 5,962
Mortgage loan . . . . . . . . . . . . . . . . . . . . . 5,473 5,473
Short-term borrowings . . . . . . . . . . . . . . . . . 78,150 -
-------------- --------------
$ 326,883 $ 255,756
============== ==============
</TABLE>
8. COMMITMENTS AND CONTINGENCIES.
The Company has certain contingencies in connection with the sale of its
investment in UGTIC and the divestiture of FMC. For information regarding
these contingencies see Note 2. Discontinued Operations.
The Company used a prefunding feature in connection with its loan
securitization transaction during the first quarter of 1996. At March 31,
1996, approximately $26.4 million was held in a prefunding account for the
purchase of the Company's home equity loans during the second quarter of
1996. Pursuant to this commitment, home equity loans with a remaining
principal balance of approximately $26.4 million were delivered in April,
1996.
9. ACCOUNTING STANDARDS.
On October 23, 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages, but does not
require, the recognition of compensation expense for grants of stock, stock
options and other equity instruments to employees based on a fair value
method of accounting. Companies are permitted to continue to apply the
existing accounting rules contained in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"); however,
companies that choose to retain this method of accounting will be required
to provide expanded disclosures of pro forma net income and earnings per
share in the notes to their year end financial statements beginning in 1996
as if the new fair value method of accounting had been adopted. The
provisions of SFAS 123 are effective for fiscal years beginning after
December 15, 1995. The Company has elected to continue to apply the
accounting rules contained in APB 25 and to comply with the additional
disclosure requirements as set forth in SFAS 123.
10. PENDING SALE OF UCLIC
On February 2, 1996, the Company signed a stock purchase agreement dated as
of January 30, 1996, for the sale of all of the stock of UCLIC to UC Life
Holding Corp., a new Delaware corporation formed by Knightsbridge Capital
Fund I, L.P. for an aggregate amount of $164 million plus earnings of UCLIC
from January 1, 1996, to closing of the transaction. Knightsbridge, which
is a private investment partnership with institutional partners, was formed
in 1995 to make equity investments in companies engaged primarily in the
life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash,
currently estimated to be $109 million and UCLIC real estate and other
assets to be distributed to the Company prior to the closing. The real
estate
9
<PAGE> 11
to be distributed includes portions of the United Plaza office park,
including the Company's home office. In addition, the Company will
purchase a convertible promissory note from an affiliate of the purchaser
for $15 million in cash. The note matures in 11 years and bears interest
at 8% per annum payable at maturity. The Company does not expect the sale
to have a material effect on net income.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the Company's
consolidated financial statements and accompanying notes presented elsewhere
herein.
RESULTS OF OPERATIONS
The Company's financial statements present United General Title Insurance
Company ("UGTIC") as discontinued operations (see Note 2 to consolidated
financial statements). Discussed below are results of continuing operations
for the periods presented and certain financial data by business segment for
such periods.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Income from continuing operations for the first quarter of 1996 was $19.0
million ($.58 per share based on 32.7 million weighted average shares
outstanding) compared to $12.8 million ($.46 per share based on 28.2 million
shares outstanding) for the same period of 1995. In comparison to the 1995
period, the increase in income in 1996 was primarily the result of a $133
million increase in the amount of loans sold and the recognition of loan sale
gains and loan fees in connection with such sales.
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,
--------------------------------
1996 1995
----------- ------------
(dollars in thousands)
<S> <C> <C>
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . $ 27,542 $ 17,903
Life insurance . . . . . . . . . . . . . . . . . . . . . 2,660 3,169
Corporate, other operations and eliminations . . . . . . (650) (1,523)
---------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 29,552 $ 19,549
========== ============
Home equity loan production . . . . . . . . . . . . . . $ 394,601 $ 309,290
Home equity loans sold . . . . . . . . . . . . . . . . . 407,700 274,653
Interest spread retained on home equity
loans sold . . . . . . . . . . . . . . . . . . . . 4.84% 4.42%
</TABLE>
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1996 1995
----------- ------------
(dollars in thousands)
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . . . . $ 105,779 $ 86,835
Total expenses . . . . . . . . . . . . . . . . . . . . . 76,227 67,286
Income from continuing operations
before income taxes . . . . . . . . . . . . . . . . 29,552 19,549
Income from continuing operations . . . . . . . . . . . 18,958 12,824
</TABLE>
11
<PAGE> 13
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the three months ended March 31, 1996
and 1995.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1996 1995
----------- ------------
(in thousands)
<S> <C> <C>
Interest, charges and fees on loans . . . . . . . . . . $ 34,614 $ 29,438
Loan sale gains . . . . . . . . . . . . . . . . . . . . 39,809 25,450
Investment income . . . . . . . . . . . . . . . . . . . 25,505 25,011
Loan servicing income . . . . . . . . . . . . . . . . . 4,233 4,834
Net insurance premiums . . . . . . . . . . . . . . . . 1,618 2,102
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 105,779 $ 86,835
=========== ============
</TABLE>
Interest, charges and fees on loans increased $5.2 million for the first
three months of 1996 compared to the same period of 1995. This line item
includes interest on mortgage loans owned by the mortgage and life 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 lives of the loans and are recognized at the
time of sale on loans sold to third parties. During the three months ended
March 31, 1996 and 1995, the Company sold approximately $408 million and $275
million, respectively, in home equity loans and recognized approximately $10.5
million and $8.2 million, respectively, in net loan origination fees in
connection with these sales.
The following table presents the composition of interest, charges and fees
on loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1996 1995
----------- ------------
(in thousands)
<S> <C> <C>
Loan origination fees . . . . . . . . . . . . . . . . . $ 19,409 $ 15,502
Mortgage loan interest . . . . . . . . . . . . . . . . 12,119 10,650
Other loan income . . . . . . . . . . . . . . . . . . . 3,086 3,286
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 34,614 $ 29,438
=========== ============
</TABLE>
The Company estimates that non-accrual loans reduced mortgage loan interest
for the first three months of 1996 and 1995 by approximately $4.5 million and
$2.9 million, respectively. During the three months ended March 31, 1996 the
average amount of non-accrual loans owned by the Company was $20.5 million
compared to approximately $21.5 million during the same period of 1995. In
addition, the average balance of loans serviced for third parties which were on
a non-accrual basis or in foreclosure was $121.3 million and $69.3 million
during the first three months of 1996 and 1995, respectively, representing 4.5%
and 3.9%, respectively, of the average amount of loans serviced for third
parties. The Company is generally obligated to advance interest on delinquent
loans which have been sold until satisfaction of the note, liquidation of the
collateral or charge off of the delinquent loan. At March 31, 1996, the
Company owned approximately $5.9 million of commercial loans which were on an
accrual status, but which the Company considers as potential problem loans,
compared to $10.5 million at March 31, 1995. 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.
12
<PAGE> 14
Loan sale gains increased $14.4 million during the first three months of
1996 over the same period in 1995. 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
$133 million increase in the amount of loans sold and 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,
---------------------------------
1996 1995
----------- ------------
(in thousands)
<S> <C> <C>
Home equity loans sold . . . . . . . . . . . . . . . . $ 407,700 $ 274,653
Average coupon on home equity loans sold . . . . . . . 11.18% 12.65%
Interest spread retained on home equity loans sold . . 4.84% 4.42%
Home equity loan sale gains . . . . . . . . . . . . . . $ 39,809 $ 25,450
</TABLE>
Fluctuations in and the level of market interest rates will impact the
interest spread retained by the Company on loans sold, and, potentially, the
amount of its loan sale gains. An increase in the level of market interest
rates will generally adversely affect the interest spread on loans sold,
whereas such interest spread generally widens during a declining interest rate
environment. Although actions have been taken by the Company during a rising
interest rate environment to mitigate the impact on earnings of fluctuations in
market rates, such as increasing the coupon rate charged on its loan products,
the effect of such actions will generally lag the impact of market rate
fluctuations. In connection with its loan securitization transactions, the
Company has used a prefunding feature which "locks in" the pass-through rate
that the Company will pay to the investors on a prefunded amount which will be
used to acquire loans at a future date. The Company is obligated for the
difference between the earnings on such prefunded amount and the pass-through
interest paid to the investors during the period from the date of the closing
of the securitization transaction until the date of delivery of the loans. In
connection with the home equity loan securitization transaction which closed in
the first quarter of 1996, approximately $26.4 million was held in a prefunding
account for purchase of the Company's home equity loans during the second
quarter of 1996. Pursuant thereto, home equity loans with a remaining
principal balance of approximately $26.4 million were delivered in April, 1996.
Investment income totaled $25.5 million for the first three months of 1996
compared to investment income of $25.0 million during the same period of 1995.
At March 31, 1996 the amortized cost of the fixed income portfolio totaled $1.1
billion and was comprised principally of $723 million in investment grade
mortgage-backed securities and $344 million in investment grade bonds. At
March 31, 1996, the weighted average rating of the publicly traded bond
portfolio according to nationally recognized rating agencies was "AA". At
March 31, 1996, the carrying value of investments in the Company's trading
account was $.9 million reflecting a $.3 million unrealized gain which is
included in investment income for the first quarter of 1996.
Loan servicing income was $4.2 million for the three months ending March
31, 1996 compared to $4.8 million for the same period of 1995. Loan servicing
income was negatively affected by an increase in the amortization of prior loan
sale gains. This increased amortization offset the impact of a $1.0 billion
increase in the average amount of home equity loans serviced by the Company for
third parties during the first quarter of 1996 compared to the
13
<PAGE> 15
same period of 1995. The following table reflects the components of loan
servicing income for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1996 1995
---------- ------------
(in thousands)
<S> <C> <C>
Servicing fees earned . . . . . . . . . . . . . . . . . $ 29,391 $ 18,301
Amortization of capitalized excess
servicing income . . . . . . . . . . . . . . . . . . (25,158) (13,467)
---------- ------------
Total . . . . . . . . . . . . . . . . . . . . . $ 4,233 $ 4,834
========== ============
</TABLE>
Net insurance premiums declined $.5 million for the first three months of
1996 compared with the same period of 1995. Net insurance premiums primarily
reflect the recognition of renewal premiums on ordinary life and credit
insurance policies sold in prior years. The decrease in premium income is
primarily the result of UCLIC's decision in 1993 to discontinue sales of pre
need and credit insurance products.
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1996 1995
----------- -------------
(dollars in thousands)
<S> <C> <C>
Interest on annuity policies . . . . . . . . . . . . . $ 18,549 $ 19,526
Personnel . . . . . . . . . . . . . . . . . . . . . . . 22,011 17,071
Interest . . . . . . . . . . . . . . . . . . . . . . . 8,683 5,894
Loan loss provision . . . . . . . . . . . . . . . . . . 2,578 4,064
Insurance commissions . . . . . . . . . . . . . . . . . 3,425 3,548
Insurance benefits . . . . . . . . . . . . . . . . . . 2,776 2,429
Other operating . . . . . . . . . . . . . . . . . . . . 18,205 14,754
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . $ 76,227 $ 67,286
=========== ============
</TABLE>
Interest on annuity policies decreased $1.0 million for the first three
months of 1996 when compared to the same period of 1995 primarily as the result
of a decrease in average annuity reserves of approximately $29 million.
Personnel expenses increased approximately $4.9 million primarily because of
costs associated with the expansion of the Company's mortgage operations.
Interest expense for the first three months of 1996 increased $2.8 million
from the same period of 1995 primarily as the result of an increase in average
amount of debt outstanding and an increase in the weighted average interest
rate on debt outstanding.
The provision for estimated losses on the commercial mortgage portfolio
during the first quarter of 1996 declined approximately $.5 million when
compared to the same period of 1995 due to a reduction in the amount of loans
serviced and an improved commercial real estate environment. In addition, the
provisions for loan losses on home equity loans declined in the first quarter
of 1996 compared to the same period of 1995 due to a $27 million decrease in
the amount of home equity loans owned by the Company during the first quarter
of 1996 compared to a $26 million increase in home equity loans owned during
the same period of 1995.
14
<PAGE> 16
Insurance commissions for the first three months of 1996 were $3.4 million
compared to $3.5 million for the same period of 1995. 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, 1996, the Company capitalized approximately $1.8 million in
commissions paid on sales of annuities compared to $3.9 million during the same
period of 1995. Amortization of commission expense on annuities capitalized in
prior periods was $3.0 million during the three months ended March 31, 1996,
compared to $2.6 million during the same period of 1995.
Other operating expenses for the three months ended March 31, 1996 increased
approximately $3.5 million when compared to the same period of 1995 primarily
as the result of expansion of the Company's mortgage operations, including a
$1.4 million increase in occupancy, general operating and administrative
expenses and a $1.1 million increase in professional and legal expenses.
15
<PAGE> 17
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, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
---------------------------------------------------------
Corporate
Life Other Operations,
Mortgage Insurance & Eliminations Total
----------- ----------- ---------------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans . . $ 23,523 $ 9,422 $ 1,669 $ 34,614
Loan sale gains . . . . . . . . . . . . 39,809 - - 39,809
Investment income . . . . . . . . . . . 2,737 23,472 (704) 25,505
Loan servicing income . . . . . . . . . 5,381 (380) (768) 4,233
Net insurance premiums . . . . . . . . - 1,618 - 1,618
----------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . 71,450 34,132 197 105,779
----------- ---------- ---------- ----------
Expenses:
Interest on annuity policies . . . . . - 18,549 - 18,549
Personnel . . . . . . . . . . . . . . . 18,618 1,418 1,975 22,011
Interest . . . . . . . . . . . . . . . 6,977 1,176 530 8,683
Loan loss provision . . . . . . . . . . 2,556 22 - 2,578
Insurance commissions . . . . . . . . . - 3,363 62 3,425
Insurance benefits . . . . . . . . . . - 2,776 - 2,776
Other operating . . . . . . . . . . . . 15,757 4,168 (1,720) 18,205
----------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . 43,908 31,472 847 76,227
----------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes . . . . . . . . . . $ 27,542 $ 2,660 $ (650) $ 29,552
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1995
----------------------------------------------------------
Corporate
Life Other Operations,
Mortgage Insurance & Eliminations Total
----------- ----------- ---------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans . . $ 18,790 $ 9,267 $ 1,381 $ 29,438
Loan sale gains . . . . . . . . . . . . 25,450 - - 25,450
Investment income . . . . . . . . . . . 1,465 24,145 (599) 25,011
Loan servicing income . . . . . . . . . 6,084 (427) (823) 4,834
Net insurance premiums . . . . . . . . . - 2,102 - 2,102
----------- ---------- ---------- --------
Total . . . . . . . . . . . . . . 51,789 35,087 (41) 86,835
----------- ---------- ---------- --------
Expenses:
Interest on annuity policies . . . . . . - 19,526 - 19,526
Personnel . . . . . . . . . . . . . . . 14,530 1,406 1,135 17,071
Interest . . . . . . . . . . . . . . . . 3,643 396 1,855 5,894
Loan loss provision . . . . . . . . . . 3,498 566 - 4,064
Insurance commissions . . . . . . . . . - 3,444 104 3,548
Insurance benefits . . . . . . . . . . . - 2,429 - 2,429
Other operating . . . . . . . . . . . . 12,215 4,151 (1,612) 14,754
----------- ---------- ---------- --------
Total . . . . . . . . . . . . . . 33,886 31,918 1,482 67,286
----------- ---------- ---------- ---------
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . $ 17,903 $ 3,169 $ (1,523) $ 19,549
=========== ========== ========== =========
</TABLE>
16
<PAGE> 18
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 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
produced through the Company's branch (i.e., retail) network or wholesale loan
programs. In connection with its origination of home equity loans, the Company
relies on thorough underwriting and credit review procedures, a mortgage on the
borrower's residence and, in some cases, other security, and, in its retail
origination program, 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, the mortgage division serviced approximately $2.8 billion in loans
for third parties at March 31, 1996, $2.7 billion of which are home equity
loans. Substantially all of the home equity loans serviced for third parties
were publicly sold as mortgage backed securities ("pass-through certificates").
The purchasers of the pass-through certificates receive a credit enhanced
security which is achieved in part through a guaranty provided by a third party
insurer and by subordinating the excess interest spread retained by the Company
to the payment of scheduled principal and interest on the certificates. The
subordination of the excess interest spread retained by the Company relates to
credit losses which may occur after the sale of the loans and continues until
the earlier of the payment in full of the loans or termination of the agreement
pursuant to which the loans were sold. If cumulative payment defaults exceed
the amount subordinated, a third party insurer is obligated to pay any further
losses experienced by the owners of the pass-through certificates.
The Company is also obligated to cure, repurchase or replace loans
which may be determined after the sale to violate representations and
warranties relating to them and which are made by the Company at the time of
the sale. The Company regularly evaluates the quality of the loan portfolio
and estimates its risk of loss based upon historical loss experience,
prevailing economic conditions, estimated collateral value and such other
factors which, in management's judgment, are relevant in estimating the credit
risk in owned and/or serviced loans. Estimated losses on the owned portfolio
are provided for by an increase in the allowance for loan losses through a
charge to current operating income. At March 31, 1996, the Company's allowance
for loan losses was $14.2 million. For loans sold, the Company reduces the
amount of gain recognized on the sale by the estimated amount of credit losses,
and records such amount on its balance sheet in the allowance for loss on loans
serviced. At March 31, 1996, the allowance for loss on loans serviced was
$48.5 million. The maximum recourse associated with sales of home equity loans
according to terms of the loan sale agreements totaled approximately $544
million, of which amount approximately $534 million relates to the subordinated
cash and excess interest spread. Should credit losses on loans sold materially
exceed the Company's estimates for such losses, such consequence will have a
material adverse impact on the Company's operations.
At March 31, 1996, the contractual balance of loans serviced was
approximately $3.2 billion comprised of approximately $402 million serviced for
the Company and approximately $2.8 billion serviced for investors. The
portfolio is geographically diversified. Although the Company services loans
in 48 states, at March 31, 1996 a substantial portion of the loans serviced
were originated in Florida (9.9%), Ohio (9.6%) and Louisiana (8.7%),
respectively, and no other state accounted for more than 7.1% of the serviced
portfolio. Included in the serviced portfolio are commercial loans originated
by the Company, a substantial portion of which were originated in Florida
(25.2%), Georgia (20.2%) and Colorado (11.5%) and no other state accounted for
more than 7.6% of the commercial loans serviced. The risk inherent in such
concentrations is dependent not only upon regional and general economic
stability which affects property values, but also the financial well-being and
creditworthiness of the borrower.
17
<PAGE> 19
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
---------------------
Contractual Delinquencies % of Owned Serviced for % of
Balance Contractual Contractual by the Third Party Net Loans Average
Period Ended of Loans Balance Balance Company Investors Charged Off Loans*
- ------------ ----------- ------------- ----------- ---------- ----------- ----------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1996
- --------------
Home equity . . . . . . $ 2,892,158 $ 222,125 7.68% $ 6,881 $ 26,177 $ 2,984 0.44 %
Commercial . . . . . . 246,671 4,042 1.64% 17,319 6,222 244 0.40 %
Conventional . . . . . 54,627 2,398 4.39% - - (10) (0.07)%
Manufactured housing . 15,773 - - - - - -
----------- ----------- --------- --------- --------
Total . . . . . . $ 3,209,229 $ 228,565 7.12% $ 24,200 $ 32,399 $ 3,218
=========== =========== ========= ========= ========
December 31, 1995
- ----------------
Home equity . . . . . . $ 2,701,481 $ 220,145 8.15% 8,469 $ 21,604 $ 12,221 0.56 %
Commercial . . . . . . 251,241 4,518 1.80% 16,547 5,325 4,416 1.68 %
Conventional . . . . . 58,554 2,734 4.67% - - 132 0.20 %
Manufactured housing . 888 - - - - - -
----------- ----------- -------- --------- --------
Total . . . . $ 3,012,164 $ 227,397 7.55% $ 25,016 $ 26,929 $ 16,769
=========== =========== ======== ========= ========
March 31, 1995
- --------------
Home equity . . . . . . $ 1,895,955 $ 134,514 7.09% $ 7,527 $ 13,187 $ 3,470 0.76 %
Commercial . . . . . . 267,291 5,208 1.95% 21,509 10,738 210 0.32 %
Conventional . . . . . 70,986 2,634 3.71% 285 - 36 0.20 %
----------- ----------- -------- --------- --------
Total . . . . 2,234,232 $ 142,356 6.37% $ 29,321 $ 23,925 $ 3,716
=========== =========== ======== ========= ========
</TABLE>
*Annualized for the three months ended March 31, 1996 and 1995.
The above delinquency and loan loss experience represents the
Company's recent experience. However, the delinquency, foreclosure and net
loss percentages may be affected by the increase in the size and relative lack
of seasoning of a substantial portion of the portfolio. In addition, the
Company can neither quantify the impact of property value declines, if any, on
the home equity loans nor predict whether or to what extent or how long such
declines may exist. In a period of such declines, the rates of delinquencies,
foreclosures and losses on the home equity loans could be higher than those
theretofore experienced in the mortgage lending industry in general. Adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the home equity loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses. As a result, the information in the
above tables should not be considered as the only basis for assessing the
likelihood, amount or severity of delinquencies or losses in the future on home
equity loans and no assurance can be given that the delinquency and loss
experience presented in the tables will be indicative of such experience on
home equity loans.
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,
---------------------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . $ 14,891 $ 16,508
Loans charged to allowance
Home equity . . . . . . . . . . . . . . . . . . . (3,809) (3,827)
Commercial . . . . . . . . . . . . . . . . . . . . (244) (210)
Conventional . . . . . . . . . . . . . . . . . . . - (36)
---------- -----------
(4,053) (4,073)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . . . . . . 835 357
---------- -----------
Net loans charged off . . . . . . . . . . . . . . . . (3,218) (3,716)
Loan loss provision . . . . . . . . . . . . . . . . . 2,578 4,064
Reserve reclassification . . . . . . . . . . . . . . . (10) (14)
---------- ----------
Balance at end of period . . . . . . . . . . . . . . . $ 14,241 $ 16,842
========== ==========
Specific reserves . . . . . . . . . . . . . . . . . . $ 5,724 $ 6,353
Unallocated reserves . . . . . . . . . . . . . . . . . 8,517 10,489
---------- ----------
Total reserves . . . . . . . . . . . . . . . . . . . . $ 14,241 $ 16,842
========== ==========
</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, 1996, the Company owned $24.2 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 limited guarantees
and 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,
1996 1995 1995
----------- ------------- -----------
(in thousands)
<S> <C> <C> <C>
Allowance for loan losses
(applicable to loans and foreclosed properties
owned by the Company) . . . . . . . . . . . . . . . $ 14,241 $ 14,891 $ 16,842
Allowance for loss on loans serviced
(applicable to loans sold with recourse) . . . . . 48,490 44,970 29,580
----------- ------------- -----------
Total . . . . . . . . . . . . . . . . . . . . $ 62,731 $ 59,861 $ 46,422
=========== ============= ===========
</TABLE>
19
<PAGE> 21
Investment securities. The Company's investment portfolio consists
primarily of mortgage backed securities and corporate bonds, comprising 65.8%
and 29.0% of the portfolio at March 31, 1996, respectively. At March 31, 1996,
approximately 93.3% of the Company's portfolio of investment securities were
classified in an available-for-sale category and the carrying value adjusted to
fair value by means of an adjustment to stockholders' equity. The remainder of
the portfolio consists primarily of private placements made either directly or
through an investment partnership and are classified as held-to-maturity and
valued at cost. At March 31, 1996, the Company owned $.9 million in equity
securities classified as trading securities. The net unrealized gain in the
debt securities portfolio (fair value over amortized cost) at March 31, 1996
was $11.2 million compared to $43.8 million at December 31, 1995.
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 life insurance operations. The Company's
mortgage operations require continued access to short and long-term sources of
debt financing and the sale of loans and asset- backed securities. The
liquidity requirements for the Company's insurance operations are generally met
by funds provided from the sale of annuities and cash flow from its investments
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.
Mortgage. The principal cash requirements of the Company's mortgage
operations arise from loan originations, deposits to reserve accounts,
repayments of inter-company debt borrowed under the Company's senior notes and
short-term borrowings, payments of operating and interest expenses, and income
taxes related to loan sale transactions. Loan production is funded principally
through proceeds of warehouse facilities pending loan sales.
Substantially all of the loans originated or acquired by the Company
are sold. Net cash from operating activities of the Company in the first
quarter of 1996 and 1995 reflects approximately $423 million and $321 million,
respectively, in cash used for loan originations and acquisitions. The primary
source of funding for loan originations is derived from the reinvestment of
proceeds from the ultimate sale of loans in the secondary market which totaled
approximately $422 million and $282 million in the three months ended March 31,
1996 and 1995. In connection with the loan sale transactions in the secondary
market, third-party surety bonds and cash deposits by the Company as credit
enhancements have been provided. The loan sale transactions have required the
subordination of certain cash flows payable to UCLC and its subsidiaries to the
payment of principal and interest due to certificate holders. In connection
with these transactions, UCLC has been required, in some instances, to fund an
initial deposit, and thereafter, in each transaction, a portion of the amounts
receivable by UCLC and its subsidiaries from the excess interest spread has been
required to be placed and maintained in a reserve account to the extent of the
subordination requirements. The subordination requirements generally provide
that the excess interest spread is payable to a reserve account until a
specified level of cash, which is less than the maximum subordination amount, is
accumulated therein. The capitalized excess servicing income of the Company is
subject to being utilized first to replenish cash paid from the reserve account
to fund shortfalls in collections from borrowers who default on the payment of
principal or interest on the loans underlying the pass-through certificates
issued until the total of the Company's deposits into the reserve account equal
the maximum subordination amount. After the Company's deposits into the
reserve account equal the maximum subordination amount for a transaction, the
subordination of the related excess interest spread (including the guarantee fee
payable therefrom) for these purposes is terminated. The excess interest spread
required to be deposited and maintained in the respective reserve accounts will
not be available to support the cash flow requirements of the Company until such
amount exceeds the maximum subordinated amount (other than amounts, if any, in
excess of the specified levels required to be maintained in the reserve
accounts, which may be distributed periodically to the Company). At March 31,
1996, the amounts on deposit in such reserve accounts totaled $179 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
20
<PAGE> 22
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.
Life insurance. The principal cash requirement of UCLIC consists 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
annuity 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 (which excludes annuity sales and
surrenders) in the first quarter of 1996 and 1995 was approximately $24.7
million and $24.2 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 1996 and 1995 reflect approximately $22.5 million
and $48.6 million, respectively, in cash received primarily from sales by UCLIC
of its annuity products. The Company believes that the decrease in annuity
sales is due in part to the interest rate environment and to the announcement
by the Company that it had signed a Stock Purchase Agreement (the "Agreement")
dated as of January 30, 1996 for the sale of all of the outstanding capital
stock of UCLIC. The Agreement is subject to approval by UCFC's shareholders
and regulatory authorities and the satisfaction of other conditions. Cash used
by financing activities during these three month periods also reflects payments
of $68.3 million and $53.8 million primarily on annuity products resulting from
policyholder surrenders and claims. The Company believes the increase in
annuity surrenders is due in part to an increase in the amount of annuity
policies which were beyond the surrender penalty period and the announcement of
the Agreement discussed above. The interest margin on the Company's annuity
liabilities during the first quarter of 1996 was 2.44% compared to 2.38% during
the same period of 1995. UCLIC's investments at March 31, 1996 included
approximately $324 million in residential and commercial mortgage loans, and
the amortized cost of its bond portfolio included $341 million in corporate and
government bonds and private debt placements and $768 million in
mortgage-backed securities.
As a Louisiana domiciled insurance company, UCLIC is subject to
certain regulatory restrictions on the payment of dividends. UCLIC had the
capacity at March 31, 1996 to pay dividends of $9.2 million. UCLIC did not pay
any dividends to the Company during 1993, 1994 or 1995 in order to retain
capital in UCLIC.
21
<PAGE> 23
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Deloitte & Touche LLP, have performed a
review of the accompanying unaudited consolidated balance sheet as of March 31,
1996 and the related consolidated statements of income and cash flows for the
three months ended March 31, 1996 and 1995 and previously audited and expressed
an unqualified opinion dated February 29, 1996 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.
22
<PAGE> 24
INDEPENDENT ACCOUNTANTS' REPORT
United Companies Financial Corporation:
We have reviewed the accompanying consolidated balance sheet of United
Companies Financial Corporation and subsidiaries as of March 31, 1996, and the
related consolidated statements of income and cash flows for the three-month
periods ended March 31, 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, 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
May 10, 1996
23
<PAGE> 25
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 LLP
(27) Financial Data Schedule
(b) Reports on Form 8-K
On February 9, 1996, the Company filed a Current Report on Form
8-K to report that it had signed a definitive agreement with
respect to the sale of all of the outstanding capital stock of its
life insurance subsidiary, United Companies Life Insurance
Company.
24
<PAGE> 26
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
<TABLE>
<S> <C>
Date: 5/10/96 By: /s/ J. Terrell Brown
----------------------- ------------------------------------
J. Terrell Brown
Chairman and Chief Executive Officer
Date: 5/10/96 By: /s/ Dale E. Redman
----------------------- ------------------------------------
Dale E. Redman
Executive Vice President and
Chief Financial Officer
</TABLE>
25
<PAGE> 27
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Page No.
----------- --------
<S> <C> <C>
11 Statement re computation of
earnings per share 27
15 Consent of Deloitte & Touche LLP 28
27 Financial Data Schedule 29
</TABLE>
26
<PAGE> 1
EXHIBIT 11
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1996 1995
------------ -------------
(in thousands, except per share amounts)
<S> <C> <C>
Primary Earnings Per Share
- --------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . . . . . . $ 18,958 $ 12,824
Less: Loss from discontinued operations . . . . . . . . . (1,119) (128)
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,839 $ 12,696
=========== ============
Weighted average number of common and
common equivalent shares:
----------------------------------------
Average common shares outstanding . . . . . . . . . . . . . 27,850 27,258
Add: Dilutive effect of stock options after
application of treasury stock method . . . . . . . 868 904
Dilutive effect of preferred stock
after application of "if converted" method . . . . 3,230 -
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,948 28,162
=========== ============
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . . . . . . $ .59 $ .46
Loss from discontinued operations . . . . . . . . . . . . . (.03) (.01)
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .56 $ .45
=========== ============
Fully Diluted Earnings Per Share
- --------------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . . . . . . $ 18,958 $ 12,824
Less: Loss from discontinued operations . . . . . . . . . (1,119) (128)
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,839 $ 12,696
=========== ============
Weighted average number of common and
all dilutive contingent shares:
----------------------------------------
Average common shares outstanding . . . . . . . . . . . . . 27,850 27,258
Add: Dilutive effect of stock options after
application of treasury stock method . . . . . . . 965 988
Dilutive effect of preferred stock
after application of "if converted" method . . . . 3,910 -
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,725 28,246
=========== ============
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . . . . . . $ .58 $ .46
Loss from discontinued operations . . . . . . . . . . . . . (.03) (.01)
----------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .55 $ .45
=========== ============
</TABLE>
27
<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, 1996 and 1995, as indicated in
our report dated May 10, 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 March 31, 1996, 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, 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
May 13, 1996
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 56,099
<SECURITIES> 1,170,559
<RECEIVABLES> 420,405
<ALLOWANCES> 14,241
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 39,167
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,387,936
<CURRENT-LIABILITIES> 0
<BONDS> 326,883
<COMMON> 58,731
0
3,910
<OTHER-SE> 312,819
<TOTAL-LIABILITY-AND-EQUITY> 2,387,936
<SALES> 0
<TOTAL-REVENUES> 105,779
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 64,966
<LOSS-PROVISION> 2,578
<INTEREST-EXPENSE> 8,683
<INCOME-PRETAX> 29,552
<INCOME-TAX> 10,594
<INCOME-CONTINUING> 18,958
<DISCONTINUED> (1,119)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,839
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
