<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 June 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 August 1, 1997 was 28,698,552, 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 JUNE 30, 1997
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996.............................................................. 2
Consolidated Statements of Income
Three months and six months ended June 30, 1997 and 1996......................................... 3
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996.......................................................... 4
Notes to Consolidated Financial Statements.......................................................... 5-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................ 9-16
Review by Independent Accountants................................................................... 17
Independent Accountants' Review Report.............................................................. 18
PART II - OTHER INFORMATION
Submission of Matters to a Vote of Security Holders................................................. 19
Exhibits and Reports on Form 8-K....................................................................19-20
Signatures.......................................................................................... 21
Index to Exhibits................................................................................... 22
</TABLE>
<PAGE> 3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30,
1997 December 31,
Assets (Unaudited) 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents ................................................. $ 591 $ 14,064
Investment securities
Trading ............................................................... -- 17,418
Available for sale .................................................... 16,939 17,510
Loans - net ............................................................... 166,369 118,750
Interest-only and residual certificates ................................... 771,072 604,474
Accrued interest receivable ............................................... 69,347 61,483
Property - net ............................................................ 56,784 46,323
Capitalized mortgage servicing rights ..................................... 34,347 23,806
Other assets .............................................................. 34,086 21,445
----------- -----------
Total assets ................................................... $ 1,149,535 $ 925,273
=========== ===========
Liabilities and Stockholders' Equity
Notes payable ............................................................. $ 552,403 $ 425,671
Deferred income taxes payable ............................................. 73,815 52,971
Managed cash overdraft .................................................... 17,760 --
Other liabilities ......................................................... 48,536 26,354
----------- -----------
Total liabilities .............................................. 692,514 504,996
----------- -----------
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 - 29,857,234 and 29,627,734 shares ......................... 59,714 59,255
Additional paid-in capital ............................................ 185,327 184,397
Net unrealized gain on securities ..................................... 52 48
Retained earnings ..................................................... 227,114 190,579
Treasury stock and ESOP debt .......................................... (19,096) (17,912)
----------- -----------
Total stockholders' equity ........................................ 457,021 420,277
----------- -----------
Total liabilities and stockholders' equity ..................... $ 1,149,535 $ 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 Six months ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Loan sale gains ...................................... $ 63,723 $ 49,878 $ 110,919 $ 89,688
Finance income, fees earned and other
loan income ..................................... 43,802 30,177 82,799 57,477
Investment income .................................... 6,133 2,671 10,881 5,552
Other ................................................ 1,571 1,111 3,052 2,293
--------- --------- --------- ---------
Total ........................................ 115,229 83,837 207,651 155,010
--------- --------- --------- ---------
Expenses:
Personnel ............................................ 32,261 23,177 59,010 43,770
Interest ............................................. 14,237 9,146 26,467 16,819
Other operating ...................................... 31,608 18,458 53,554 34,473
--------- --------- --------- ---------
Total ........................................ 78,106 50,781 139,031 95,062
--------- --------- --------- ---------
Income from continuing operations before
income taxes ......................................... 37,123 33,056 68,620 59,948
Provision for income taxes .............................. 13,364 12,229 24,703 21,892
--------- --------- --------- ---------
Income from continuing operations ....................... 23,759 20,827 43,917 38,056
Income (loss) from discontinued operations:
Income from discontinued operations, net of income
tax expense of $894 and $1,651, respectively ..... -- 1,623 -- 3,199
Loss on disposal, net of income tax
benefit of $474 and $868, respectively ........... -- (6,765) -- (7,731)
--------- --------- --------- ---------
Total ........................................ -- (5,142) -- (4,532)
--------- --------- --------- ---------
Net income .............................................. $ 23,759 $ 15,685 $ 43,917 $ 33,524
========= ========= ========= =========
Per share data:
Income from continuing operations .................... $ .73 $ .64 $ 1.35 $ 1.16
Loss from discontinued operations .................... -- (.16) -- (.14)
--------- --------- --------- ---------
Net income ........................................... $ .73 $ .48 $ 1.35 $ 1.02
========= ========= ========= =========
</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>
Six months ended June 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations ............................................. $ 43,917 $ 38,056
Adjustments to reconcile income from continuing operations
to net cash used by continuing operating activities:
Increase in accrued interest receivable ............................. (7,864) (7,604)
Increase in other assets ............................................ (10,391) (7,987)
Increase in other liabilities ....................................... 22,495 14,495
Increase in interest-only and residual certificates ................. (166,598) (68,893)
Increase in capitalized mortgage servicing rights ................... (14,303) (8,879)
Amortization of capitalized mortgage servicing rights ............... 3,762 813
Loan loss provision on owned loans .................................. 1,454 1,393
Amortization and depreciation ....................................... 3,042 1,740
Deferred income taxes ............................................... 20,842 19,038
Proceeds from sales and principal collections of loans
held for sale .................................................... 1,362,942 1,742,397
Originations and purchases of loans held for sale ................... (1,412,015) (1,797,090)
Decrease in trading securities ...................................... 17,418 --
------------ ------------
Net cash used by continuing operating activities ............... (135,299) (72,521)
------------ ------------
Cash flows provided by discontinued operations ................................ -- (39)
------------ ------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities ................ 577 --
Proceeds from disposition of title insurance subsidiary ............. -- (5,126)
Capital expenditures ................................................ (12,455) 3,664
------------ ------------
Net cash (used) provided by investing activities ............... (11,878) (1,462)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of subordinated notes ........................ 146,855 --
Proceeds from construction loan ..................................... 3,846 --
Payments on construction and mortgage loans ......................... (12,612) --
(Decrease) increase in debt with maturities of three months or less . (47,100) 93,050
Increase in revolving credit facility ............................... 50,500 --
(Decrease) increase in warehouse loan facility ...................... (17,097) 27,480
Proceeds from ESOP debt ............................................. 850 3,000
Payments on ESOP debt ............................................... (759) (522)
Cash dividends paid ................................................. (7,382) (6,796)
Increase (decrease) in managed cash overdraft ....................... 17,760 (27,052)
Increase in unearned ESOP compensation .............................. (1,184) (2,478)
Proceeds from exercise of stock options ............................. 27 310
------------ ------------
Net cash provided by financing activities ...................... 133,704 86,992
------------ ------------
(Decrease) increase in cash and cash equivalents .............................. (13,473) 12,970
Cash and cash equivalents at beginning of period .............................. 14,064 5,284
------------ ------------
Cash and cash equivalents at end of period .................................... $ 591 $ 18,254
============ ============
</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 six months
ended June 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.
As discussed in Note 2 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, during the first quarter of 1997, the
Company implemented Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS No. 125"). As a result of the
implementation of SFAS No. 125, net income for the six months ended June
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 six months of
1997.
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of year ................................ $ 604,474
Interest-only and residual receivables on loans sold ...... 154,430
Net increase in allowance for loss on loans sold .......... (12,749)
Net increase in reserve accounts .......................... 95,804
Amortization of interest-only and residual receivable ..... (70,887)
---------
Balance, June 30, 1997 .................................... $ 771,072
=========
</TABLE>
The following schedule sets forth the components of the Interest-only and
residual certificates owned by the Company at June 30, 1997 and December
31, 1996, which are recorded at fair value.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Certificated interests ...................... $ 509,936 $ 426,393
Temporary investments - reserve accounts .... 346,987 251,183
Allowance for losses on loans serviced ...... (85,851) (73,102)
---------- ----------
Total ............................. $ 771,072 $ 604,474
========== ==========
</TABLE>
5
<PAGE> 7
3. LOANS
Loans Owned. The following schedule sets forth the components of Loans-net
at June 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Receivables held for sale .................... $ 107,295 $ 69,558
Other receivables ............................ 52,524 39,831
---------- ----------
Total ............................... 159,819 109,389
Real estate owned:
Home equity ............................. 5,371 6,647
Commercial and other .................... 6,438 9,446
Manufactured housing chattel contracts .. 199 372
Nonrefundable loan fees ...................... (2,198) (2,945)
Other ........................................ 583 (18)
---------- ----------
Total ............................... 170,212 122,891
---------- ----------
Less:
Allowance for loan losses ............... (3,843) (4,141)
---------- ----------
$ 166,369 $ 118,750
========== ==========
</TABLE>
Included in Loans-net at June 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 June 30, 1997 and December 31, 1996, by type
of loan. Substantially all of these loans were originated by the Company.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Home equity ................................. $ 4,527,800 $ 3,940,289
Manufactured housing chattel contracts ...... 194,272 107,741
Other ....................................... 38,887 44,649
------------ ------------
Total ............................. $ 4,760,959 $ 4,092,679
============ ============
</TABLE>
4. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
June 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 ............................. 50,500 --
Warehouse facilities .................................. 6,575 23,672
ESOP debt ............................................. 11,224 11,133
Mortgage loan ......................................... -- 5,473
Construction loan ..................................... -- 3,293
--------- ---------
Total senior debt ................................. 393,299 415,671
--------- ---------
Subordinated debt:
8.375% Subordinated unsecured notes due July, 2005 .... 149,104 --
Subordinated debentures ............................... 10,000 10,000
--------- ---------
Total ............................................ $ 552,403 $ 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 plans to use proceeds from this three-year credit
facility to refinance existing debt and 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 six months ended June 30, 1997 and 1996, the Company paid
interest on notes payable in the amount of $20.2 million and $16.1
million, respectively. During the six months ended June 30, 1997 and 1996,
the Company paid income taxes in the amount of $9.7 million and $2.4
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 and United Companies Life
Insurance Company and the divestiture, during 1993, of Foster Mortgage
Company ("FMC"). There have been no material changes in these
contingencies in the six months ended June 30, 1997. The operations of
each of these companies have been classified as discontinued operations.
The Company used a prefunding feature in connection with its
securitization transactions during the second quarter of 1997. At June 30,
1997, approximately $11.2 million was held in a prefunding account for the
purchase of the Company's home equity loans during the third quarter of
1997. In addition, at June 30, 1997, approximately $6.4 million was held
in a prefunding account for purchase of the Company's manufactured housing
contracts during the third 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 has filed a motion to vacate the
May 28, 1997 order which motion is pending before 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 also currently 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 $.76 and $.73
and $1.41 and $1.35, respectively, for the three months and six months
ended June 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 as
discontinued operations. Discussed below are results of continuing operations
for the periods presented.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Income from continuing operations for the first six months of 1997 was
$43.9 million ($1.35 per share based on 32.6 million weighted average shares
outstanding) compared to $38.1 million ($1.16 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 1997 was primarily the result of
an increase of approximately $107 million in the amount of home equity loans
sold and the sale of approximately $145 million in manufactured housing
contracts 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 for the six months ended June 30, 1997 and
1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Loan sale gains ....................................... $ 110,919 $ 89,688
Finance income, fees earned and other loan income ..... 82,799 57,477
Investment income ..................................... 10,881 5,552
Other ................................................. 3,052 2,293
--------- ---------
Total ....................................... $ 207,651 $ 155,010
========= =========
</TABLE>
Loan sale gains increased $21.2 million during the first six 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. Loan sale gains for the six months ended
June 30, 1997 also include the capitalization of mortgage servicing rights in
the amount of $14.3 million compared to $8.9 million for same period of 1996.
The positive effect of these factors was partially offset by costs totaling
$6.4 million incurred on a series of interest rate hedge mechanisms implemented
in connection with the Company's 1997 second quarter securitization
transactions. There were no open hedge positions at December 31, 1996 or June
30, 1997.
The following table presents information regarding loan sale transactions
for the periods indicated:
<TABLE>
<CAPTION>
HOME EQUITY LOANS MANUFACTURED HOUSING CONTRACTS
----------------------------- ------------------------------
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
------------ ------------- ------------ --------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans sold .................... $ 1,159,687 $ 1,053,053 $ 144,586 --
Average coupon ................ 11.12% 11.19% 10.99% --
Interest spread retained ...... 4.79% 4.67% 3.68% --
Loan sale gains ............... $ 100,354 $ 89,688 $ 10,565 --
</TABLE>
9
<PAGE> 11
Approximately $136 million and $185 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 six months of 1997,
approximately $320 million and $210 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 June 30, 1997 was approximately $379 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. 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. The
Company has also utilized interest rate hedge mechanisms to mitigate the impact
on earnings of market rate fluctuations. In connection with its securitization
transactions, the Company has used a prefunding feature which "locks in" the
pass-through rate that the Company will pay to the investors on a prefunded
amount which will be used to acquire loans at a future date. The Company is
obligated for the difference between the earnings on such prefunded amount and
the pass-through interest paid to the investors during the period from the date
of the closing of the securitization transaction until the date of delivery of
the loans. In connection with the securitization transactions which closed in
the second quarter of 1997, approximately $11.2 million and $6.4 million were
held in prefunding accounts for purchase of the Company's home equity loans and
manufactured housing contracts, respectively, during the third quarter of 1997.
Finance income, fees earned and other loan income increased $25.3 million
for the first six 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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Servicing fees and excess interest collected ... $ 91,966 $ 61,754
Loan origination fees .......................... 50,282 40,895
Loan interest .................................. 10,317 7,122
Other loan income .............................. 5,984 4,019
Amortization of interest-only
and residual receivables ..................... (70,887) (58,952)
Amortization of mortgage servicing rights ...... (3,762) (813)
Other .......................................... (1,101) 3,452
--------- ---------
Total ................................. $ 82,799 $ 57,477
========= =========
</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 $4.4 billion and $2.9 billion for the six months
ended June 30, 1997 and 1996, respectively. The increase in amortization of
interest-only and residual certificates
10
<PAGE> 12
as well as mortgage servicing rights is likewise related to the increase in the
amount of loans serviced for third parties.
During the six months ended June 30, 1997 and 1996, the Company sold
approximately $1.2 billion and $1.1 billion, respectively, in home equity loans
and recognized approximately $42.4 million and $41.7 million, respectively, in
loan origination fees in connection with these sales. The amount of loan fees
earned as a percent of the amount of loans sold in the first six months of 1997
declined when compared to the same period of 1996 as the result of an increase
in the amount of loans originated by the wholesale and bulk purchase units that
were included in loan securitization transactions.
The Company estimates that non-accrual loans reduced loan interest for the
first six months of 1997 and 1996 by approximately $17.5 million and $9.6
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 six months ended June 30, 1997, the average amount of non-accrual
loans owned and/or serviced by the Company was $266 million compared to
approximately $150 million during the same period of 1996.
Investment income totaled $10.9 million for the first six months of 1997
compared to investment income of $5.6 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 six 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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Personnel .......... $ 59,010 $ 43,770
Interest ........... 26,467 16,819
Other operating .... 53,554 34,473
-------- --------
Total ..... $139,031 $ 95,062
======== ========
</TABLE>
Personnel expenses for the six months ended June 30, 1997, increased
approximately $15.2 million compared to the same period of 1996 primarily
because of costs associated with the expansion of the Company's lending
operations. Approximately 23% of the increase in personnel costs is related to
the Company's manufactured housing lending operations. The remaining increase
is primarily related to expansion of the Company's lending distribution network
and incentive compensation related to an increase in home equity loan
production.
Interest expense for the first six months of 1997 increased $9.6 million
from the same period of 1996 primarily as the result of an increase in the
average amount of debt outstanding.
Other operating expenses for the six months ended June 30, 1997 increased
approximately $19.1 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 $7.2 million increase in advertising and a
$2.9 million increase in occupancy and general office expenses.
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 publicly offered and sold, with servicing rights retained.
The purchasers of the pass-through certificates receive a credit enhanced
security which is provided in part in home equity loan securitizations through
a guaranty provided by a third party insurer 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 June 30, 1997, the carrying value of the Company's
interest-only and residual certificates was reduced by $85.9 million to provide
for estimated credit losses on loans sold. At June 30, 1997 the allowance for
loan losses on owned loans totaled $3.8 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 $993 million at June 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 June 30, 1997, the contractual balance of home equity loans serviced
was approximately $4.7 billion, substantially all of which are owned by and
serviced for third party investors. The portfolio is geographically
diversified. Although the Company services loans in 50 states, at June 30, 1997
a substantial portion of the home equity loans serviced were originated in
California (10.7%), Louisiana (7.8%), Florida (7.4%), and Ohio (6.7%),
respectively, and no other state accounted for more than 7% of the serviced
portfolio. In addition, at June 30, 1997, the Company serviced approximately
$205 million of manufactured housing contracts, 34.7% of which were originated
in Texas, 15.2% in South Carolina, 13.7% in North Carolina and 10.0% 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>
JUNE 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 ................... $ 4,669,196 $ 4,040,138
============= =============
Delinquency
30-59 days ................. $ 163,540 3.50% $ 136,976 3.39%
60-89 days ................. 34,355 0.74 53,124 1.31
90+ days ................... 17,898 0.38 28,663 0.71
------------- ------------- ------------- -------------
215,793 4.62 218,763 5.41
------------- ------------- ------------- -------------
Defaults
Foreclosures in process .... 173,491 3.72 135,779 3.36
Bankruptcy ................. 95,210 2.04 73,887 1.83
------------- ------------- ------------- -------------
268,701 5.76 209,666 5.19
------------- ------------- ------------- -------------
Total delinquency
and defaults ............. $ 484,494 10.38% $ 428,429 10.60%
============= ============= ============= =============
</TABLE>
The contractual balances exclude home equity real estate owned and/or
serviced which totaled $74.4 million and $52.6 million at June 30, 1997 and
December 31, 1996, respectively. The charge-off rate on the average home equity
loan portfolio for the first six months of 1997 was .65% (annualized) and was
.51% for 1996.
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>
JUNE 30, 1997
--------------------------------------------------------------------------------------------
DEFAULTS
----------------------------
DELINQUENCY FORECLOSURES TOTAL
CONTRACTUAL ------------------------------------- IN BANK- DELINQUENCY
BALANCE 30-59 60-89 90+ TOTAL PROCESS RUPTCY TOTAL & DEFAULTS
------------ ------ -------- ------- --------- --------- -------- ------- -----------
(DOLLARS IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 & prior......... $ 92,370 4.29% 0.50% 0.59% 5.38% 4.84% 6.47% 11.31% 16.69%
1992................. 53,055 4.22% 0.87% 1.36% 6.45% 5.61% 5.61% 11.22% 17.67%
1993................. 165,236 4.30% 0.54% 0.65% 5.49% 5.04% 5.16% 10.20% 15.69%
1994................. 366,815 4.83% 0.83% 0.64% 6.30% 6.69% 6.01% 12.70% 19.00%
1995................. 874,781 5.24% 1.16% 0.70% 7.10% 7.75% 4.34% 12.09% 19.19%
1996................. 1,886,697 4.16% 0.96% 0.37% 5.49% 3.37% 0.92% 4.29% 9.78%
1997................. 1,230,242 0.66% 0.10% - 0.76% 0.14% 0.03% 0.17% 0.93%
------------
Total............ $ 4,669,196 3.50% 0.74% 0.38% 4.62% 3.72% 2.04% 5.76% 10.38%
============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
DEFAULTS
----------------------------
DELINQUENCY FORECLOSURES TOTAL
CONTRACTUAL ------------------------------------- IN BANK- DELINQUENCY
BALANCE 30-59 60-89 90+ TOTAL PROCESS RUPTCY TOTAL & DEFAULTS
------------ ------ -------- ------- --------- --------- -------- ------- -----------
(DOLLARS IN THOUSANDS)
<C> <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>
13
<PAGE> 15
Delinquent manufactured housing contracts (which for purposes hereof
includes land-and-home contracts and chattel contracts) totaled 402 units or
4.10% of the manufactured housing contracts owned and/or serviced at June 30,
1997.
The Company's management believes that the decrease 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 and changes made in internal
collection procedures.
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>
SIX MONTHS ENDED JUNE 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 ........................ 1,454 25,831 27,285
Net loans charged off ............................ (2,146) (13,082) (15,228)
Reserve reclassification ......................... 394 -- 394
-------- -------- --------
Allowance for loan losses, end of period ......... $ 3,843 $ 85,851 $ 89,694
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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 ........................ 1,393 16,206 17,599
Net loans charged off ............................ (1,937) (5,112) (7,049)
Reserve reclassification ......................... (34) -- (34)
-------- -------- --------
Allowance for loan losses, end of period ......... $ 5,906 $ 56,064 $ 61,970
======== ======== ========
</TABLE>
The following table provides certain pool factors and cumulative losses
with respect to the Company's home-equity loans by year of production:
<TABLE>
<CAPTION>
CUMULATIVE
YEAR NET LOSSES AS
OF HOME-EQUITY POOL * % OF
PRODUCTION PRODUCTION FACTOR PRODUCTION
- ---------- ----------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FIXED
1993 $ 500,900 0.3092 1.66%
1994 $ 837,901 0.4201 1.47%
1995 $ 1,130,715 0.5760 0.56%
1996 $ 1,383,714 0.8516 0.01%
1997 $ 663,744 0.9803 0.00%
ARM
1993 $ 38,968 0.2663 0.80%
1994 $ 70,920 0.2089 0.29%
1995 $ 410,822 0.5439 0.17%
1996 $ 860,744 0.8229 0.00%
1997 $ 583,144 0.9939 0.00%
</TABLE>
*Percentage of original production outstanding at June 30, 1997.
14
<PAGE> 16
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
relative lack of seasoning of a substantial portion of the portfolio. In
addition, the Company can neither quantify the impact of property value
declines, if any, on the home equity loans and manufactured housing contracts
nor predict whether or to what extent or how long such declines may exist. In a
period of such declines, the rates of delinquencies, defaults and losses on the
home equity loans and manufactured housing contracts could be higher than those
theretofore experienced in the residential mortgage lending industry in
general. Adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the home equity loans and manufactured housing
contracts and, accordingly, the actual rates of delinquencies, 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 proceeds 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. In June
1997, the Company sold $150 million of unsecured subordinated notes maturing in
2005 and used the proceeds to reduce borrowings under the Credit Facility and
for general corporate purposes. The Company has issued senior unsecured notes
of $100 million, $125 million and $100 million which mature in 1998, 1999 and
2004, respectively. 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 second quarter, 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. 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 second 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 second 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 June 30,
1997, no amounts were available 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 June 30, 1997, $6.6 million in loans eligible for
securitization were funded under this facility.
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 six months of 1997 and 1996
reflects approximately $1.4 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 $1.4
billion and $1.7 billion in the first six 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 three 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
15
<PAGE> 17
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 reached, and
thus is unavailable to the Company until such time. At June 30, 1997, the
amounts on deposit in such reserve accounts totaled $347 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 letters of credit to replace a substantial
portion of the cash previously required to be maintained in the reserve
accounts for five loan securitization transactions consummated in 1993 and
1994. As a consequence, $40 million was released from the related reserve
accounts to the Company, and these proceeds, net of transaction costs, were
used to pay down outstanding debt of the Company in April, 1996. In April,
1997, the Company terminated this letter of credit and reimbursement agreement
and caused the letters of credit to be replaced by cash in the required amounts
in the related reserve accounts.
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.
16
<PAGE> 18
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 June 30,
1997 and the related consolidated statements of income and cash flows for the
three months and six months ended June 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.
17
<PAGE> 19
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 June 30, 1997 and the
related consolidated statements of income for the three months and six months
ended June 30, 1997 and 1996 and statements of cash flows for the six months
ended June 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
August 11, 1997
18
<PAGE> 20
PART II
OTHER INFORMATION
<TABLE>
<S> <C> <C>
Items 1 through 3. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The matters discussed below were submitted to a vote of security holders at the Company's Annual
Meeting of Shareholders held on May 14, 1997.
(b) Item 4(b) is inapplicable as proxies for the Annual Meeting of Shareholders were solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, there was no
solicitation in opposition to the management's nominees as listed in the proxy statement and all
nominees for director were elected.
(c) The results of voting on the other matters submitted to a vote of security holders were as follows:
(2) Approval of the Company's 1996 Long-Term Incentive Compensation Plan
For Against Abstentions Broker non-votes
--------------- --------------- --------------- --------------------
13,885,250 4,267,102 238,444 5,718,972
(3) Approval of the Company's 1996 Non-Employee Director Stock Plan
For Against Abstentions Broker non-votes
--------------- --------------- --------------- --------------------
15,116,909 2,949,986 323,901 5,718,972
Item 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
1. On June 2, 1997, the Company filed a Current Report on Form 8-K and included therein
under Item 7, the following exhibit:
10.1 Credit Agreement dated as of April 10, 1997, by and among United Companies Financial
Corporation, as borrower, the Lenders referred to therein, First Union National Bank of
North Carolina, as agent and Morgan Guaranty Trust Company of New York, as documentation
agent.
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C> <C>
2. On June 11, 1997, the Company filed a
Current Report on Form 8-K and included
therein, under Item 7, the following
exhibits:
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
12.2 Statement of Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
3. On June 24, 1997, the Company filed a
Current Report on Form 8-K and included
therein, under Item 7, the following
exhibits:
1.2 Terms Agreement dated June 17, 1997 for 8 3/8% Subordinated Notes due
July 1, 2005.
4.13 First Supplemental Indenture dated as of June 20, 1997 for 8 3/8%
Subordinated Notes due July 1, 2005.
4.14 8 3/8% Subordinated Note due July 1, 2005.
</TABLE>
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: August 11, 1997 By: /s/ J. Terrell Brown
--------------- ----------------------
J. Terrell Brown
Chairman and Chief Executive Officer
Date: August 11, 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 Six Months Ended
June 30, June 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 .................................. $ 23,759 $ 20,827 $ 43,917 $ 38,056
Less: Loss from discontinued operations ............................ -- (5,142) -- (4,532)
-------- -------- -------- --------
Total .............................................................. $ 23,759 $ 15,685 $ 43,917 $ 33,524
======== ======== ======== ========
Weighted average number of common and common equivalent shares:
Average common shares outstanding .................................. 27,959 27,863 27,989 27,856
Add: Dilutive effect of stock options after
application of treasury stock method ....................... 526 909 583 887
Dilutive effect of preferred stock
after application of "if converted" method ................. 3,230 3,230 3,230 3,230
-------- -------- -------- --------
Total .............................................................. 31,715 32,002 31,802 31,973
======== ======== ======== ========
Earnings (loss) per share:
Income from continuing operations .................................. $ .75 $ .65 $ 1.38 $ 1.19
Loss from discontinued operations .................................. -- (.16) -- (.14)
-------- -------- -------- --------
Total .............................................................. $ .75 $ .49 $ 1.38 $ 1.05
======== ======== ======== ========
Fully Diluted Earnings Per Share
Income available to common shareholders:
Income from continuing operations .................................. $ 23,759 $ 20,827 $ 43,917 $ 38,056
Less: Loss from discontinued operations ............................ -- (5,142) -- (4,532)
-------- -------- -------- --------
Total .............................................................. $ 23,759 $ 15,685 $ 43,917 $ 33,524
======== ======== ======== ========
Weighted average number of common and all dilutive contingent
shares:
Average common shares outstanding .................................. 27,959 27,863 27,989 27,856
Add: Dilutive effect of stock options after
application of treasury stock method ....................... 684 938 686 962
Dilutive effect of preferred stock
after application of "if converted" method ................. 3,910 3,910 3,910 3,910
-------- -------- -------- --------
Total .............................................................. 32,553 32,711 32,585 32,728
======== ======== ======== ========
Earnings (loss) per share:
Income from continuing operations .................................. $ .73 $ .64 $ 1.35 $ 1.16
Loss from discontinued operations .................................. -- (.16) -- (.14)
-------- -------- -------- --------
Total .............................................................. $ .73 $ .48 $ 1.35 $ 1.02
======== ======== ======== ========
</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 June 30, 1997 and 1996, as indicated in
our report dated August 11, 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 June 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
August 11, 1997
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 591
<SECURITIES> 16,939
<RECEIVABLES> 166,369
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 56,784
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,149,535
<CURRENT-LIABILITIES> 0
<BONDS> 552,403
0
3,910
<COMMON> 59,714
<OTHER-SE> 393,397
<TOTAL-LIABILITY-AND-EQUITY> 1,149,535
<SALES> 0
<TOTAL-REVENUES> 207,651
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 112,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,467
<INCOME-PRETAX> 68,620
<INCOME-TAX> 24,703
<INCOME-CONTINUING> 43,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,917
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.35
</TABLE>
