<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period from ........... to ..........
Commission file number 1-7067
UNITED COMPANIES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Louisiana 71-0430414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 Essen Lane 70809
Baton Rouge, Louisiana (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including
area code (504) 987-0000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of $2.00 par value common stock issued and
outstanding as of October 24, 1997 was 28,717,752, excluding 1,159,682 treasury
shares.
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<PAGE> 2
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months and nine months ended September 30, 1997 and 1996 . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 5-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-17
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Independent Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART II - OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
<PAGE> 3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
1997 December 31,
Assets (Unaudited) 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents ............................................ $ 583 $ 14,064
Investment securities
Trading .......................................................... -- 17,418
Available for sale ............................................... 17,434 17,510
Loans - net .......................................................... 174,713 118,750
Interest-only and residual certificates .............................. 834,034 604,474
Accrued interest receivable .......................................... 76,664 61,483
Property - net ....................................................... 60,627 46,323
Capitalized mortgage servicing rights ................................ 40,274 23,806
Other assets ......................................................... 30,485 21,445
----------- -----------
Total assets .............................................. $ 1,234,814 $ 925,273
=========== ===========
Liabilities and Stockholders' Equity
Notes payable ........................................................ $ 595,886 $ 425,671
Deferred income taxes payable ........................................ 81,375 52,971
Managed cash overdraft ............................................... 17,897 --
Other liabilities .................................................... 57,955 26,354
----------- -----------
Total liabilities ......................................... 753,113 504,996
----------- -----------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 1,955,000 shares of 6 3/4% PRIDES(sm) ($44 per share
liquidation preference) ................................... 3,910 3,910
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 29,862,674 and 29,627,734 shares .................... 59,725 59,255
Additional paid-in capital ....................................... 186,211 184,397
Net unrealized gain on securities ................................ 85 48
Retained earnings ................................................ 250,459 190,579
Treasury stock and ESOP debt ..................................... (18,689) (17,912)
----------- -----------
Total stockholders' equity ................................... 481,701 420,277
----------- -----------
Total liabilities and stockholders' equity ................ $ 1,234,814 $ 925,273
=========== ===========
</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,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Loan sale gains .................................. $ 79,636 $ 53,637 $ 190,556 $ 143,325
Finance income, fees earned and other
loan income ................................. 43,814 35,270 126,613 92,747
Investment income ................................ 5,628 3,920 16,508 9,472
Other ............................................ 1,388 1,358 4,440 3,651
--------- --------- --------- ---------
Total .................................... 130,466 94,185 338,117 249,195
--------- --------- --------- ---------
Expenses:
Personnel ........................................ 35,790 27,004 94,799 70,774
Interest ......................................... 16,906 10,767 43,373 27,586
Other operating .................................. 35,506 18,417 89,061 52,890
--------- --------- --------- ---------
Total .................................... 88,202 56,188 227,233 151,250
--------- --------- --------- ---------
Income from continuing operations before
income taxes ..................................... 42,264 37,997 110,884 97,945
Provision for income taxes .......................... 15,215 13,869 39,918 35,761
--------- --------- --------- ---------
Income from continuing operations ................... 27,049 24,128 70,966 62,184
Income (loss) from discontinued operations:
Income from discontinued operations, net of income
tax expense of $1,651 ........................ -- -- -- 3,199
Loss on disposal, net of income tax
benefit of $868 .............................. -- -- -- (7,731)
--------- --------- --------- ---------
Total .................................... -- -- -- (4,532)
--------- --------- --------- ---------
Net income .......................................... $ 27,049 $ 24,128 70,966 $ 57,652
========= ========= ========= =========
Per share data:
Income from continuing operations ................ $ 0.83 $ 0.74 $ 2.17 $ 1.90
Loss from discontinued operations ................ -- -- -- (0.14)
--------- --------- --------- ---------
Net income ....................................... $ 0.83 $ 0.74 $ 2.17 $ 1.76
========= ========= ========= =========
</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,
-------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations .......................................... $ 70,966 $ 62,184
Adjustments to reconcile income from continuing operations
to net cash used by continuing operating activities:
Increase in accrued interest receivable ............................... (15,181) (14,752)
Increase (decrease) in other assets ................................... (6,791) 4,096
Increase in other liabilities ......................................... 31,760 19,762
Increase in interest-only and residual certificates ................... (229,560) (130,618)
Increase in capitalized mortgage servicing rights ..................... (22,773) (13,428)
Amortization of capitalized mortgage servicing rights ................. 6,305 1,690
Loan loss provision on owned loans .................................... 2,957 (178)
Amortization and depreciation ......................................... 5,360 3,017
Deferred income taxes ................................................. 28,384 4,648
Proceeds from sales and principal collections of loans
held for sale ..................................................... 2,133,768 1,736,577
Originations and purchases of loans held for sale ..................... (2,192,688) (1,765,280)
Decrease (increase) in trading securities ............................. 17,418 (15,603)
----------- -----------
Net cash used by continuing operating activities ............ (170,075) (107,885)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of available for sale securities .............. 1,375 --
Purchase of available for sale securities ......................... (1,242) (87)
Proceeds from disposition of insurance subsidiaries ............... -- 106,870
Capital expenditures .............................................. (17,644) (7,253)
----------- -----------
Net cash (used) provided by investing activities ............ (17,511) 99,530
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of subordinated notes ...................... 146,855 --
Proceeds from construction and mortgage loans ..................... 3,846 2,122
Payments on construction and mortgage loans ....................... (12,612) --
(Decrease) increase in debt with maturities of three months or less (47,100) 30,550
Increase in revolving credit facility ............................. 95,400 --
(Decrease) increase in warehouse loan facility .................... (18,136) 404
Proceeds from ESOP debt ........................................... 850 4,000
Payments on ESOP debt ............................................. (1,137) (822)
Cash dividends paid ............................................... (11,086) (10,207)
Increase (decrease) in managed cash overdraft ..................... 17,897 (20,221)
Increase in unearned ESOP compensation ............................ (777) (3,178)
Proceeds from exercise of stock options ........................... 105 1,247
----------- -----------
Net cash provided by financing activities ................... 174,105 3,895
----------- -----------
Decrease in cash and cash equivalents ...................................... (13,481) (4,460)
Cash and cash equivalents at beginning of period ........................... 14,064 5,284
----------- -----------
Cash and cash equivalents at end of period ................................. $ 583 $ 824
=========== ===========
</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,
1996, filed with the United States Securities and Exchange Commission ("the
Commission").
The consolidated results of operations for the three months and nine months
ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full year. Certain 1996 amounts have been reclassified
to conform with the current year presentations. Such reclassifications had
no effect on net income.
2. INTEREST-ONLY AND RESIDUAL CERTIFICATES.
During the first quarter of 1997, the Company implemented, effective as of
January 1, 1997, Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS No. 125"). As a result of the
implementation of SFAS No. 125, net income for the nine months ended
September 30, 1997 increased by $4.5 million, or $.14 per share on a fully
diluted basis. The following summary reflects the changes in the Company's
Interest-only and residual certificates during the first nine months of
1997.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Balance, beginning of year . . . . . . . . . . . . . . . . .$ 604,474
Interest-only and residual certificates on loans sold . . . . 247,891
Net increase in allowance for losses on loans sold . . . . . (20,313)
Net increase in reserve accounts . . . . . . . . . . . . . . 117,046
Amortization of interest-only and residual certificates . . . (115,064)
-----------
Balance, September 30, 1997 . . . . . . . . . . . . . . . . .$ 834,034
===========
</TABLE>
The following schedule sets forth the components of the Interest-only and
residual certificates owned by the Company, which are recorded at fair
value.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Certificated interests . . . . . . . . . . . . . . . . $ 559,220 $ 426,393
Temporary investments - reserve accounts . . . . . . . 368,229 251,183
Allowance for losses on loans serviced . . . . . . . . (93,415) (73,102)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . $ 834,034 $ 604,474
=========== ===========
</TABLE>
5
<PAGE> 7
3. LOANS
Loans Owned. The following schedule sets forth the components of
Loans-net as of the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Receivables held for sale . . . . . . . . . . . . . . . $ 115,804 $ 69,558
Other receivables . . . . . . . . . . . . . . . . . . . 57,875 39,831
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . 173,679 109,389
Real estate owned:
Home equity . . . . . . . . . . . . . . . . . . . 6,650 6,647
Commercial and other. . . . . . . . . . . . . . . . 4,009 9,446
Manufactured housing chattel contracts. . . . . . . 84 372
Nonrefundable loan fees . . . . . . . . . . . . . . . . (2,813) (2,945)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (2,393) (18)
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . 179,216 122,891
------------ ------------
Less:
Allowance for loan losses . . . . . . . . . . . . (4,503) (4,141)
------------ ------------
$ 174,713 $ 118,750
============ ============
</TABLE>
Included in Loans-net at September 30, 1997 and December 31, 1996 were
nonaccrual loans totaling $10.7 million and $6.6 million, respectively.
Loans Serviced. The following table sets forth the loans serviced by the
Company for third parties at September 30, 1997 and December 31, 1996, by
type of loan. Substantially all of these loans were originated by the
Company.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Home equity . . . . . . . . . . . . . . . . . . . $ 4,851,311 $ 3,940,289
Manufactured housing chattel contracts . . . . . 247,596 107,741
Other . . . . . . . . . . . . . . . . . . . . . . 36,071 44,649
--------------- --------------
Total . . . . . . . . . . . . . . . . . $ 5,134,978 $ 4,092,679
=============== ==============
</TABLE>
4. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Senior debt:
------------
7% Senior unsecured notes due July, 1998 . . . . . . . . . $ 100,000 $ 100,000
9.35% Senior unsecured notes due November, 1999 . . . . . 125,000 125,000
7.7% Senior unsecured notes due January, 2004 . . . . . . 100,000 100,000
Short-term borrowings . . . . . . . . . . . . . . . . . . -- 47,100
Revolving credit facility . . . . . . . . . . . . . . . . 95,400 --
Warehouse facilities . . . . . . . . . . . . . . . . . . . 5,536 23,672
ESOP debt . . . . . . . . . . . . . . . . . . . . . . . . 10,846 11,133
Mortgage loan . . . . . . . . . . . . . . . . . . . . . . -- 5,473
Construction loan . . . . . . . . . . . . . . . . . . . . -- 3,293
----------- ----------
Total senior debt . . . . . . . . . . . . . . . . . . 436,782 415,671
----------- ----------
Subordinated debt:
------------------
8.375% Subordinated unsecured notes due July, 2005 . . . . 149,104 --
Subordinated debentures . . . . . . . . . . . . . . . . . 10,000 10,000
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 595,886 $ 425,671
=========== ==========
</TABLE>
6
<PAGE> 8
In April 1997, the Company entered into a $800 million senior unsecured
revolving credit facility syndicated with a total of 22 participating
lenders. The Company used a portion of the proceeds from this three-year
credit facility to refinance existing debt and is using the remaining
proceeds for general corporate purposes, including interim funding of loan
originations.
In June 1997, the Company publicly sold $150 million of its subordinated
unsecured notes (the "Notes"). The Notes provide for interest payable
semi-annually and are not redeemable prior to their maturity on July 1,
2005. The Notes bear interest at 8 3/8% per annum and were issued at a
discount from par. Such discount is being amortized using the effective
interest method as an adjustment to yield over the life of the Notes
resulting in an effective interest rate on the Notes of 8.48% per annum.
The Notes rank subordinate and junior in right of payment to the prior
payment of all existing and future senior indebtedness of the Company.
5. CASH PAID FOR INTEREST AND INCOME TAXES.
During the nine months ended September 30, 1997 and 1996, the Company paid
interest on notes payable in the amount of $34.1 million and $25.2 million,
respectively. During the nine months ended September 30, 1997 and 1996,
the Company paid income taxes in the amount of $9.5 million and $18.3
million, respectively.
6. DISCONTINUED OPERATIONS; COMMITMENTS AND CONTINGENCIES.
As discussed in Notes 11 and 12 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, the Company has certain contingencies
in connection with the sale, during 1996, of its investments in United
General Title Insurance Company ("UGTIC") and United Companies Life
Insurance Company ("UCLIC") and the divestiture, during 1993, of Foster
Mortgage Company ("FMC"). There have been no material changes in these
contingencies in the nine months ended September 30, 1997. The Company
did, however, record a charge of $1.6 million in the third quarter of 1997
for policy claims paid by UGTIC over the level specified in the definitive
stock sale agreement for which the Company remained liable. Further,
certain claims of the institutional lenders against the Company in the
bankruptcy proceedings of FMC have been set for trial before the bankruptcy
court on November 18, 1997. The operations of UGTIC, UCLIC and FMC have
been classified as discontinued operations.
The Company used a prefunding feature in connection with its home equity
securitization transaction during the third quarter of 1997. At September
30, 1997, approximately $60.7 million was held in a prefunding account for
the purchase of the Company's home equity loans during the fourth quarter
of 1997.
In ruling on a pretrial motion of the plaintiffs in a class action lawsuit
pending in Alabama state district court involving 910 home equity loans
alleged to be subject to the Alabama Mini Code, Autrey v. United Companies
Lending Corporation, the trial court entered an order on May 28, 1997,
holding that retroactive application of the 1996 amendments to the Alabama
Mini Code would be unconstitutional as applied to the plaintiffs' class.
The 1996 amendments, which in general limited the remedy for finance
charges in excess of the maximum permitted by the Alabama Mini Code, were
expressly made retroactive by the Alabama legislature. The Company
strenuously disagrees with the trial court's holding and believes that the
liability, if any, should be limited to $495,000, being the aggregate
finance charges allegedly exceeding the maximum permitted by the Alabama
Mini Code, plus interest thereon. If upheld after a trial on the merits
and related appeals, the trial court's holding could result in a liability
for the Company's subsidiary presently estimated by the Company to be
approximately $15 million. The Company's motion to vacate the May 28, 1997
order was denied by the trial court. The Company does not believe the
Alabama Mini Code provision alleged to have been violated is applicable to
the loans in this class and its motion for summary judgment to dismiss all
claims asserted under this provision to the Alabama Mini Code, based on a
recent decision of an Alabama state appeals court that this provision is
not applicable to loans in excess of $2,000, is pending before the trial
court. The Company further believes that it has other valid defenses to
the claims asserted in this suit and intends to continue its vigorous
defense of this matter.
7
<PAGE> 9
7. ACCOUNTING STANDARDS.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). This Statement establishes new standards for computing and
presenting earnings per share ("EPS") information and requires dual
presentation of "basic" and "diluted" EPS on the face of the income
statement. SFAS No. 128 replaces the presentation of "primary" and "fully
diluted" required by APB Opinion No. 15 and its related interpretations and
is effective for financial statements issued for periods ending after
December 15, 1997. At that time, the Company will be required to change
the method currently used to compute EPS and to restate all prior periods.
Earlier implementation of the provisions of SFAS No. 128 is not permitted.
Basic EPS excludes common stock equivalents from the EPS calculation, while
calculation of diluted EPS is generally consistent with the Company's
current method of determining fully diluted EPS. Basic and diluted EPS, as
computed under SFAS No. 128, would have been $.87 and $.83 and $2.27 and
$2.17, respectively, for the three months and nine months ended September
30, 1997.
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 and identifies the major factors which influenced the results of
operations of the Company during the indicated periods.
RESULTS OF OPERATIONS
The Company's Consolidated Financial Statements present United Companies
Life Insurance Company ("UCLIC") and United General Title Insurance Company
("UGTIC") as discontinued operations. Discussed below are results of
continuing operations for the periods presented.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Income from continuing operations for the first nine months of 1997 was
$71.0 million ($2.17 per share based on 32.7 million weighted average shares
outstanding) compared to $62.2 million ($1.90 per share based on 32.7 million
weighted average shares outstanding) for the same period of 1996. In
comparison to the 1996 period, the increase in income in the 1997 period was
primarily the result of an increase of approximately $265 million and $122
million, respectively, in the amount of home equity loans and manufactured
housing contracts sold as well as the recognition of loan sale gains and loan
fees in connection with such sales.
Revenues. The following table sets forth information regarding the
components of the Company's revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Loan sale gains . . . . . . . . . . . . . . . . . . . . $ 190,556 $ 143,325
Finance income, fees earned and other loan income . . . 126,613 92,747
Investment income . . . . . . . . . . . . . . . . . . . 16,508 9,472
Other . . . . . . . . . . . . . . . . . . . . . . . . . 4,440 3,651
--------------- --------------
Total . . . . . . . . . . . . . . . . . . . . $ 338,117 $ 249,195
=============== ==============
</TABLE>
Loan sale gains increased $47.2 million during the first nine months of
1997 over the same period in 1996. The increase in the amount of loan sale
gains was due primarily to the increase in the amount of home equity loans
and manufactured housing contracts sold and a change in the mix of fixed, ARM
and hybrid home equity loan products sold. Loan sale gains for the nine months
ended September 30, 1997 also include the capitalization of mortgage servicing
rights in the amount of $22.8 million compared to $13.4 million for same period
of 1996. The positive effect of these factors was partially offset by costs
totaling $7.4 million incurred on a series of interest rate hedge mechanisms
implemented in connection with the Company's 1997 second and third quarter
securitization transactions. There were no open hedge positions at December 31,
1996 or September 30, 1997.
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,
------------------------------------- --------------------------------------
1997 1996 1997 1996
------------ --------------- ----------- --------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans sold......................... $ 1,827,357 $ 1,562,205 $ 225,974 $ 103,556
Average coupon..................... 11.11% 11.25% 10.82% 11.00%
Interest spread retained........... 4.78% 4.71% 3.63% 3.25%
Loan sale gains.................... $ 175,113 $ 137,060 $ 15,443 $ 6,265
</TABLE>
9
<PAGE> 11
Approximately $136 million and $422 million of the home equity loans sold
in securitizations during 1997 have a fixed interest rate per annum for two and
three years, respectively, then convert into an adjustable rate for the
remaining life of the loan. The pass-through rate on the certificates backed
by these loans is based on a floating interest rate and is calculated by
reference to the London interbank offered rate for one-month U.S. dollar
deposits ("1-month LIBOR"). Additionally, during 1996 and the first nine
months of 1997, approximately $320 million and $303 million, respectively, of
the fixed rate home equity loans were sold in securitizations at a pass-through
rate based on the 1 month LIBOR. The foregoing securitizations were
structured so that the maturity of these floating interest rate pass-through
certificates is anticipated to be approximately one year. The remaining
principal balance of these loans at September 30, 1997 was approximately $372
million.
Fluctuations in and the level of market interest rates 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. The
Company has taken actions during rising interest rate environments 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, however,
will generally lag the impact of market rate fluctuations. The Company has
also utilized interest rate hedge mechanisms to mitigate the impact on earnings
of market rate fluctuations. The Company incurred costs in the amount of $7.4
million for such mechanisms implemented in connection with its 1997 second and
third quarter securitization transactions. 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 1997, approximately $60.7 million was held
in prefunding accounts for purchase of the Company's home equity loans during
the fourth quarter of 1997.
Finance income, fees earned and other loan income increased $34 million for
the first nine months of 1997 compared to the same period of 1996 as the result
of the following factors: (i) growth in the portfolio of loans held pending
loan sales; (ii) a $1.5 billion increase in the average portfolio of loans
serviced; (iii) the recognition of loan fees at the time of sale of the loans
and the impact of finance income earned from the manufactured housing unit; and
(iv) the positive effect of implementation of SFAS No. 125 which increased
finance income by $8.9 million as the result of changes required in the method
of valuing the Company's retained interests in loans sold. 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,
----------------------------------
1997 1996
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Servicing fees and excess interest collected . . . . . $ 141,165 $ 96,279
Loan origination fees . . . . . . . . . . . . . . . . . 82,032 63,411
Loan interest . . . . . . . . . . . . . . . . . . . . . 17,966 14,822
Other loan income . . . . . . . . . . . . . . . . . . . 10,011 6,323
Amortization of interest-only
and residual certificates . . . . . . . . . . . . . . (115,064) (89,373)
Amortization of mortgage servicing rights . . . . . . . (6,305) (1,690)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (3,192) 2,975
---------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 126,613 $ 92,747
========== ============
</TABLE>
The increase in servicing fees earned reflects the growth in the portfolio
of loans serviced for third parties. The average portfolio of loans serviced
for third party investors was $4.6 billion and $3.1 billion for the nine months
ended September 30, 1997 and 1996, respectively. The increase in amortization
of interest-only and residual
10
<PAGE> 12
certificates as well as mortgage servicing rights is likewise related to the
increase in the amount of loans serviced for third parties.
During the nine months ended September 30, 1997 and 1996, the Company sold
approximately $1.8 billion and $1.6 billion, respectively, in home equity loans
and recognized approximately $71.6 million and $63.3 million, respectively, in
loan origination fees in connection with these sales.
The Company estimates that non-accrual loans reduced loan interest for the
first nine months of 1997 and 1996 by approximately $27.9 million and $14.9
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, 1997, the average amount of
non-accrual loans owned and/or serviced by the Company was $282 million
compared to approximately $153 million during the same period of 1996.
Investment income totaled $16.5 million for the first nine months of 1997
compared to investment income of $9.5 million during the same period of 1996.
Investment income is primarily related to interest earned on funds in reserve
accounts established in connection with loan sales in securitization
transactions.
Other income includes income earned by the Company's property management
and telecommunication services operations with respect to its office park. In
the first nine months of 1996, Other income also included overhead
reimbursement from discontinued operations prior to their disposition.
Expenses. The following table presents the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1997 1996
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Personnel . . . . . . . . $ 94,799 $ 70,774
Interest . . . . . . . . 43,373 27,586
Other operating . . . . . 89,061 52,890
----------- -------------
Total . . . . . . . $ 227,233 $ 151,250
=========== =============
</TABLE>
Personnel expenses for the nine months ended September 30, 1997, increased
approximately $24.0 million compared to the same period of 1996 primarily
because of costs associated with the expansion of the Company's lending
operations. Approximately $3.5 million of the increase in personnel costs is
related to the Company's manufactured housing lending operations. The
remaining increase is primarily related to expansion of the Company's lending
distribution network and incentive compensation paid as a result of the
increase in home equity loan production.
Interest expense for the first nine months of 1997 increased $15.8 million
from the same period of 1996 primarily as the result of an increase in the
average amount of debt outstanding. See "Liquidity and Capital Resources."
Other operating expenses for the nine months ended September 30, 1997
increased approximately $36.2 million when compared to the same period of 1996
primarily as the result of expansion of the Company's lending operations. The
increase in Other operating expenses included a $15.2 million increase in
advertising and a $5.5 million increase in occupancy and general office
expenses. In addition, Other operating expenses during the third quarter of
1997 includes a $1.6 million charge for claims related to the Company's sale of
UGTIC in February of 1996. Under the stock sale agreement with the purchaser of
UGTIC, the Company is liable for policy claims paid by UGTIC over certain
specified levels for a 10 year period after the sale. The Company's liability
for such policy claims is limited to the remaining balance of approximately $2.5
million of the notes received by the Company in connection with the sale.
11
<PAGE> 13
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 offered and sold, with servicing rights retained. The
purchasers of the pass-through certificates receive a credit enhanced security
which is provided in part in home equity loan securitizations through a
guaranty provided by a third party insurer or, in connection with certain
manufactured housing contract securitization transactions, through a
senior/subordinated structure. Credit enhancement for the pass-through
certificates is also provided by subordinating a cash deposit and the excess
interest spread retained by the Company to the payment of scheduled principal
and interest on the certificates. The subordination of the cash deposit and
the excess interest spread retained by the Company relates to credit losses
which may occur after the sale of the loans and contracts and generally
continues until the earlier of the payment in full of the loans and contracts
or termination of the agreement pursuant to which the loans and contracts were
sold. If cumulative payment defaults exceed the amount subordinated, a third
party insurer, except in certain manufactured housing securitization
transactions, is obligated to pay any further losses experienced by the owners
of the pass-through certificates. Such losses are borne first by the
subordinated pass-through certificates in certain of the Company's
manufactured housing contract securitization transactions.
The Company is also obligated to cure, repurchase or replace loans and
contracts which may be determined after the sale to violate representations and
warranties relating to them and which are made by the Company at the time of
the sale. The Company regularly evaluates the quality of the loan portfolio
and estimates its risk of loss based upon historical loss experience,
prevailing economic conditions, estimated collateral value and such other
factors which, in management's judgment, are relevant in estimating the credit
risk in owned and/or serviced loans. For loans and contracts sold, the Company
estimates the amount of credit losses at the time of sale and, because such
amount is a component of and is considered in determining the fair value of
Interest-only and residual certificates, records such amount on its balance
sheet as a reduction of this asset. Estimated losses on the owned portfolio
are provided for by an increase in the allowance for loan losses through a
charge to current operating income. At September 30, 1997, the carrying value
of the Company's interest-only and residual certificates was reduced by $93.4
million to provide for estimated credit losses on loans sold. At September 30,
1997 the allowance for loan losses on owned loans totaled $4.5 million. (See
also the analysis of the allowance for loan losses below). The maximum
recourse associated with sales of home equity loans and manufactured housing
contracts according to terms of the sale agreements totaled approximately $1.0
billion at September 30, 1997. 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, 1997, the contractual balance of home equity loans
serviced was approximately $5.0 billion, substantially all of which are owned
by and serviced for third party investors. The portfolio is geographically
diversified. Although the Company services loans in 50 states, at September
30, 1997 a substantial portion of the home equity loans serviced were
originated in California (10.2%), Louisiana (7.9%), Florida (7.5%), and Ohio
(6.6%), respectively, and no other state accounted for more than 5.8% of the
serviced portfolio. In addition, at September 30, 1997, the Company serviced
approximately $260 million of manufactured housing contracts, 30.7% of which
were originated in Texas, 15.2% in South Carolina, 13.5% in North Carolina and
9.3% in Georgia. The risk inherent in geographic concentrations is dependent
not only upon regional and general economic stability which affects property
values, but also the financial well-being and creditworthiness of the borrower.
12
<PAGE> 14
The following table provides certain contractual delinquency and default
information for home equity loans serviced as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------------- --------------------------
% OF % OF
CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL
BALANCE BALANCE BALANCE BALANCE
-------------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Home equity loans
serviced....................... $ 5,001,501 $ 4,040,138
============== =============
Delinquency
30-59 days..................... $ 185,426 3.71% $ 136,976 3.39%
60-89 days..................... 47,602 0.95 53,124 1.31
90+ days....................... 24,911 0.50 28,663 0.71
-------------- --------- ------------- ---------
257,939 5.16 218,763 5.41
-------------- --------- ------------- ---------
Defaults
Foreclosures in process........ 190,743 3.81 135,779 3.36
Bankruptcy..................... 113,673 2.27 73,887 1.83
-------------- --------- ------------- ---------
304,416 6.08 209,666 5.19
-------------- --------- ------------- ---------
Total delinquency
and defaults................. $ 562,355 11.24% $ 428,429 10.60%
============== ========= ============= =========
</TABLE>
The contractual balances exclude home equity real estate owned and/or
serviced which totaled $84.9 million and $52.6 million at September 30, 1997 and
December 31, 1996, respectively. The charge-off rate on the average home equity
loan portfolio for the first nine months of 1997 was .64% (annualized) and was
.51% for 1996.
The following table provides certain contractual delinquency information for
manufactured housing contracts serviced as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Number of manufactured housing contracts ..... 12,097 5,412
Delinquency(1)
--------------
30-59 days ................................. 2.43% 1.88%
60-89 days ................................. .78 .57
90+ days ................................. 1.00 .16
------------ ------------
4.21% 2.61%
============ ============
Manufactured housing contracts in $ 2,617 $ 725
repossession ................................ ============ ============
</TABLE>
(1) As a percentage of the number of manufactured housing contracts as of the
date indicated and excluding contracts already in repossession.
13
<PAGE> 15
The following table provides certain contractual delinquency and default
data with respect to the Company's home equity loans serviced, by year of loan
origination, as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY ----------------------------
------------------------------------- FORECLOSURES TOTAL
CONTRACTUAL IN BANK- DELINQUENCY
YEAR OF PRODUCTION BALANCE 30-59 60-89 90+ TOTAL PROCESS RUPTCY TOTAL & DEFAULTS
- ------------------ ------------ ------ -------- ------- --------- --------- -------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 & prior . . . $ 83,278 5.06% 1.05% 0.99% 7.10% 5.19% 6.22% 11.41% 18.51%
1992 . . . . . . . 48,250 5.11% 0.82% 1.41% 7.34% 5.96% 5.82% 11.78% 19.12%
1993 . . . . . . . 149,616 5.32% 1.31% 0.75% 7.38% 4.92% 5.37% 10.29% 17.67%
1994 . . . . . . . 332,598 5.92% 1.52% 0.70% 8.14% 5.89% 7.16% 13.05% 21.19%
1995 . . . . . . . 788,921 5.70% 1.31% 0.81% 7.82% 8.64% 5.22% 13.86% 21.68%
1996 . . . . . . . 1,716,079 4.66% 1.32% 0.65% 6.63% 4.55% 1.77% 6.32% 12.95%
1997 . . . . . . . 1,882,759 1.39% 0.33% 0.13% 1.85% 0.55% 0.12% 0.67% 2.52%
------------
Total . . . . . $ 5,001,501 3.71% 0.95% 0.50% 5.16% 3.81% 2.27% 6.08% 11.24%
============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -----------------------------
------------------------------------ FORECLOSURES TOTAL
CONTRACTUAL IN BANK- DELINQUENCY
YEAR OF PRODUCTION BALANCE 30-59 60-89 90+ TOTAL PROCESS RUPTCY TOTAL & DEFAULTS
- ------------------ ------------ ------ -------- ------- -------- ------------ ------ ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990 & prior . . . $ 75,252 5.12% 1.20% 1.22% 7.54% 5.97% 4.85% 10.82% 18.36%
1991 . . . . . . . 38,114 5.26% 0.97% 0.83% 7.06% 5.45% 6.59% 12.04% 19.10%
1992 . . . . . . . 63,842 4.74% 1.74% 1.97% 8.45% 5.87% 5.40% 11.27% 19.72%
1993 . . . . . . . 199,037 4.39% 1.28% 1.07% 6.74% 4.94% 5.05% 9.99% 16.73%
1994 . . . . . . . 451,224 5.15% 1.58% 0.92% 7.65% 4.70% 6.37% 11.07% 18.72%
1995 . . . . . . . 1,069,818 4.75% 2.12% 1.17% 8.04% 2.64% 6.26% 8.90% 16.94%
1996 . . . . . . . 2,142,851 2.11% 0.86% 0.35% 3.32% 0.20% 0.95% 1.15% 4.47%
------------
Total . . . . . $ 4,040,138 3.39% 1.31% 0.71% 5.41% 3.36% 1.83% 5.19% 10.60%
============
</TABLE>
The Company's management believes that the increase in the total
percentage of delinquencies and defaults is not attributable to any single
factor but rather reflects a combination of factors, such as the seasonal
nature of delinquencies inherent in the portfolio, aging of the portfolio and
an industry wide trend in increased bankruptcy filings.
The following table reflects, as of the periods indicated, the allowance
for loan losses for loans owned by the Company and loans serviced for third
parties. These allowance accounts are deducted in the Company's balance sheet
from the asset to which they apply.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------
OWNED SERVICED TOTAL
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses, beginning of period . . . . . . . $ 4,141 $ 73,102 $ 77,243
Provision for loan losses . . . . . . . . . . . . . . . . . . 2,956 40,785 43,741
Net loans charged off . . . . . . . . . . . . . . . . . . . . (3,379) (20,472) (23,851)
Reserve reclassification . . . . . . . . . . . . . . . . . . 785 -- 785
------------ ---------- ----------
Allowance for loan losses, end of period . . . . . . . . . . $ 4,503 $ 93,415 $ 97,918
============ ========== ==========
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
----------------------------------------
OWNED SERVICED TOTAL
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses, beginning of period . . . . . . . $ 6,484 $ 44,970 $ 51,454
Provision for loan losses . . . . . . . . . . . . . . . . . . (178) 30,362 30,184
Net loans charged off . . . . . . . . . . . . . . . . . . . . (3,482) (9,750) (13,232)
Reserve reclassification . . . . . . . . . . . . . . . . . . 2,241 -- 2,241
----------- --------- ---------
Allowance for loan losses, end of period . . . . . . . . . . $ 5,065 $ 65,582 $ 70,647
=========== ========= =========
</TABLE>
The following table provides pool factors and cumulative net losses, as a
percentage of production, with respect to the Company's home-equity loans by
year of production for the indicated years:
<TABLE>
<CAPTION>
CUMULATIVE
YEAR HOME-EQUITY NET LOSSES AS
OF LOAN POOL % OF
PRODUCTION PRODUCTION FACTOR (1) PRODUCTION
------------- --------------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FIXED
-----
1993 $ 500,900 0.2806 1.77%
1994 $ 837,901 0.3808 1.74%
1995 $ 1,130,715 0.5204 0.79%
1996 $ 1,383,714 0.7813 0.05%
1997 $ 1,001,853 0.9639 0.00%
ARM
---
1993 $ 38,968 0.2326 1.28%
1994 $ 70,920 0.1912 0.38%
1995 $ 410,822 0.4878 0.33%
1996 $ 860,744 0.7377 0.01%
1997 $ 943,967 0.9715 0.00%
</TABLE>
(1) The Pool Factor is the percentage of the related year's production by
type (fixed or ARM), expressed as a decimal, remaining outstanding at
September 30, 1997.
The above delinquency, default and loss experience represents the Company's
experience for the periods reported. However, the delinquency, default and
loss percentages may be affected by the increase in the size and aging of the
portfolio. In addition, the Company can neither quantify the impact of
property value declines, if any, on the home equity loans and manufactured
housing contracts nor predict whether or to what extent or how long such
declines may exist. In a period of such declines, the rates of delinquencies,
defaults and losses on the home equity loans and manufactured housing contracts
could be higher than those theretofore experienced in the residential mortgage
and manufactured housing lending industry in general. Adverse economic
conditions (which may or may not affect real property or manufactured housing
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the home equity loans and manufactured housing
contracts and, accordingly, the actual rates of delinquencies, defaults and
losses. As a result, the information in the above tables should not be
considered as the only basis for assessing the likelihood, amount or severity of
delinquencies, defaults and losses in the future and no assurance can be given
that the delinquency, default and loss experience presented in the tables will
be indicative of such experience.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements arise from loan originations,
deposits to reserve accounts, repayments of debt borrowed under the Company's
senior and subordinated notes and credit facilities, payments of operating and
interest expenses, and income taxes related to loan sale transactions. The
Company uses the
15
<PAGE> 17
proceeds of its $800 million revolving credit facility (the "Credit Facility")
as the primary source of funding of loan production pending sales in
securitizations. The Company's borrowings are in turn repaid with proceeds
received from selling such loans through securitizations. The Credit Facility
is provided by a group of 22 banks, matures in April, 2000, and provides for
revolving loans and letters of credit. Proceeds of the Credit Facility may be
used for general corporate purposes, including the interim funding of loan
originations, and to refinance existing debt. During the third quarter of
1997, the Credit Facility was primarily used to fund the origination of home
equity loans and manufactured housing contracts. These borrowings were repaid
upon the delivery of loans into the securitization transaction. Also during
this quarter, a letter of credit in the maximum amount of $47 million was issued
under the Credit Facility for the Company's account and was deposited in lieu of
cash into the reserve account established in connection with the Company's
third quarter home equity loan securitization transaction. In addition to the
Credit Facility, the Company maintains two additional sources of financing for
its home equity loan originations: a warehouse facility provided by the
investment banker which acted as lead underwriter for the Company's third
quarter home equity loan securitization (the "Investment Bank Warehouse"), and a
warehouse facility provided by UCLIC (the "UCLIC 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, 1997, $150 million was available and no
amounts were outstanding under the Investment Bank Warehouse. The UCLIC
Warehouse, which was established upon the sale of UCLIC, initially provided for
the purchase of up to $300 million in first mortgage residential loans and has a
maturity of July, 1999. During the second quarter of 1997, the Company reduced
the commitment under this facility to $150 million. The Company has the right
for a limited time to repurchase certain loans which are eligible for
securitization and as of September 30, 1997, $5.5 million in loans eligible for
securitization were funded under this facility. The Company has issued senior
unsecured notes of $100 million, $125 million and $100 million which mature in
1998, 1999 and 2004, respectively and in June, 1997 sold $150 million of
unsecured subordinated notes maturing in 2005.
Substantially all of the home equity loans and manufactured housing
contracts originated or acquired by the Company are sold. Net cash from
operating activities of the Company in the first nine months of 1997 and 1996
reflects approximately $2.2 billion and $1.8 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 $2.1
billion and $1.7 billion in the first nine months of 1997 and 1996,
respectively. In connection with the sale transactions in the secondary
market, third-party surety bonds (except in the case of four manufactured
housing contract securitizations) and cash deposits by the Company as credit
enhancements have been provided. The loan sale transactions have required the
subordination of certain cash flows payable to the Company to the payment of
principal and interest due to certificate holders. In connection with these
transactions, the Company has been required, in some instances, to fund an
initial deposit, and thereafter, in each transaction, a portion of the amounts
receivable by the Company from the excess interest spread has been required to
be placed and maintained in a reserve account to the extent of the
subordination requirements. The subordination requirements generally provide
that the excess interest spread is payable to a reserve account until a
specified level of cash, which is less than the maximum subordination amount,
is accumulated therein. The Interest-only and residual certificates of the
Company are subject to being utilized first to replenish cash paid from the
reserve account to fund shortfalls in collections from borrowers who default on
the payment of principal or interest on the loans and contracts underlying the
pass-through certificates issued until the total of the Company's deposits into
the reserve account equal the maximum subordination amount. After the
Company's deposits into the reserve account equal the maximum subordination
amount for a transaction, the subordination of the related excess interest
spread (including the guarantee fee payable therefrom) for these purposes is
terminated. The excess interest spread required to be deposited and maintained
in the respective reserve accounts will not be available to support the cash
flow requirements of the Company until such amount exceeds the maximum
subordinated amount (other than amounts, if any, in excess of the specified
levels required to be maintained in the reserve accounts, which may be
distributed periodically to the Company). In the home equity loan
securitization completed in the second quarter of 1997, the excess interest
spread on the fixed rate loans included therein is utilized initially to cover
current losses, and then to pay down the principal of the related pass-through
certificates until a specified level of overcollateralization is
16
<PAGE> 18
reached, and thus is unavailable to the Company until such time. At September
30, 1997, the amounts on deposit in such reserve accounts totaled $368.2
million, exclusive of the letter of credit issued under the Credit Facility in
the amount of $47 million discussed above.
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.
17
<PAGE> 19
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, 1997 and the related consolidated statements of income for the three months
and nine months ended September 30, 1997 and 1996 and statements of cash flows
for the nine months ended September 30, 1997 and 1996, and previously audited
and expressed an unqualified opinion dated February 28, 1997 on the
consolidated financial statements of the Company and its subsidiaries as of
December 31, 1996, from which the consolidated balance sheet as of this date is
derived.
18
<PAGE> 20
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
United Companies Financial Corporation:
We have reviewed the accompanying consolidated balance sheet of United
Companies Financial Corporation and subsidiaries as of September 30, 1997 and
the related consolidated statements of income for the three months and nine
months ended September 30, 1997 and 1996 and statements of cash flows for the
nine months ended September 30, 1997 and 1996. These financial statements are
the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
As discussed in Note 2 of the Notes to the Consolidated Financial Statements,
in 1997, the Corporation changed its method of accounting for loan sale gains
and related retained interests to conform with Statement of Financial
Accounting Standards No. 125.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Companies Financial
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 28,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1996 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
October 30, 1997
19
<PAGE> 21
PART II
OTHER INFORMATION
Items 1 through 5. Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - (11) Statement re computation of
earnings per share
- (15) Letter of Deloitte & Touche LLP
- (27) Financial Data Schedule
(b) Reports on Form 8-K
None
20
<PAGE> 22
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: October 31, 1997 By: /s/ J. TERRELL BROWN
--------------------------------------
J. Terrell Brown
Chairman and Chief Executive Officer
Date: October 31, 1997 By: /s/ DALE E. REDMAN
--------------------------------------
Dale E. Redman
Executive Vice President and Chief
Financial Officer
21
<PAGE> 23
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
11 Statement re computation of earnings per share
15 Letter of Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
22
<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,
--------------------------- --------------------------
1997 1996 1997 1996
------------ ---------- ------------ ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Primary Earnings Per Share
Income available to common shareholders:
Income from continuing operations . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 62,184
Less: Loss from discontinued operations . . . . . . . . . -- -- -- (4,532)
------------ ---------- ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 57,652
============ ========== ============ ==========
Weighted average number of common and
common equivalent shares:
Average common shares outstanding . . . . . . . . . . . . . 27,979 27,955 27,985 27,890
Add: Dilutive effect of stock options after
application of treasury stock method . . . . . . . 730 866 634 879
Dilutive effect of preferred stock
after application of "if converted" method . . . . 3,230 3,230 3,230 3,230
------------ ---------- ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,939 32,051 31,849 31,999
============ ========== ============ ==========
Earnings (loss) per share:
Income from continuing operations . . . . . . . . . . . . . $ .85 $ .75 $ 2.23 $ 1.94
Loss from discontinued operations . . . . . . . . . . . . . -- -- -- (.14)
------------ ---------- ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .85 $ .75 $ 2.23 $ 1.80
============ ========== ============ ==========
Fully Diluted Earnings Per Share
Income available to common shareholders:
Income from continuing operations . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 62,184
Less: Loss from discontinued operations . . . . . . . . . -- -- -- (4,532)
------------ ---------- ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,049 $ 24,128 $ 70,966 $ 57,652
============ ========== ============ ==========
Weighted average number of common and
all dilutive contingent shares:
Average common shares outstanding . . . . . . . . . . . . . 27,979 27,955 27,985 27,890
Add: Dilutive effect of stock options after
application of treasury stock method . . . . . . . 797 867 792 912
Dilutive effect of preferred stock
after application of "if converted" method . . . . 3,910 3,910 3,910 3,910
------------ ---------- ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,686 32,732 32,687 32,712
============ ========== ============ ==========
Earnings (loss) per share:
Income from continuing operations . . . . . . . . . . . . . $ .83 $ .74 $ 2.17 $ 1.90
Loss from discontinued operations . . . . . . . . . . . . . -- -- -- (.14)
------------ ---------- ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .83 $ .74 $ 2.17 $ 1.76
============ ========== ============ ==========
</TABLE>
23
<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, 1997 and 1996, as
indicated in our report dated October 30, 1997; 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, 1997, 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, Registration Statement No.
33-63069 on Form S-8 pertaining to the United Companies Financial Corporation
Management Incentive Plan, Registration Statement No. 333-21985 on Form S-3
pertaining to the registration of $500 million of United Companies Financial
Corporation Debt Securities, Preferred Stock and Common Stock and Registration
Statement No. 333-33347 on Form S-8 pertaining to the 1996 Long-Term Incentive
Compensation Plan and the 1996 Non-Employee Director Stock 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
October 30, 1997
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 583
<SECURITIES> 17,434
<RECEIVABLES> 174,713
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 60,627
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,234,814
<CURRENT-LIABILITIES> 0
<BONDS> 595,886
0
3,910
<COMMON> 59,725
<OTHER-SE> 418,066
<TOTAL-LIABILITY-AND-EQUITY> 1,234,814
<SALES> 0
<TOTAL-REVENUES> 338,117
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 183,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,373
<INCOME-PRETAX> 110,884
<INCOME-TAX> 39,918
<INCOME-CONTINUING> 70,966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,966
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 2.17
</TABLE>
