<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7067
UNITED COMPANIES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
LOUISIANA 71-0430414
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4041 ESSEN LANE
BATON ROUGE, LOUISIANA 70809
(Address of principal executive office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (504) 987-0000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
Common Stock, Par Value $2.00 NEW YORK STOCK EXCHANGE
6 3/4% PRIDES(SM), Convertible Preferred NEW YORK STOCK EXCHANGE
Stock, Par Value $2.00
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as reported on the New York Stock Exchange as of March 9, 1998 was
$408,974,147.
The number of shares of $2.00 par value stock issued and outstanding as of
March 9, 1998 was 28,800,339 excluding 1,180,117 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement to be prepared pursuant to
Regulation 14A and filed in connection with solicitation of proxies for its
Annual Meeting of Stockholders, to be held on approximately May 12, 1998, is
incorporated by reference into Part III of this Form 10-K.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
United Companies Financial Corporation (the "Company" or "UCFC"), founded
in 1946, is engaged through its subsidiaries in consumer lending. The Company's
operations primarily are focused on the origination, purchase, sale and
servicing of first mortgage, non-conventional, home equity loans which are
typically not loans for the purchase of homes. These home equity loans, which
are fixed and variable rate mortgage loans, are sub-prime loans, i.e., loans
made primarily to individuals who may not otherwise qualify for conventional
loans which are readily marketable to government-sponsored mortgage agencies or
conduits and available through most commercial banks and many other lending
institutions. The Company's home equity loans are originated primarily through
the following origination channels: (i) a retail branch network conducted
through United Companies Lending Corporation(R) ("UC Lending"), (ii) a wholesale
operation conducted through UNICOR MORTGAGE(R), Inc. and GINGER MAE(R), Inc.
(operating as a division of UC Lending) and (iii) a bulk loan purchase program
conducted by Southern Mortgage Acquisition, Inc. ("UC Acquisition"). In
addition, the Company's operations include manufactured housing loan products
offered through its wholly-owned subsidiary, United Companies Funding, Inc.
("UCFI"). These manufactured housing contracts are made primarily to finance the
purchase of new or used manufactured homes and are typically secured by a first
lien security interest in the manufactured homes. The Company also offers a
secured credit card product which is presently targeted to the Company's home
equity loan customer base. These credit card loans are typically secured by a
second lien, behind the Company's first lien, on the borrower's residence.
Loan production is funded principally through credit facilities pending
loan sales. Substantially all of the home equity loans and manufactured housing
contracts originated or purchased by the Company are sold in the secondary
market principally through securitization transactions under Company sponsored
shelf registration statements.
The Company was incorporated in the State of Louisiana in 1946 and its
principal offices are located in Baton Rouge, Louisiana. It currently has
approximately 3,200 employees.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements contained in this
Annual Report on Form 10-K that are not historical facts are forward looking
statements based on the Company's current expectations and beliefs concerning
future developments and their potential effects on the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by the Company. Actual results may differ from those projected in
the forward-looking statements. These forward-looking statements involve
significant risks and uncertainties (some of which are beyond the control of the
Company) and are subject to change based upon various factors, including but not
limited to the following risks and uncertainties: changes in the asset
securitization industry and 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; the presence of competitors with
greater financial resources and the impact of competitive products and pricing;
the effect of the Company's policies, including the amount and rate of growth of
Company expenses; the continued availability to the Company of adequate funding
sources; actual prepayment rates and credit losses on loans sold as compared to
prepayment rates and credit losses assumed by the Company at the time of sale
for purposes of its gain on sale computations; the effect of changes in market
interest rates on the spread between the coupon rate on loans sold and the
pass-through rate on securities backed by such loans issued by the Company in
securitization transactions and on the discount rate assumed by the Company in
its gain on sale computations; timing of loan sales; the quality of the
Company's owned and serviced loan portfolio, including levels of delinquencies,
customer bankruptcies and charge-offs; ratings; and various legal, regulatory
and litigation risks. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as the result of new information,
future events or otherwise. For a more detailed discussion of some of the
foregoing risks and uncertainties, see Item 7. Management's Discussion and
Analysis
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of Financial Condition and Results of Operations -- Investment Considerations as
well as other Company filings with the Securities and Exchange Commission.
Origination network. At December 31, 1997, the Company's lending activities
were primarily conducted through the following origination channels:
UC Lending, the Company's retail operation, consisted of 221 offices
in 42 states at year end 1997 compared to 185 offices in 42 states at year
end 1996. During 1997, UC Lending originated $1.5 billion in home equity
loans compared to $1.1 billion for 1996, representing a 36% increase.
UNICOR, one of the Company's wholesale operations, which acquires
loans primarily from brokers and correspondents, produced $566.8 million in
home equity loans in 1997 compared to $570.1 million for 1996. At year end
1997, UNICOR had 1,860 active brokers and correspondents and operated in 47
states.
GINGER MAE, another of the Company's wholesale operations, which
operates through financial institutions (banks, thrifts and credit unions),
produced $211.4 million in home equity loans in 1997 compared to $118.9
million in 1996. GINGER MAE had a total of 136 active financial
institutions under contract in a total of 34 states at year end 1997.
UC Acquisition, which purchases home equity loans in bulk, produced
$540.2 million in home equity loans in 1997 compared to $441.4 million for
1996.
United Companies Funding, the Company's manufactured housing lender,
originated $195.6 million in manufactured housing chattel contracts and
$56.2 million in land-and-home contracts in 1997, compared to $115.6
million and $3.2 million in 1996, respectively. The manufactured housing
unit originates loan products through dealers and directly to the consumer.
At year end 1997, UCFI operated in 44 states through 3,061 dealers.
Products. The Company's principal products are fixed and adjustable rate
("ARM") home equity loans with a fixed amount and term to maturity, which are
secured by a first lien mortgage on the borrower's residence. In 1997, the
Company began offering a hybrid home equity loan product which has a rate that
is fixed for three years and becomes adjustable thereafter (such hybrid loans
are included in the category of ARM loans in the following discussion and
tables). Typically the proceeds of the loan will be used by the borrower to
refinance an existing first mortgage in order to finance home improvements or
for debt consolidation. These types of loans are commonly referred to as "B" and
"C" grade or "sub-prime" loans. These loans are distinct from home equity
revolving lines of credit, which are generally secured by a second mortgage and
typically carry a floating interest rate.
In addition to home equity loans, the Company offers manufactured housing
loan products made primarily to finance the purchase of new or used manufactured
homes. These contracts are typically secured by (i) a security interest in the
manufactured home purchased with the proceeds of such contracts or (ii) with
respect to certain of the contracts, liens on the real estate to which the
related manufactured homes are deemed permanently affixed.
The Company also offers a secured credit card product which is presently
targeted to the Company's home equity loan customer base. These credit cards are
typically secured by a second lien, behind the Company's first lien, on the
borrower's residence.
As of December 31, 1997, approximately 96.8% in aggregate principal amount
of the home equity loans owned and/or serviced by the Company were secured by a
first mortgage with the remaining 3.2% in aggregate principal amount secured by
second or multi-property mortgages. During 1997, approximately $2.8 billion in
first mortgage home equity loans and $98.1 million in second mortgage and
multi-property home equity mortgage loans were originated or acquired by the
Company. In the case of most home equity loans for home improvements, the loan
proceeds are disbursed to an escrow agent which, according to guidelines
established by the Company, releases such proceeds upon completion of the
improvements or in draws as the work on the improvements progresses. The
weighted average interest rate on home equity loans produced during 1997 was
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10.9%, compared to 11.2% during 1996. Costs incurred by the borrower for loan
origination, including origination points and appraisal, legal and title fees,
are often included in the amount financed.
The Company's principal market for its home equity loans is individuals who
may not otherwise qualify for conventional loans that are readily marketable to
the government-sponsored mortgage agencies or conduits and available through
most commercial banks and many other lending institutions. Loans to such
borrowers present a greater credit risk and therefore produce higher loan
origination fees and interest rates as compared to loans to customers of banks
and thrifts. The Company believes that its customers generally place a higher
priority on the amount of the monthly payment and prompt credit approval than on
the interest rate and origination fees associated with the loan. Management of
the Company believes that the greater credit risk arising out of making loans to
these borrowers is compensated by higher fees and interest rates. There are
generally numerous competitors for these borrowers in each of the Company's
geographic markets. Principal competitors include recognized national and
regional lenders.
The Company's manufactured housing lending program is primarily conducted
through UCFI. UCFI may (i) purchase contracts from approved manufactured housing
dealers ("indirect financing"), (ii) originate contracts directly with
individual owners or purchasers of manufactured homes ("direct financing") or
(iii) make bulk purchases of contracts originated or acquired by other lending
institutions, finance companies or affiliates. These contracts are generally
secured by a security interest in the manufactured home purchased with the
proceeds of the loan. Through its affiliates, UCFI also originates contracts
("land and home contracts") which, in addition to being secured by security
interests in the manufactured homes, are secured by liens on the real estate to
which the manufactured homes are deemed permanently affixed. Manufactured home
contracts are generally subject to minimum down payments of approximately 10% of
the amount financed and the term of the contracts do not exceed 30 years. At
December 31, 1997, UCFI was licensed to conduct business in 44 states.
Through its regional managers, UCFI purchases manufactured housing
contracts from manufactured housing dealers. UCFI's regional managers contact
dealers located in their region and explain UCFI's available financing plans,
terms, prevailing rates and credit and financing policies. If the dealer wishes
to use UCFI's available customer financing, the dealer must make an application
for dealer approval. Upon satisfactory results of UCFI's investigation of the
dealer's creditworthiness and general business reputation, UCFI and the dealer
execute a dealer agreement. As of December 31, 1997, the dealers with which UCFI
has entered into dealer agreements are located in 44 states.
UCFI provides indirect financing only for manufactured homes which are
manufactured by an approved manufacturer. Approval may be requested by a dealer
or a manufacturer. If UCFI's review of the manufacturer's creditworthiness and
general business reputation is satisfactory, UCFI will approve the
manufacturer's products as being eligible for indirect financing.
All contracts that UCFI purchases from dealers are written on forms
provided by UCFI and are purchased on an individually approved basis. The dealer
submits the customer's credit application and purchase order to UCFI's executive
offices where UCFI's underwriters make an analysis of the creditworthiness of
the proposed buyer. If the application meets UCFI's guidelines and the credit is
approved, UCFI purchases the contract after the manufactured home is delivered
and set up and the customer has been contacted by telephone to obtain the
customer's approval of the manufactured home and the delivery and set-up of the
manufactured home.
Financing is also provided directly to individuals who own or wish to
purchase manufactured homes. The customer's credit application is submitted to
UCFI or one of its affiliate's executive offices where the underwriters make an
analysis of the creditworthiness of the customer. A customer's application will
also be accepted over a toll-free telephone number established for that purpose.
If the telephone application receives preliminary approval, it is further
processed as with other customer applications.
Manufactured housing contracts originated or acquired by other lending
institutions, finance companies or affiliates may also be purchased by the
Company. Each contract so purchased from an unaffiliated party is
re-underwritten prior to the purchase thereof using the then-current
underwriting standards of UCFI.
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Production. The following table reflects loan production by the respective
origination channels of the Company by product type for the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
AMOUNT LOAN SIZE AMOUNT LOAN SIZE AMOUNT LOAN SIZE
---------- --------- ---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Home Equity
UC Lending
Fixed.................... $ 681,399 37 $ 680,481 38 $ 740,707 37
ARM...................... 831,631 69 430,374 69 198,369 78
---------- ---------- ----------
1,513,030 1,110,855 939,076
UNICOR
Fixed.................... 439,635 48 542,845 56 337,802 50
ARM...................... 127,214 103 27,259 107 85,208 104
---------- ---------- ----------
566,849 570,104 423,010
GINGER MAE
Fixed.................... 146,527 61 115,079 71 44,497 59
ARM...................... 64,870 104 3,805 131 6,351 115
---------- ---------- ----------
211,397 118,884 50,848
UC ACQUISITION
Fixed.................... 50,267 70 42,139 72 7,709 50
ARM...................... 489,952 114 399,306 111 120,894 156
---------- ---------- ----------
540,219 441,445 128,603
UCFI
Fixed.................... 56,156 59 3,170 52 -- --
---------- ---------- ----------
Manufactured housing --chattel
contracts
UC Lending............... 14,529 15 1,289 18 -- --
GINGER MAE............... 74 19 -- -- -- --
UCFI..................... 195,598 33 115,631 30 887 --
---------- ---------- ----------
210,201 116,920 887
Total Production.... $3,097,852 $2,361,378 $1,542,424
========== ========== ==========
</TABLE>
Underwriting.
Home equity loans. Supervision of the underwriting staff is centralized,
however, each of the Company's origination channels for home equity loans has
its own staff of underwriters in order to provide better service to its
respective customers. Regardless of the manner of origination, all home equity
loans are underwritten (or generally, in the case of bulk purchases, are
re-underwritten) prior to approval and funding utilizing essentially similar
underwriting guidelines. Underwriting guidelines are modified from time to time.
The following is a description of the current underwriting guidelines.
The underwriting process is intended to assess both the prospective
borrower's ability to repay the loan and the adequacy of the real property
security as collateral for the loan granted. On a case-by-case basis, after
review and approval by the Company's underwriters, home equity loans may be made
which vary from the underwriting guidelines.
The Company originates fixed-rate home equity loans with original terms to
maturity not to exceed: 360 months for single family, owner occupied first
mortgages; 360 months for single family, non-owner occupied first mortgages; 360
months for single family, combination owner occupied/rental property first
mortgages; and 180 months for single family, owner occupied second mortgages.
The fixed-rate home equity loan amounts generally do not exceed $500,000 in the
case of loans secured by first liens, and $150,000 in the
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case of loans secured by second liens, in each case unless a higher amount is
specifically approved by the applicable underwriters.
All of the fixed-rate home equity loans are fully amortizing, except for
Balloon Loans which comprised 2.2% of the Company's owned and/or serviced
portfolio at December 31, 1997. UNICOR originates and the Company's other
origination networks may originate fixed-rate loans with an original term to
maturity ranging from 60 to 240 months and a longer amortization schedule
ranging from 180 to 360 months ("Balloon Loans"). Balloon Loans must be secured
by first liens on single family, owner occupied residential properties. UNICOR
and GINGER MAE also originate fixed-rate home equity loans which provide that
the interest rate may decrease by one percentage point if the borrower makes the
first 12 consecutive monthly payments without a delinquency. At that time, the
monthly payments will be recalculated to fully amortize the loan at the reduced
rate over the remaining term to maturity.
Adjustable rate home equity loans (which for purposes hereof includes
hybrid loans) generally amortize fully over a period not to exceed 360 months.
The maximum loan amount for adjustable-rate home equity loans is $500,000 unless
a higher amount is specifically approved by the applicable underwriters.
The homes used for collateral to secure the fixed-rate home equity loans
may be owner occupied, non-owner occupied rental properties or a combination of
owner occupied/rental properties, which in any case are one-to-four family
residences (which may be a detached or semi-detached row house, townhouse, a
condominium unit or a unit in a planned unit development). In addition, such
loans may be secured by single-family owner occupied manufactured or mobile
homes with land if the manufactured or mobile homes are permanently affixed and
defined as real estate under applicable state law. Certain loans may be secured
by a leasehold interest and the improvements thereon. Second mortgage loans are
generally permitted only for fixed-rate home equity loans and generally are
limited to one-to-four family owner occupied property. Second mortgage loans
typically will not be made if the first mortgage loan is a balloon or an
individual or owner financed mortgage loan.
The homes used for collateral to secure adjustable-rate home equity loans
may be owner occupied or non-owner occupied rental properties, which in any case
are one-to-four-family residences (which may be a detached or semi-detached, row
house, townhouse, a condominium or unit in a planned unit development).
In general, the value of each property proposed as security for a home
equity loan is required to be determined by a current appraisal from an
independent appraiser who has been approved by the Company. The Company selects
the appraiser and orders the appraisal except for broker or correspondent
originated home equity loans for which the broker or the correspondent selects
the appraiser from a list of appraisers pre-approved by the Company.
The Company requires that the appraisal provide an adequately supported
estimate of the value of the property proposed as security for the requested
home equity loan and a complete, accurate description of the property. In some
cases, the appraisal is subject to completion of improvements which are to be
made with the proceeds of the home equity loan. The property is analyzed by the
Company, based on the appraisal, to determine its acceptability as security for
the loan requested.
Manufactured housing contracts. The same underwriting standards are applied
regardless of the method of production of a manufactured housing contract. The
underwriting of manufactured housing contracts focuses primarily on the
borrower's capacity to repay the debt. The analysis includes application of a
credit scoring system and a review of the applicant's paying habits, length and
likelihood of continued employment, and certain other factors. The Company's
current underwriting guidelines for conventional contracts limit the maximum
loan size to $200,000 in the case of chattel contracts (i.e., manufactured
housing installment sales contracts and manufactured housing installment loan
agreements) and $300,000 in the case of land-and-home contracts (i.e., contracts
where the manufactured home is deemed permanently affixed to the real estate on
which it is located). These amounts may be exceeded when the Company's
underwriters deem it appropriate. Appraisals on used manufactured homes are
performed by employees of the Company in the case of indirect financing or by
independent appraisers approved by the Company in the case of direct financing.
The appraisals of such independent appraisers are validated by the Company's
personnel through a review of the
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National Automobile Dealers Association base values and on-site inspections. The
Company applies substantially the same loan-to-value ratio, appraisal and other
underwriting standards and procedures to the land-and-home contracts as are
applied to other home equity loans.
Loan-to-Value.
Home equity loans. The total amount of a home equity loan generally
includes origination fees, credit life insurance premium, if any, prepaid
interest and other closing costs (such as the cost of an appraisal report and
title insurance premiums). Loan-to-value is the percentage equal to the note
amount divided by the lesser of appraised value or the purchase price of the
real estate plus financed improvements for the real estate. For fixed-rate and
adjustable rate home equity loans originated through UNICOR and GINGER MAE, the
maximum loan-to-value is 90%, with the maximum for rural properties generally
being 80%. For home equity loans originated through UC Lending, an Underwriting
Loan-to-Value Ratio, as described below, is utilized. The total amount of a home
equity loan, net of the origination fees, credit life insurance premium, if any,
prepaid tax and insurance escrow, real estate tax service fee, loan application
fee and prepaid interest, is defined as the "Cash Out." The "Underwriting
Loan-to-Value Ratio" for underwriting purposes is the Cash Out divided by the
appraised value or purchase price of the property plus financed improvements for
the real estate, whichever is less. The Cash Out with respect to fixed-rate and
adjustable-rate loans originated through the branch network is limited to 90% of
the lesser of the applicable appraised value or purchase price of the property.
Because the Underwriting Loan-to-Value Ratio is based on the Cash Out rather
than the actual principal balance of the related loan, the loan-to-value ratio
of such loan will be higher and could be substantially higher than the
Underwriting Loan-to-Value Ratio. However, the loan-to-value ratio may not
exceed 100%, except as described below.
Generally, the maximum Underwriting Loan-to-Value Ratio is 85% for a loan
with a second mortgage on the property. With respect to rural properties, the
maximum Underwriting Loan-to-Value Ratio (utilizing only up to ten acres and the
improvements thereon) is 80%. The maximum Underwriting Loan-to-Value Ratio
generally applicable to non-owner occupied homes and owner occupied
manufactured/mobile homes with land is generally 80%.
In 1997, the Company began originating a home equity loan product having a
loan-to-value ratio up to 125%. The Company originates these loans with the
intent to sell them shortly after origination on a servicing released basis to
third party purchasers.
Manufactured housing contracts. With respect to conventional chattel
contracts for new manufactured homes, the Company may finance up to the lesser
of (a) 95% of the cash sale price (including taxes, fees and insurance) of the
manufactured home or (b) 130% of the manufacturer's invoice price of the
manufactured home plus 100% of taxes, license fees and freight charges, 100% of
the dealer's cost of additional dealer-installed equipment (not to exceed 25% of
the base price of the manufactured home), and up to $1,500 of set-up costs per
module. With respect to used manufactured homes, the Company may finance up to
100% of the lesser of (a) the total delivered sales price of the manufactured
home (including taxes, fees, insurance and up to $1,500 of set-up costs per
module), or (b) the appraised value of the manufactured home. Taxes, fees, and
insurance may be included in the amount financed up to a maximum of 100% of the
appraised value of the used manufactured home. The guidelines in this paragraph
may be exceeded when the Company's underwriters deem it appropriate.
Creditworthiness.
Home equity loans/manufactured housing contracts. Verification of personal
financial information for each applicant is required. The applicant's total
monthly obligations (including principal and interest on each mortgage, tax
assessments, other loans, charge accounts and all scheduled indebtedness)
generally should not exceed 50% of a borrower's gross monthly income. In the
case of adjustable-rate home equity loans, except for the hybrid product, the
debt ratio calculation is based upon the principal and interest payment amount
utilizing the maximum rate on the second change date. Generally, the borrowers
are required to have two years of employment with their current employer or two
years of like experience. Applicants who are salaried
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<PAGE> 8
employees must provide current employment information in addition to recent
employment history. This information is verified for salaried borrowers based on
written confirmation from employers, or a combination of a telephone
confirmation from the employer and the most recent pay stub and the most recent
W-2 tax form. A self-employed applicant is generally required to provide copies
of complete federal income tax returns filed for the most recent two years.
Re-verification of the foregoing information is generally not undertaken for
home equity loans purchased through the bulk purchase program of the Company.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's credit history is required. The credit report
should reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies and similar instances of adverse credit
that can be discovered by a search of public records. Verification is required
to be obtained of the first mortgage balance, if any, its status and whether
local taxes, interest, insurance and assessments are included in the applicant's
monthly payment. All taxes and assessments not included in the payment are
required to be verified as current. A borrower's mortgage payment history should
generally reflect no more than three payments over 30 days delinquent in the
last twelve months; however, in some cases, a borrower is permitted to have no
more than five payments over 30 days delinquent in the last twelve months and
one payment over 60 days delinquent in the last twelve months. Credit analysis
is subjective and subject to interpretation in the underwriting process.
Other requirements. The Company generally requires title insurance coverage
on each home equity loan or land-and-home manufactured housing contract it
originates.
The borrower is required to obtain property insurance in an amount
sufficient to cover, in the case of a first mortgage, the new loan and in the
case of a fixed-rate second mortgage, the new loan and the prior mortgage. If
the sum of an outstanding first mortgage, if any, and the fixed-rate home equity
loan exceeds the lesser of replacement or insurable value, insurance equal to
the lesser of replacement or insurable value may be accepted. The Company
requires that its name and address are properly added to the "mortgagee clause"
of the insurance policy. In the event the Company's name is added to a "loss
payee clause" and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required. The
borrower is required to obtain flood insurance to the extent such insurance is
available under the Flood Disaster Protection Act of 1973, as amended.
After a loan is underwritten, approved and funded, the mortgage loan
packages are reviewed and monitored by home office loan review personnel. A
random sample of the mortgage loan packages are subsequently subjected to a
quality control audit.
Loan sales and securitizations. Substantially all of the home equity loans
and manufactured housing contracts originated or purchased by the Company are
sold. Since 1985, the Company has sold home equity loans originated by it in the
secondary market, initially in transactions with government-sponsored mortgage
agencies or conduits, later in private placement transactions with financial
institutions and, since the second quarter of 1993, through shelf registration
statements filed with the Securities and Exchange Commission by subsidiaries of
the Company. Approximately $7.9 billion of pass-through certificates backed
primarily by first mortgage home equity loans originated or purchased by the
Company through its origination channels have been issued under the registration
statements and publicly sold since 1993 through December 31, 1997. During 1996,
a subsidiary of the Company filed a shelf registration statement with the
Securities and Exchange Commission for the sale of manufactured housing contract
pass-through certificates. The registration statement was declared effective in
September of 1996 and subsequent thereto the Company has sold approximately $470
million of manufactured housing contracts in securitization transactions through
December 31, 1997. The Company intends to continue to effect securitization
transactions on a quarterly basis, but the amount and timing of sales of
securities under the shelf registration statements will depend upon market and
other conditions affecting the operations of the Company.
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The following table reflects certain information regarding home equity loan
production and sales during the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Home equity loan production.................... $2,887,651 $2,244,458 $1,541,537
Home equity loan sales......................... $2,710,320 $2,245,406 $1,471,868
Average coupon on loans sold................... 11.00% 11.20% 11.67%
Interest spread retained on loans sold......... 4.73% 4.80% 4.98%
</TABLE>
The following table reflects certain information regarding manufactured
housing contract production and sales during the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Manufactured housing contract production............... $210,201 $116,920 $887
Manufactured housing contract sales(1)................. $303,165 $163,999 --
Average coupon on contracts sold....................... 10.53% 11.20% --
Interest spread retained on contracts sold............. 3.37% 3.55% --
</TABLE>
- ---------------
(1) Manufactured housing contracts sold in 1997 and 1996 include $89.7 million
and $52.9 million, respectively, of land-and-home manufactured housing
contracts included in 1997 and 1996 home equity loan production.
The weighted average interest spread on loans and contracts sold (the
difference between the stated rate on the loan or contract and the rate paid to
purchasers of the pass-through certificates, less certain recurring fees) is
determined without regard to expected credit losses. Servicing rights are
retained on substantially all loans and contracts sold.
The Company's home equity loan securitization transactions are credit
enhanced and the certificates issued pursuant thereto have received ratings of
"Aaa" from Moody's Investors Service, Inc., "AAA" from Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. and "AAA" from Fitch
IBCA, Inc. (or AAAr in the case of interest only certificates). Credit
enhancement has been achieved in part through a guaranty provided by a third
party insurer and by subordinating a cash deposit and the excess interest spread
retained by the Company, up to a specified amount (the "Subordinated Amount"),
to the payment of scheduled principal and interest on the certificates should
there be a shortfall in collections from borrowers in the form of monthly
mortgage payments during any given period. If cumulative payment defaults exceed
the Subordinated Amount, the third party insurer is obligated to pay any further
losses to the owners of the certificates. The Company has, from time to time,
used Financial Guaranty Insurance Company and MBIA Insurance Corporation as
third party insurers. Credit enhancement for the manufactured housing contract
securitization transactions has been achieved by a senior/subordinated
structure, except in one transaction in which credit enhancement was provided in
part through a guaranty by a third party insurer. In the senior/subordinated
structure, losses are borne first by the subordinated certificates. The
certificates publicly issued pursuant to the manufactured housing contract
securitizations have received investment grade ratings by nationally recognized
rating agencies. The Company has retained some of the subordinated certificates
in such securitizations.
Each pooling and servicing agreement relating to home equity loan
securitization transactions governs the distribution of cash flows from the
pooled loans and requires the establishment of an account (the "Reserve
Account"). Such agreements have required for many of such securitization
transactions an initial cash deposit by the Company to the Reserve Account.
Thereafter, the excess interest spread retained by the Company is deposited in
the Reserve Account. There are no events that will require the aggregate
deposits to the Reserve Account of such excess interest to exceed the related
Subordinated Amount. To the extent that losses are
9
<PAGE> 10
incurred on the loans underlying the certificates issued in a securitization
transaction, such losses are paid out of the related Reserve Account to the
extent that funds are available.
The Company derives a significant portion of its income by recording gains
at the time of the sale of home equity loans and manufactured housing contracts
(sometimes referred to collectively herein as "loans"). 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") which required the Company to
change the method it previously utilized in calculating the gain on its sale of
loans and required the reclassification of the assets and liabilities retained
by the Company (the "retained interests") in connection with such sales.
Previously, the retained interests were classified as "Capitalized excess
servicing income", "Temporary investments -- reserve accounts" and the
"Allowance for loan losses on serviced loans". Such amounts are now classified
as "Interest-only and residual certificates" and are net of the allowance for
loan losses on serviced loans (recorded in connection with loan sale
transactions), such allowance having been previously recorded as a liability.
SFAS No. 125 requires that servicing assets and other retained interests in the
transferred assets be measured by allocating the carrying amount prior to the
transfer between the assets sold and the retained interests, if any, based on
their relative fair values at the date of transfer. Effective with the
implementation of SFAS No. 125, the fair value of the Interest-only and residual
certificates was estimated using the expected dates that the retained interests
are to be released from the related reserve accounts. The allowance for loan
losses on serviced loans is a component in determining the fair value of the
Interest-only and residual certificates. In addition, the Interest-only and
residual certificates are classified as trading securities under the provisions
of SFAS No. 115 and, as such, recorded at fair value with the resultant change
in unrealized gain or loss recorded in the results of operations in the period
of change in value. The fair value of the Company's Interest-only and residual
certificates is determined by computing the present value of the excess of the
weighted average coupon on the loans sold over the sum of: (1) the rate paid to
the buyer, (2) a normal servicing fee and (3) where applicable, a trustee fee
and surety bond fee. For home equity loans, prepayment assumptions used in the
present value computation are based on the actual prepayment experience of the
Company's owned and serviced loan portfolio. Prepayment assumptions for
manufactured housing contracts are based on comparable industry prepayment
statistics. The cash flows expected to be received by the Company are discounted
at an interest rate that the Company believes an unaffiliated third-party
purchaser would require as a rate of return on a financial instrument comprised
of such cash flows. At December 31, 1997, the Company's balance sheet reflected
"Interest-only and residual certificates of approximately $882 million. See Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of prepayment rate, discount rate and loan loss
assumptions utilized by the Company in the valuation of its Interest-only and
residual certificates.
Loan Servicing. The Company retains the servicing on substantially all
loans it originates. The following services are performed for investors to whom
the Company has sold loans and for which it has retained servicing: investor
reporting; collecting and remitting periodic principal and interest payments to
investors and performing other administrative services, including maintaining
required escrow accounts for payment of real estate taxes and standard hazard
insurance; determining the adequacy of standard hazard insurance; advising
investors of delinquent loans; conducting foreclosure proceedings, and
inspecting and reporting on the physical condition of the properties securing
the loans; and disposing of foreclosed properties. The Company is generally
obligated to advance interest on delinquent loans to the secondary market
investors at the applicable pass-through rate until satisfaction of the note,
liquidation of the property securing the loan or charge off of the loan. To the
extent that the amount recovered through liquidation of collateral is
insufficient to cover the unpaid balance of the loan, the Company incurs a loss
until such losses aggregate the limit specified in the related loan sale
agreement. In connection with its servicing activities, the Company sends to
borrowers monthly statements that specify the fixed payment amount and due date
in the case of fixed-rate loans and the adjusted payment amount and due date in
the case of adjustable-rate loans and the late payment amount, if any. With
respect to adjustable-rate loans, the Company provides written notices to
borrowers of upcoming rate adjustments reflecting the adjusted payment amounts.
10
<PAGE> 11
The Company, as master servicer, is required under each loan sale agreement
to service the mortgage loans or manufactured housing contracts, as the case may
be, either directly or through sub-servicers. Substantially all servicing
activities with respect to home equity loans are centralized at the home office,
other than disposal of foreclosed properties. In addition, the home office
performs certain servicing activities for manufactured housing contracts with
the other activities performed by that unit.
The contractual balances of loans owned and/or serviced, excluding real
estate owned and/or serviced, by the Company were as follows for the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Owned and serviced:
Home equity.................................. $5,528,923 $4,040,138 $2,701,481
Commercial(1)................................ -- -- 251,241
Manufactured housing -- chattel contracts.... 308,903 115,137 888
Other........................................ 39,513 46,846 58,554
---------- ---------- ----------
Total................................ $5,877,339 $4,202,121 $3,012,164
========== ========== ==========
</TABLE>
- ---------------
(1) Under the terms of the Company's sale of United Companies Life Insurance
Company ("UCLIC"), servicing of commercial real estate loans owned by UCLIC
and pass-through certificates owned by third parties and UCLIC which are
backed by commercial real estate loans originated by the Company were
transferred from the Company to UCLIC at the closing of the sale in July,
1996.
At December 31, 1997, the Company's owned home equity portfolio of
properties acquired in foreclosure or for which deeds in lieu of foreclosure
have been accepted and held by the Company pending disposition represented
approximately $6.4 million (excluding the allowance for loan losses attributable
to these properties). This amount may include the first mortgage balance,
delinquent first mortgage payments and certain advances made on the property.
When the Company believes that borrowers with existing loans with the
Company are likely to refinance such loans due to interest rate changes, equity
build-up or other reasons, the Company actively attempts to retain such
borrowers through solicitations of such borrowers to refinance with the Company.
Such refinancings generate fee income and servicing income for the Company.
OTHER OPERATIONS
The Company has developed an 80 acre office park which includes its home
office building and investment properties owned by the Company. The Company owns
four office buildings which have approximately 500,000 square feet, of which
267,000 square feet were used by the Company and its subsidiaries at December
31, 1997. In addition, United Companies Realty and Development Co., Inc. ("UC
Realty"), a wholly-owned subsidiary of the Company, is a general partner in the
ownership of a 100,000 square foot office building, also located in the office
park. All of the investment properties were approximately 100% leased at
December 31, 1997. UC Realty manages each of these properties as well as an
additional 58,000 square foot building in the park owned by a third party.
During 1997, UC Realty completed construction of a 103,000 square foot
operations center in the park and began construction of a 53,000 square foot
addition to this operations center. The Company also operates a homeowners
insurance agency and engages in telecommunications business which provides
telephone service to the home office and tenants in the office park, neither of
which are material to its operations.
DISCONTINUED OPERATIONS
In addition to its lending operations, the Company was historically engaged
in insurance operations. During 1996, the Company sold all of the outstanding
common stock of United Companies Life Insurance Company, its life and annuity
insurance subsidiary, and United General Title Insurance Company, its title
11
<PAGE> 12
insurance subsidiary. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discontinued Operations and
Note 12 to the Notes to Consolidated Financial Statements.
GOVERNMENT REGULATION AND LEGISLATION
The Company's operations are subject to extensive regulation, supervision
and licensing by federal and state authorities. Regulated matters include,
without limitation, maximum interest rates and fees which may be charged by the
Company, disclosure in connection with loan originations, credit reporting
requirements, servicing requirements, federal and state taxation, and multiple
qualification and licensing requirements for doing business in various
jurisdictions. The Company believes that it maintains all requisite licenses,
permits and approvals which are material to its operations and is in compliance
in all material respects with applicable federal and state regulations.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. The
Company's activities as a lender are also subject to various federal laws
including the Truth-in-Lending Act, the Real Estate Settlement Procedures Act,
the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Fair
Credit Reporting Act.
In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
There are currently proposed various laws, rules and regulations which, if
adopted, could impact the Company. There can be no assurance that these proposed
laws, rules and regulations, or other such laws, rules or regulations, will not
be adopted in the future which could make compliance much more difficult or
expensive, restrict the Company's ability to originate, broker or sell loans,
further limit or restrict the amount of commissions, interest and other charges
earned on loans originated or sold by the Company, or otherwise adversely affect
the business or prospects of the Company.
COMPETITION
As a purchaser and originator of sub-prime loan products, the Company faces
increasing competition. Traditional competitors include other mortgage banking
companies, commercial banks, credit unions, thrift institutions, credit card
issuers and finance companies. Many of these competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms including convenience in obtaining a loan, customer service,
marketing and origination channels and interest rates. Certain large national
finance companies, commercial banks, thrifts, credit card originators and
conforming mortgage originators, with greater capitalization and financial
resources, have adapted their origination programs and allocated resources to
the origination of non-conforming loans. A large bank holding company recently
announced its proposed acquisition of a major sub-prime lender with nationwide
operations. In addition, Fannie Mae and Freddie Mac have taken recent actions
which indicate an interest in becoming involved in the secondary market for home
equity loans. Such actions include the issuance of securities backed by loans of
a lower credit quality than historically has been the case and the
implementation of automated underwriting systems that could be used to originate
home equity loans. The entrance of these competitors into the Company's market
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
ITEM 2. PROPERTIES
The Company's executive offices are located in its home office building in
Baton Rouge, Louisiana. The Company occupies all of its home office building
which has approximately 94,000 square feet. The executive offices of the
Company's home equity loan lending subsidiaries are located at the Company's
home office building and adjacent investment property. At December 31, 1997, the
operations of UC Lending were conducted in 42 states from 4 locations owned by
the Company in 4 cities and from 217 additional leased offices in 213 cities.
The offices owned or leased range in size from approximately 1,500 square feet
to 3,650
12
<PAGE> 13
square feet; leases expire from 1998 to 2003, excluding renewal options.
Operations of UCFI are based in Minneapolis, Minnesota in leased offices
totaling approximately 51,000 square feet. During 1997, aggregate annual rental
expense for leased office space was approximately $7.9 million. Management
believes that the properties are adequately maintained and insured, and
satisfactorily meet the requirements of the business conducted therein.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business is such that it is routinely involved
in litigation and is a party to or subject to other items of pending or
threatened litigation. Although the outcome of certain of these matters cannot
be predicted, management of the Company believes, based upon information
currently available, that the resolution of these various matters will not
result in any material adverse effect on its consolidated financial condition,
results of operations and cash flows.
The remaining affairs of the Company's subsidiary, Foster Mortgage
Corporation ("FMC"), a discontinued operation, which had been conducted under
the supervision of a bankruptcy court have been concluded. The claims of the
institutional lenders under FMC's primary credit facility (the "FMC
Institutional Lenders") relating to the Company's alleged failure to remit all
sums due FMC regarding federal income taxes under a tax agreement among the
Company and its subsidiaries, including FMC, were settled. The Company recorded
a $5.6 million charge in the fourth quarter of 1997 resulting from the
settlement. The claims of the FMC Institutional Lenders against the Company
seeking avoidance of certain payments alleged to be preferences or fraudulent
conveyances were dismissed after a trial before the bankruptcy court.
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 has ruled 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Common Stock Prices and Dividends
On September 20, 1996, the Company's Common Stock began trading on the New
York Stock Exchange (the "NYSE") under the symbol "UC". Prior to that date, the
Company's Common Stock traded on the National Association of Securities Dealers
Automated Quotation System/National Stock Market ("the Nasdaq Stock Market")
under the symbol "UCFC". The following table sets forth for the periods
indicated the high and low sale prices of the Company's Common Stock as reported
on the NYSE subsequent to September 20, 1996 and on the Nasdaq Stock Market
prior to that date and the per share cash dividends declared:
<TABLE>
<CAPTION>
SALES PRICES
---------------- CASH
HIGH LOW DIVIDENDS
------ ------ ---------
<S> <C> <C> <C>
1997
First Quarter......................................... $30.75 $19.88 $.08
Second Quarter........................................ 28.25 15.50 .08
Third Quarter......................................... 32.75 24.94 .08
Fourth Quarter........................................ 36.56 13.00 .08
----
Total......................................... $.32
====
1996
First Quarter......................................... $32.75 $22.25 $.07
Second Quarter........................................ 36.75 28.00 .07
Third Quarter......................................... 39.25 28.50 .07
Fourth Quarter........................................ 34.63 25.00 .08
----
Total......................................... $.29
====
</TABLE>
The Company has declared and paid regular quarterly cash dividends on its
Common Stock since 1974. While the Company intends to continue to pay regular
quarterly cash dividends on its Common Stock, its ability to do so will be
subject to its earnings, financial condition, capital and regulatory
requirements, credit facility restrictions and such other factors as the
Company's Board of Directors may consider relevant. (See Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.)
Number of Common Equity Security Holders
APPROXIMATE NUMBER OF COMMON EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF
SHAREHOLDERS
TITLE OF CLASS AS OF MARCH 9, 1998
-------------- ---------------------
<S> <C>
Common Stock, $2.00 par value 3,093
</TABLE>
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from the Company's
audited Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)(2)
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues............................ $440,811 $342,558 $252,650 $179,162 $121,312
Total expenses............................ 314,904 208,701 149,985 104,168 80,886
-------- -------- -------- -------- --------
Income from continuing operations before
income taxes........................... 125,907 133,857 102,665 74,994 40,426
Provision for income taxes................ 45,326 47,665 37,740 26,298 13,751
-------- -------- -------- -------- --------
Income from continuing operations......... 80,581 86,192 64,925 48,696 26,675
Income (loss) from discontinued
operations(1).......................... (5,981) (4,532) 4,543 838 (15,100)
-------- -------- -------- -------- --------
Net income........................ $ 74,600 $ 81,660 $ 69,468 $ 49,534 $ 11,575
======== ======== ======== ======== ========
Per Share Data(4)(5):
Basic:
Income from continuing operations...... $ 2.58 $ 2.77 $ 2.19 $ 1.78 $ 1.25
Income (loss) from discontinued
operations........................... (.19) (.15) .16 .03 (.71)
-------- -------- -------- -------- --------
Net income........................ $ 2.39 $ 2.62 $ 2.35 $ 1.81 $ .54
======== ======== ======== ======== ========
Diluted:
Income from continuing operations...... $ 2.48 $ 2.64 $ 2.10 $ 1.71 $ 1.13
Income (loss) from discontinued
operations........................... (.18) (.14) .15 .03 (.64)
-------- -------- -------- -------- --------
Net income........................ $ 2.30 $ 2.50 2.25 $ 1.74 $ .49
======== ======== ======== ======== ========
Weighted average shares outstanding
Basic.................................. 31,224 31,159 29,606 27,298 21,304
Diluted................................ 32,496 32,677 30,881 28,486 23,637
Cash dividends............................ $ .32 $ .29 $ .20 $ .1818 $ .1546
Book value per common share............... $ 13.79 $ 11.73 $ 9.47 $ 7.38 $ 5.73
Return on common equity (continuing
operations)............................... 20.3% 26.5% 26.2% 27.4% 21.1%
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data -- Year End:
Loans -- net........................ $ 206,598 $ 118,750 $ 68,393 $ 43,942 $ 55,165
---------- ---------- ---------- ---------- ----------
Interest-only and residual
certificates:
Certificated interests........... 599,426 426,393 280,985 174,031 105,917
Temporary investments -- reserve
accounts....................... 389,253 251,183 155,254 81,980 27,672
Allowance for losses on loans
serviced....................... (106,563) (73,102) (44,970) (26,822) (12,937)
---------- ---------- ---------- ---------- ----------
Total....................... 882,116 604,474 391,269 229,189 120,652
---------- ---------- ---------- ---------- ----------
Total assets........................ 1,337,208 925,273 708,730 479,719 365,310
Notes payable....................... 691,826 425,671 265,756 223,668 165,500
Total liabilities................... 856,579 504,996 356,256 277,634 211,942
Stockholders' equity................ 480,629 420,277 352,474 202,085 153,368
Other Data:
Total loan production............... 3,097,852 2,361,378 1,542,424 908,821 539,868
Home equity loan production......... 2,887,651 2,244,458 1,541,537 908,821 539,868
Average home equity loan size....... 58 56 49 41 39
Chattel contract production......... 210,201 116,920 887 -- --
Home equity loans serviced -- year
end(3)........................... 5,528,923 4,040,138 2,701,481 1,683,698 1,125,139
Total loans serviced -- year
end(3)........................... 5,877,339 4,202,121 3,012,164 2,032,405 1,568,781
Loan origination fees as % of retail
production....................... 7.3% 7.3% 7.3% 7.5% 7.7%
Weighted average interest spread
retained on home equity loans
sold............................. 4.73% 4.80% 4.98% 4.49% 6.06%
</TABLE>
- ---------------
(1) On July 24, 1996, the Company sold 100% of the capital stock of its
wholly-owned life insurance subsidiary, United Companies Life Insurance
Company ("UCLIC") and on February 29, 1996, the Company sold 100% of the
capital stock of its wholly-owned title insurance subsidiary, United General
Title Insurance Company ("UGTIC"). Previously, on May 7, 1993, the Company
announced its decision to dispose of the net assets and operations of Foster
Mortgage Corporation ("FMC"), a wholly-owned subsidiary of the Company. The
operations of UCLIC, UGTIC and FMC have been reclassified as discontinued
operations and the prior years' financial statements of the Company included
herewith have been restated accordingly.
(2) The Company implemented SFAS No. 125 during the quarter ended March 31,
1997. As a result of the implementation of SFAS No. 125, net income for 1997
was increased by $4.5 million or $0.14 per share on a fully diluted basis.
In addition, the amounts previously reflected on the Company's balance
sheets as "Capitalized excess servicing income" and "Temporary
investments -- reserve accounts" have been reclassified as "Interest-only
and residual certificates" and are net of the allowance for loan losses on
serviced loans (recorded in connection with loan sale transactions), such
allowance having been previously recorded as a liability. The allowance for
loan losses on serviced loans is a component in determining the fair value
of the Interest-only and residual certificates.
(3) Excludes real estate owned and/or serviced.
(4) During the fourth quarter of 1997, the Company implemented Financial
Accounting Standards Board 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. In accordance with the provisions of SFAS No. 128, the
Company was required to change the method previously used to compute EPS and
to restate all prior periods. Basic EPS excludes common stock equivalents
from the EPS calculation, while calculation of diluted EPS is generally
consistent with the Company's prior method of determining fully diluted EPS.
(5) All share and per share data have been adjusted to reflect stock dividends.
16
<PAGE> 17
ITEM 7. 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.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements contained herein
that are not historical facts are forward-looking statements based on the
Company's current expectations and beliefs concerning future developments and
their potential effects on the Company. There can be no assurance that future
developments affecting the Company will be those anticipated by the Company.
Actual results may differ from those projected in the forward-looking
statements. These forward-looking statements involve significant risks and
uncertainties (some of which are beyond the control of the Company) and are
subject to change based upon various factors, including but not limited to the
following risks and uncertainties: changes in the asset securitization industry
and 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; the presence of competitors with greater financial
resources and the impact of competitive products and pricing; the effect of the
Company's policies, including the amount and rate of growth of Company expenses;
the continued availability to the Company of adequate funding sources; actual
prepayment rates and credit losses on loans sold as compared to prepayment rates
and credit losses assumed by the Company at the time of sale for purposes of its
gain on sale computations; the effect of changes in market interest rates on the
spread between the coupon rate on loans sold and the pass-through rate on
securities backed by such loans issued by the Company in securitization
transactions and on the discount rate assumed by the Company in its gain on sale
computations; timing of loan sales; the quality of the Company's owned and
serviced loan portfolio including levels of delinquencies, customer bankruptcies
and charge-offs; ratings; and various legal, regulatory and litigation risks.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as the result of new information, future
events or otherwise. For a more detailed discussion of some of the foregoing
risks and uncertainties, see "Investment Considerations" below as well as other
Company filings with the Securities and Exchange Commission.
1997, 1996 AND 1995 RESULTS OF OPERATIONS
The Company's operations primarily consist of the production (by
origination or purchase), sale and servicing of first mortgage,
non-conventional, home equity loans ("loans") and manufactured housing loan
contracts ("contracts"). Fundamental to the profitability and funding of the
Company's operations is the sale of loans and contracts with servicing rights
retained. The majority of the Company's revenue is derived from the gain
recognized on the sale of loans and the recognition of net loan fees at the time
of sale of the loans. Net loan fees on loans owned by the Company are recognized
over the lives of the loans as an adjustment to yield using the interest method.
The Company sells substantially all of its loan production in public
securitization transactions through shelf registration statements of its
subsidiaries. During 1997, 1996 and 1995, the Company sold publicly $2.7
billion, $2.2 billion and $1.5 billion, respectively, of pass-through
certificates backed by its home equity loans and, during 1997 and 1996, $303
million and $164 million, respectively, of pass-through certificates backed by
its manufactured housing contracts.
The weighted average interest spread on home equity loans sold to third
parties (the difference between the stated rate on the loan and the rate paid to
purchasers, less recurring fees) was 4.73%, 4.80% and 4.98% in
17
<PAGE> 18
1997, 1996 and 1995, respectively. The weighted average interest spread on loans
sold is determined without regard to credit losses, which are provided for
separately by the Company.
Net income for 1997 was $74.6 million ($2.30 per share based on 32.5
million weighted average shares outstanding) compared to $81.7 million for 1996
($2.50 per share based on 32.7 million weighted average shares outstanding) and
$69.5 million for 1995 ($2.25 per share based on 30.9 million weighted average
shares outstanding). The decrease in net income in 1997 resulted primarily from
increased expenses related to continued expansion of the Company's retail
infrastructure, including a $25 million increase in advertising expenses. Net
income for 1997 and 1996 was reduced by losses of $6.0 million and $4.5 million,
respectively, recognized in connection with the Company's discontinued
operations. Net income for 1995 was increased by $4.5 million as the result of
net income earned by these subsidiaries.
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the years ended December 31, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan sale gains.................................... $265,122 $199,030 $142,156
Finance income, fees earned and other loan
income........................................... 145,639 125,306 97,759
Investment income.................................. 24,230 13,156 7,403
Other.............................................. 5,820 5,066 5,332
-------- -------- --------
Total.................................... $440,811 $342,558 $252,650
======== ======== ========
</TABLE>
The Company sells substantially all loans which it originates or purchases
and generally retains the servicing rights on loans sold. Under the
sales/servicing agreements, the buyer receives the principal collected on the
loan and an agreed upon rate on the outstanding principal balance, and the
Company retains the excess of the interest at the contractual rate over the sum
of the rate paid to the buyer (the "pass-through" rate), a normal servicing fee
and, where applicable, the trustee fee and surety bond fee. At the time of sale,
the Company allocates a portion of its basis in the loans to mortgage servicing
rights which is recorded as an asset (Capitalized mortgage servicing rights),
records as an asset the fair value of the excess interest retained by it
(Interest-only and residual certificates), makes a provision for an allowance
for losses on the loans sold for which it retains the servicing, and recognizes
the resulting loan sale gain as revenue. The fair value of the Company's
Interest-only and residual certificates, which is net of the allowance for loan
losses on serviced loans, is determined at the time of sale by the Company by
computing the present value of the cash flows of the excess interest retained by
the Company expected to be received by it (using the expected dates that such
interest is to be released from the related reserve accounts), discounted at an
interest rate that the Company believes an unaffiliated third-party purchaser
would require as a rate of return on a financial instrument comprised of such
cash flows. These amounts are calculated using prepayment and default
assumptions based on the actual experience of the Company's owned and serviced
portfolio for home equity loans and comparable industry prepayment statistics
for manufactured housing contracts. On a quarterly basis, the Company reviews
the fair value of the Interest-only and residual certificates by analyzing its
prepayment and other assumptions in relation to its actual experience, and, if
necessary, adjusts the carrying value of the Interest-only and residual
certificates to such fair value through a charge or credit to earnings. The
following information describes the prepayment assumptions used by the Company
as of December 31, 1997, in computing loan sale gains for its home equity
products:
- With its fixed rate product, the Company assumes a life-to-date
prepayment speed of 24% based on a seasoning curve that begins at 9% in
month one, increases to 27% in month twelve, increases to 30% in month 20
and stays constant until month 36, ramps down to 17% in month 53 and
remains constant at this rate until maturity. At December 31, 1997, the
Company had $3.2 billion in fixed rate home equity loans in its servicing
portfolio.
- The Company assumes a life-to-date prepayment speed of 28%, based on a
seasoning curve, for its adjustable rate product ("ARMs"). The curve
begins at 14% in month one, reaches 32% by month 12,
18
<PAGE> 19
increases to 34% in month 18 and stays constant until month 28 when it declines
to 33% and remains at this rate until month 48, then ramps down to 17% in month
56 and remains at 17% until maturity. At December 31, 1997, the Company had $1.1
billion in ARMs in its servicing portfolio.
- The Company assumes a life-to-date prepayment speed of 24%, based on a
seasoning curve for its hybrid loan products, i.e., products which have
rates fixed for two or three years and become adjustable thereafter. The
curve begins at 4% in month one, increases to 22% in month 12, continues
to increase to 30% in month 30 and stays constant until month 40, ramps
down to 20% by month 56 and remains constant at this rate until maturity.
At December 31, 1997, the Company had $1.0 billion in hybrid loans in its
servicing portfolio, of which $644 million have rates fixed for three
years.
The following table provides life-to-date prepayment rates and pool factors
as of December 31, 1997, with respect to the Company's home equity loan
securitizations by year of securitization:
<TABLE>
<CAPTION>
FIXED ARM HYBRID
-------------------------------- ------------------------------ ------------------------------
LIFE- LIFE- LIFE-
YEAR OF ORIGINAL TO-DATE POOL ORIGINAL TO-DATE POOL ORIGINAL TO-DATE POOL
SECURITIZATION BALANCE CPR FACTOR(1) BALANCE CPR FACTOR(1) BALANCE CPR FACTOR(1)
- -------------- ---------- ------- --------- -------- ------- --------- -------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993........................ $ 415,525 26% 23.26% $ 34,990 36% 14.71% -- -- --
1994........................ 935,568 25% 36.00% 74,987 37% 22.62% -- -- --
1995........................ 1,030,698 25% 48.85% 391,652 30% 45.59% -- -- --
1996........................ 1,350,058 21% 70.59% 732,762 30% 64.20% $142,308 20% 73.55%
1997(2)..................... 924,998 16% 91.58% 339,595 19% 90.60% 585,406 11% 95.27%
</TABLE>
- ---------------
(1) Pool Factor -- Percentage of the securitization remaining outstanding at
December 31, 1997.
(2) Amounts exclude 1997-D securitization, which was not fully funded as of
December 31, 1997.
The following table provides life-to-date prepayment rates and pool factors
as of December 31, 1997, with respect to the Company's manufactured housing loan
securitizations by year of securitization:
<TABLE>
<CAPTION>
REAL ESTATE CHATTEL
------------------------------------- -------------------------------------
YEAR OF ORIGINAL LIFE-TO-DATE POOL ORIGINAL LIFE-TO-DATE POOL
SECURITIZATION BALANCE CPR FACTOR(1) BALANCE CPR FACTOR(1)
- -------------- -------- ------------ --------- -------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1996........................ $55,031 21% 73.20% $109,968 6% 91.01%
1997(2)..................... 76,120 14% 90.87% 148,853 6% 95.92%
</TABLE>
- ---------------
(1) Pool Factor -- Percentage of the securitization remaining outstanding at
December 31, 1997.
(2) Amounts exclude 1997-4 securitization, which was not fully funded as of
December 31, 1997.
In addition, in its loan sale gain calculations, the Company has used a
discount rate of approximately 10% and projected cumulative losses of
approximately 250 basis points for its fixed rate products and 200 basis points
for its adjustable rate and hybrid loan products. See "Investment
Considerations" below.
Loan sale gains constitute the largest component of the Company's revenues.
Loan sale gains for 1997, 1996 and 1995 were reduced by $53.0 million, $47.6
million and $27.9 million, respectively, to provide for estimated future losses
on loans sold. The increase in the amount of loan sale gains in 1997 and 1996
was due primarily to a $465 million and a $774 million increase in the amount of
home equity loans sold during 1997 and 1996, respectively, over the prior year's
sales. Loan sale gains in 1997 were increased by $6.4 million over 1996 as the
result of an increase of approximately $139 million in manufactured housing
contracts sold. Loan sale gains are reduced by estimated future credit losses on
loans sold, transaction expenses and loan acquisition premiums. Loan sale gains
in 1997 include the capitalization of mortgage servicing rights in the amount of
$34.2 million compared to $20.9 million and $6.0 million in 1996 and 1995,
respectively. During the first quarter of 1997, the Company added a 3/27 hybrid
loan product to its home equity product line, which product features a fixed
coupon for the first three years of the life of the loan converting to an
adjustable coupon rate thereafter. Home equity loan production during 1997 was
comprised of 25% of the hybrid product,
19
<PAGE> 20
27% of adjustable rate loans and 48% of fixed rate loans. During the fourth
quarter of 1997, as the result of evaluating actual experience during the second
and third quarters of 1997, the Company increased the prepayment ("CPR")
assumption used by it in calculating loan sale gains on its hybrid product. This
adjustment to the CPR assumption for sales of this new product in 1997 resulted
in a $15 million negative adjustment to earnings during the fourth quarter of
1997.
The Company anticipates that loan sale gains recognized by it as a
percentage of loans sold will be reduced in future periods based upon its
analysis of several factors, including the use of alternative securitization
structures that focus on improving cash flow and a proposed change in accounting
rules by the Financial Accounting Standards Board expected to be adopted in
1998, to allow the classification of Interest-only and residual certificates as
"available-for-sale" assets, which will reduce the amount of earnings recorded
at the time of sale.
The Company from time to time enters into interest rate hedge mechanisms to
manage its exposure to interest rate changes in connection with the
securitization and sale of its loans. The Company closes out the hedge position
to coincide with the related loan sale and securitization transactions and
recognizes the results of the hedge transaction in determining the amount of the
related loan sale gain. Loan sale gains decreased in 1997 by approximately $7.4
million as the result of hedge transactions. During 1996, hedge transactions
increased loan sale gains by $.8 million. In 1995, loan sale gains were reduced
by $5.5 million from hedge transactions. There were no open hedge positions at
December 31, 1997 or 1996.
The following table presents information regarding loan sale transactions
for the periods indicated:
<TABLE>
<CAPTION>
HOME EQUITY LOANS MANUFACTURED HOUSING CONTRACTS
-------------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- --------- --------- -----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans sold.............. $2,710,320 $2,245,406 $1,471,868 $303,165 $163,999 $--
Average coupon.......... 11.00% 11.20% 11.67% 10.53% 11.20% --
Interest spread
retained.............. 4.73% 4.80% 4.98% 3.37% 3.55% --
Loan sale gains......... $ 246,729 $ 187,029 $ 142,156 $ 18,393 $ 12,001 $--
</TABLE>
During 1996 and 1997, the Company securitized certain home equity loans
that have a fixed coupon rate for two or three years then convert into an
adjustable rate for the remaining lives of the loans ("hybrid loans") of which
$1.05 billion is outstanding as of December 31, 1997. The pass-through rate on
the certificates backed by these hybrid loans is based on a floating interest
rate and is calculated monthly by reference to the London interbank offered rate
for one-month U.S. dollar deposits ("1-month LIBOR"). During the first quarter
of 1998, the Company entered into an interest rate cap transaction to mitigate
its exposure during the initial two or three year period when the coupon rates
are fixed and the pass-through rates are floating. In addition, certain classes
of the pass-through certificates of the Company's 1996 and 1997 securitizations
backed by fixed rate home equity loans provide for floating pass-through rates
based on 1-month LIBOR. These securitizations were structured so that the
maturity of these floating pass-through rate certificates is anticipated to be
approximately one year. As of December 31, 1997, $45 million of such 1996
certificates and $314 million of such 1997 certificates remain outstanding.
Fluctuations in and the level of market interest rates will impact the
interest spread retained by the Company on loans sold (which includes for
purposes hereof manufactured housing contracts) and, potentially, the amount of
its loan sale gains. As reflected in the table above, the average coupon on
loans and contracts originated during the respective periods has declined, which
decline the Company believes resulted from a lower interest rate environment and
increased competition in the sub-prime lending industry.
In connection with loan securitization transactions, the Company has used a
prefunding feature which "locks in" the pass-through rate that the Company will
pay to the investor on a predetermined amount of loans for future delivery. The
Company is obligated for the difference between the earnings on the prefunded
amount and the pass-through interest paid to the investor 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 fourth quarter of 1997, approximately $65 million was held in a
prefunding
20
<PAGE> 21
account for purchase of the Company's home equity loans and $3 million for the
purchase of manufactured housing contracts during the first quarter of 1998.
Such loans and contracts were delivered during the first quarter of 1998.
Finance income, fees earned and other loan income, which constitutes the
second largest component of the Company's revenues, was comprised of the
following items for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing fees earned............................ $ 194,600 $ 135,599 $ 89,410
Loan origination fees............................ 115,482 84,608 68,442
Loan interest.................................... 24,038 21,482 9,238
Other loan income................................ 13,259 9,623 8,576
Amortization of Interest-only certificates....... (182,709) (128,318) (70,268)
Amortization of mortgage servicing rights........ (9,272) (2,879) (173)
Other............................................ (9,759) 5,191 (7,466)
--------- --------- --------
Total.................................. $ 145,639 $ 125,306 $ 97,759
========= ========= ========
</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 $4.9 billion, $3.4 billion and $2.5 billion for 1997,
1996 and 1995, respectively.
Loan origination fees in excess of direct origination costs on each loan
originated by the Company are recognized over the life of the loan or earlier at
the time of sale of the loan to a third party. During 1997, 1996 and 1995, the
Company sold approximately $2.7 billion, $2.2 billion and $1.5 billion,
respectively, in home equity loans and recognized approximately $51.4 million,
$44.1 million and $36.0 million, respectively, in net loan origination fees
(which relate primarily to fixed rate retail production) in connection with
these sales. In addition, during 1997 and 1996, the Company recognized $1.6
million and $(.8) million, respectively, in net origination fees (costs) on
manufactured housing contracts in connection with sales of these contracts.
The Company estimates that nonaccrual loans reduced finance income for
1997, 1996 and 1995 by approximately $39.9 million, $21.7 million and $13.3
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
1997, the average amount of nonaccrual loans owned and/or serviced by the
Company was approximately $302 million compared to $166 million and $105 million
in 1996 and 1995, respectively.
Other loan income primarily includes insurance commissions and ancillary
loan income.
Investment income totaled $24.2 million for 1997 compared to investment
income of $13.2 million and $7.4 million during 1996 and 1995, respectively.
Investment income is primarily related to interest earned on temporary
investments reserve accounts.
Other income relates to income earned by the Company's telecommunications
business and property management with respect to its office park and overhead
reimbursement for 1995 and 1996 from discontinued operations prior to their
disposition.
21
<PAGE> 22
Expenses. The following table presents the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Personnel.......................................... $132,164 $ 96,313 $ 70,762
Interest........................................... 60,812 38,626 25,559
Other operating.................................... 121,928 73,762 53,664
-------- -------- --------
Total.................................... $314,904 $208,701 $149,985
======== ======== ========
</TABLE>
The increase in personnel costs are primarily associated with the expansion
of the Company's lending operations. During 1997, expansion of the Company's
retail branch office network resulted in an increase of 345 employees over 1996
and production support personnel increased by 117 employees. In addition,
staffing for the Company's wholesale and manufactured housing operations
increased by 171 employees during 1997 compared to 1996. The remaining increase
is primarily related to incentive compensation related to an increase in home
equity loan production.
Interest expense for 1997 increased approximately $22.2 million compared to
1996 principally due to an increase in the average amount of debt outstanding.
Interest expense for 1996 increased approximately $13.1 million compared to 1995
primarily as a result of an increase in the weighted average interest rate and
an increase in the average amount of debt outstanding.
Other operating expenses increased approximately $48.2 million and $20.1
million during 1997 and 1996, respectively, from the prior year primarily as the
result of costs associated with the expansion of the Company's lending
operations. During 1997, 1996 and 1995, advertising expense totaled $37.4
million, $12.9 million and $9.0 million and occupancy and equipment expenses
were $26.8 million, $15.6 million and $10.9 million, respectively.
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 without
limitation 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. See "Investment Considerations" below.
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 security which is credit
enhanced, in part, in home equity loan securitizations and one manufactured
housing contract securitization, through a guaranty provided by a third party
insurer or, in connection with the other manufactured housing contract
securitizations, through a senior/subordinated structure. Credit enhancement for
the home equity pass-through certificates is also provided by subordinating a
cash deposit and the excess interest spread retained by the Company, up to a
specified amount (the "Subordinated Amount"), 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 generally continues until
the earlier of the payment in full of the loans or termination of the agreement
pursuant to which the loans were sold. If cumulative payment defaults exceed the
Subordinated Amount, a third party insurer is obligated to pay any further
losses experienced by the owners of the pass-through certificates. Except for
one securitization in which credit enhancement is provided by a third party
insurer and subordination of the retained excess interest spread, such losses
are borne first by the subordinated pass-through certificates in the Company's
manufactured housing
22
<PAGE> 23
contract securitizations. The Company has retained some of the subordinated
certificates in such securitizations.
The Company is also obligated to cure, repurchase or replace loans and
contracts which may be determined after the sale to violate representations and
warranties relating to them and which are made by the Company at the time of the
sale. The Company regularly evaluates the quality of the loan portfolio and
estimates its risk of loss based upon historical loss experience, prevailing
economic conditions, estimated collateral value and such other factors which, in
management's judgment, are relevant in estimating the credit risk in owned
and/or serviced loans. For loans and contracts sold, the Company records a
provision for the estimated amount of credit losses at the time of sale, and
records such amount on its balance sheet in the allowance for loan losses as a
reduction of Interest-only and residual certificates. Estimated losses on the
owned portfolio are also provided for by an increase in the allowance for loan
losses through a charge to current operating income. At December 31, 1997, the
allowance for loan losses on loans serviced was $106.6 million and $3.7 million
on loans owned by the Company. The maximum recourse associated with sales of
home equity loans and manufactured housing contracts according to terms of the
sale agreements totaled approximately $1.3 billion at December 31, 1997,
substantially all of which relates to the subordinated cash and excess interest
spread. Should credit losses on loans and contracts sold materially exceed the
Company's estimates for such losses, such consequence will have a material
adverse impact on the Company's operations.
At December 31, 1997, the contractual balance of home equity loans serviced
was approximately $5.5 billion, substantially all of which are owned by and
serviced for third party investors. The portfolio is geographically diversified.
Although the Company services loans in 50 states and the District of Columbia,
at December 31, 1997 a substantial portion of the home equity loans serviced
were originated in California (9.9%), Louisiana (7.8%), Florida (7.3%), Ohio
(6.4%) and North Carolina (5.6%), respectively, and no other state accounted for
more than 5.0% of the serviced portfolio. In addition, at December 31, 1997, the
Company serviced approximately $309 million of manufactured housing chattel
contracts, 27.2% of which were originated in Texas, 15.9% in South Carolina and
12.8% of which were originated in North Carolina. The risk inherent in
geographic concentrations is dependent not only upon regional and general
economic stability which affects property values, but also the financial
well-being and creditworthiness of the borrower.
The following two tables set forth information relating to certain
contractual delinquency, default and loss experience for home equity loans
serviced as of the dates indicated in the first table and for the periods
indicated in the second table, including loans owned by the Company and loans
serviced for others:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- ------------------------- -------------------------
% OF % OF % OF
CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL CONTRACTUAL
BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Home equity loans
serviced................ $5,528,923 $4,040,138 $2,701,481
========== ========== ==========
Delinquency
30-59 days.............. $ 176,882 3.20% $ 136,976 3.39% $ 73,723 2.73%
60-89 days.............. 57,975 1.05 53,124 1.31 16,471 0.61
90+ days................ 46,873 0.85 28,663 0.71 7,562 0.28
---------- ---------- ---------- ----- ---------- ----
281,730 5.10 218,763 5.41 97,756 3.62
---------- ---------- ---------- ----- ---------- ----
Defaults
Foreclosures in
process.............. 189,801 3.43 135,779 3.36 75,104 2.78
Bankruptcy.............. 115,856 2.10 73,887 1.83 47,285 1.75
---------- ---------- ---------- ----- ---------- ----
305,657 5.53 209,666 5.19 122,389 4.53
---------- ---------- ---------- ----- ---------- ----
Total delinquency and
defaults................ $ 587,387 10.63% $ 428,429 10.60% $ 220,145 8.15%
========== ========== ========== ===== ========== ====
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Average dollar amount of home equity loans
outstanding during period.................. $4,784,531 $3,370,810 $2,192,590
Net losses:
Gross Losses(1)............................ $ 32,984 $ 19,484 $ 13,818
Recoveries(2).............................. (1,937) (2,371) (1,597)
---------- ---------- ----------
Net Losses(3).............................. $ 31,047 $ 17,113 $ 12,221
========== ========== ==========
Net losses as a percentage of average amount
outstanding................................ 0.65% 0.51% 0.56%
</TABLE>
- ---------------
(1) "Gross Losses" are amounts which have been determined to be uncollectible
relating to home equity loans for each respective period.
(2) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(3) "Net Losses" means "Gross Losses" minus "Recoveries".
The contractual balances exclude home equity real estate owned and/or
serviced which totaled $98.9 million, $52.6 million and $30.1 million at
December 31, 1997, 1996 and 1995, respectively. The charge off rate on the
average home equity loan portfolio for 1997, 1996 and 1995 was .65%, .51% and
.56%, respectively. The Company believes that the increase in the total
percentage of delinquencies and defaults at December 31, 1997 compared to
December 31, 1996 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 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>
DECEMBER 31, 1997
----------------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY ----------------------------------- TOTAL
CONTRACTUAL ------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
------------------- ----------- ----- ----- ---- ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 & Prior......... $ 75,114 4.79% 1.06% 1.56% 7.41% 4.92% 5.72% 10.64% 18.05%
1992................. 43,134 5.21% 1.72% 2.28% 9.21% 4.82% 5.23% 10.05% 19.26%
1993................. 135,399 4.59% 1.12% 1.01% 6.72% 4.79% 5.30% 10.09% 16.81%
1994................. 302,819 4.95% 1.54% 1.47% 7.96% 6.17% 6.79% 12.96% 20.92%
1995................. 710,685 5.04% 1.59% 1.46% 8.09% 7.80% 5.66% 13.46% 21.55%
1996................. 1,544,278 4.54% 1.50% 1.22% 7.26% 5.39% 2.28% 7.67% 14.93%
1997................. 2,717,494 1.62% 0.58% 0.35% 2.55% 0.74% 0.23% 0.97% 3.52%
----------
Total........ $5,528,923 3.20% 1.05% 0.85% 5.10% 3.43% 2.10% 5.53% 10.63%
==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY ----------------------------------- TOTAL
CONTRACTUAL ------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS BANKRUPTCY 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>
24
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY --------------------------------- TOTAL
CONTRACTUAL ---------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
------------------- ----------- ----- ----- ---- ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 & prior............... $ 68,275 3.39% 0.95% 0.34% 4.68% 5.51% 4.83% 10.34% 15.02%
1990....................... 44,862 3.76% 0.47% 0.19% 4.42% 5.46% 5.56% 11.02% 15.44%
1991....................... 57,815 4.22% 0.74% 0.36% 5.32% 5.35% 5.84% 11.19% 16.51%
1992....................... 98,473 3.81% 0.90% 0.89% 5.60% 5.96% 6.22% 12.18% 17.78%
1993....................... 298,882 3.72% 0.58% 0.39% 4.69% 3.63% 4.55% 8.18% 12.87%
1994....................... 668,797 4.03% 0.90% 0.40% 5.33% 2.29% 4.45% 6.74% 12.07%
1995....................... 1,464,377 1.74% 0.45% 0.16% 2.35% 0.41% 1.12% 1.53% 3.88%
----------
Total.................... $2,701,481 2.73% 0.61% 0.28% 3.62% 2.78% 1.75% 4.53% 8.15%
==========
</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
HOME-EQUITY NET LOSSES AS
LOAN POOL % OF
YEAR OF PRODUCTION PRODUCTION FACTOR(1) PRODUCTION
------------------ ----------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed
1993........................................ $ 500,900 25.42% 1.98%
1994........................................ $ 837,901 34.69% 2.01%
1995........................................ $1,130,715 47.27% 1.03%
1996........................................ $1,383,714 71.28% 0.11%
1997........................................ $1,373,984 93.42% 0.00%
ARM
1993........................................ $ 38,968 20.65% 1.64%
1994........................................ $ 70,920 17.16% 0.55%
1995........................................ $ 410,922 42.89% 0.58%
1996........................................ $ 860,744 64.82% 0.05%
1997........................................ $1,513,667 94.73% 0.00%
</TABLE>
- ---------------
(1) Pool Factor -- Percentage of the year's production remaining outstanding at
December 31, 1997.
The following two tables provide certain contractual delinquency, default
and loss experience information for manufactured housing contracts serviced as
of the dates indicated in the first table and for the periods indicated in the
second table, including manufactured housing contracts owned by the Company and
contracts serviced for others.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Number of manufactured housing contracts................. 13,816 5,412 122
Delinquency period(1)(2)(3)
30-59 days............................................. 3.13% 1.88% 2.46%
60-89 days............................................. 1.11 .57 --
90 days and over....................................... 1.49 .16 .82
------- ------ -----
5.73% 2.61% 3.28%
======= ====== =====
Dollar amount (in thousands) of manufactured housing
contracts in repossession at the end of period(3)...... $ 4,797 $ 725 $ --
</TABLE>
- ---------------
(1) As a percentage of the number of manufactured housing contracts as of the
date indicated and excluding contracts already in repossession.
(2) The delinquency period is based on the number of days payments are
contractually past due (assuming 30-day months). Therefore, a manufactured
housing contract with a payment due on the first day of a
25
<PAGE> 26
month is not 30 days delinquent until the first day of the next month. The
information includes as current those manufactured housing contracts whose
borrowers have entered bankruptcy proceedings, had their scheduled payment
changed under a bankruptcy payment plan, provided that the borrowers are
current under their bankruptcy payment plan.
(3) Manufactured housing contracts in the process of foreclosure but not yet
repossessed have been included in the appropriate delinquency period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Dollar amount of manufactured housing contracts
outstanding at end of period....................... $456,937 $170,869 $1,184
Net Losses
Gross Losses(1).................................... $ 866 $ 32 $ --
Recoveries(2)...................................... (7) (10) --
-------- -------- ------
Net Losses(3)...................................... $ 859 $ 22 $ --
======== ======== ======
Net Losses as a percentage of average amount
outstanding........................................ 0.27% 0.03% 0.00%
</TABLE>
- ---------------
(1) "Gross Losses" are amounts which have been determined to be uncollectible
relating to manufactured housing contracts for each respective period.
(2) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(3) "Net Losses" means "Gross Losses" minus "Recoveries."
The above delinquency, default and loan 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 sub-prime residential
mortgage lending and manufactured housing industries 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 or 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. The Company uses the 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 cash 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 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 the loans and contracts into the
securitization transactions. As a result of the recent downgrade by S&P of its
rating of the Company's long-term unsecured debt, the rate of interest payable
by the Company under the terms of the Credit Facility will increase. See
"Ratings" below. At December 31, 1997, letters of credit in the aggregate
26
<PAGE> 27
maximum amount of $100 million were outstanding under the Credit Facility for
the Company's account and were deposited in lieu of cash into the related
reserve accounts established in connection with the Company's third and fourth
quarter home equity loan securitization transactions. In addition to the Credit
Facility, the Company maintains two 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 fourth quarter home equity loan
securitization (the "Investment Bank Warehouse"), and a warehouse facility
provided by United Companies Life Insurance Company ("UCLIC"). The Investment
Bank Warehouse was directly related to the fourth 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 related prefunding accounts of this
securitization. As of December 31, 1997, $150 million was available and no
amounts were outstanding under the Investment Bank Warehouse. The warehouse
facility provided by UCLIC, 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 December 31, 1997, $4.7 million in
loans eligible for securitization were funded under this facility. The Company
has issued $100 million, $125 million and $100 million of senior unsecured notes
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 1997 and 1996 reflects approximately $3.2
billion and $2.5 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 $3.1 billion and $2.5 billion in 1997 and 1996,
respectively. In connection with the home equity loan and one manufactured
housing contract transactions in the secondary market, third-party surety bonds
and subordination of cash deposits and excess interest retained by the Company
have been provided as credit enhancements. The loan sale transactions have
required the subordination of certain cash flows retained by the Company from
the loans sold 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 excess spread retained by the
Company is subject to being utilized first to replenish cash paid from the
reserve account to fund shortfalls in collections from borrowers who default on
the payment of principal or interest on the loans and contracts underlying the
pass-through certificates issued until the total of the Company's deposits into
the reserve account equal the maximum subordination amount. After the Company's
deposits into the reserve account equal the maximum subordination amount for a
transaction, the subordination of the related excess interest spread (including
the guarantee fee payable therefrom) for these purposes is terminated. The
excess interest spread required to be deposited and maintained in the respective
reserve accounts will not be available to support the cash flow requirements of
the Company until such amount exceeds the maximum subordinated amount (other
than amounts, if any, in excess of the specified levels required to be
maintained in the reserve accounts, which may be distributed periodically to the
Company). In certain home equity loan securitizations completed in 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. With respect to four home equity loan securitization transactions
which closed in the second half of 1994 and the first half of 1995 for which the
aggregate unpaid principal balance as of December 31, 1997 of the loans sold
thereby was approximately $504 million, the delinquency and loss experiences of
such loans, pursuant to levels thereof set forth in the related pooling and
servicing agreements, have resulted in an increase in the required amount of
excess interest spread to be maintained in the related reserve accounts. As a
result, the Company's cash flow has been
27
<PAGE> 28
negatively affected by the increased minimum reserve account requirements. At
December 31, 1997, the amounts on deposit in reserve accounts totaled $389.3
million, exclusive of the letters of credit issued under the Credit Facility in
the amount of $100 million discussed above. See "Investment Considerations"
below.
RATINGS
The Company, since 1994, has sold publicly three senior unsecured note
offerings which total in the aggregate $325 million. At December 31, 1997, all
of these senior notes, which have varying maturities, were rated "BBB" by Duff
and Phelps Credit Rating Co.("D&P"), and Fitch IBCA, Inc. ("Fitch"), "BBB-" by
Standard & Poor's, a division of the McGraw-Hill Companies, Inc. ("S&P") and
"Ba1" by Moody's Investor Services, Inc. ("Moody's"). However, on March 10,
1998, S&P lowered its ratings of these notes to "BB+" after having announced on
December 19, 1997 that it placed the Company's long-term unsecured debt ratings
on credit-watch with negative implications.
In June 1997, the Company sold $150 million of subordinated notes which
were rated "BBB-" by D&P and Fitch, "BB+" by S&P and "Ba3" by Moody's. On March
10, 1998, S&P lowered its rating of the Company's subordinated notes to "BB-"
and on the Company's preferred stock from "BB" to "B+". Also, on December 17,
1997, Moody's confirmed its subordinated debt ratings of the Company but changed
its rating outlook to negative from stable. The Moody's release stated in part,
that "the outlook change reflects the increasing level of delinquencies in UC's
securitized home equity loans, the Company's increasing effective leverage, and
the highly competitive conditions in UC's consumer business." In addition, the
certificates issued in connection with the Company's home equity loan and
manufactured housing contract securitization transactions have received
investment grade ratings from one or more of these rating agencies.
ACCOUNTING STANDARDS
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
disclosure standards for reporting comprehensive income in a full set of general
purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of this standard is not expected
to have a material impact on the Company's financial statement presentation and
related disclosures.
In June 1997, FASB also issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which is effective for periods beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of this standard is not
expected to have a material impact on the Company's financial statement
presentation and related disclosures.
YEAR 2000 ISSUE
The "Year 2000" issue relates to the fact that many existing computer
programs and applications use only two digits to identify a year in the date
field. A failure to modify such programs and applications to be Year 2000
compliant may have a material adverse impact on the Company's operations at the
turn of the century. To address the Year 2000 issue, the Company has constituted
a Year 2000 task force (the "Task Force") with members of its Management
Information Services and Internal Audit departments as well as other employees
of the Company. The Audit Committee of the Company's Board of Directors will
monitor the activities of the Task Force.
The Task Force has completed a written plan for identifying issues relating
to Year 2000 compliance by the Company as well as compliance by the Company's
vendors and other constituents. The Task Force has reported that it expects to
finalize its identification of such issues by the end of the third quarter of
1998 and either correct or be in the process of replacing all non-Year 2000
compliant systems by year-end 1998. At the present time, the Company cannot
estimate the costs of the contemplated Year 2000 compliance.
28
<PAGE> 29
DISCONTINUED OPERATIONS
United Companies Life Insurance Company
On July 24, 1996, the Company concluded the sale of the outstanding capital
stock of its wholly-owned life insurance subsidiary, United Companies Life
Insurance Company ("UCLIC") for a sales price of $167.6 million. The Company
recorded, in 1996, a net loss of $6.8 million on the transaction. As a result of
the sale, the assets (including $67 million of assets transferred to the Company
by UCLIC immediately prior to closing) and the operations of UCLIC have been
classified as discontinued operations. In the fourth quarter of 1997, the
Company wrote off an additional $2.2 million related to an intercompany
receivable.
United General Title Insurance Company.
February 29, 1996, the Company completed the sale of all the capital stock
of its wholly-owned subsidiary, United General Title Insurance Company
("UGTIC"). The definitive stock sale agreement contains a provision making the
Company liable to UGTIC for claims from defalcation and fraud losses incurred by
UGTIC which were unknown and occurred prior to closing and were discovered
within 24 months thereafter. At the end of the 24 month period, various claims
for such defalcation and fraud losses were pending and under review by the
Company. Management of the Company does not believe at the present time that the
resolution of pending claims for such losses will have a material impact upon
the financial condition, results of operations and cash flows of the Company.
The Company is also liable, up to $2.5 million, for policy claims paid over a
ten year period after the closing that exceed certain specified levels. The
Company recorded a loss from discontinued operations (net of income tax benefit)
of $3.5 million in 1995, $1.1 million in 1996 and $1.6 million in 1997 in
connection with the sale of UGTIC.
Foster Mortgage Corporation
The remaining affairs of the Company's subsidiary, Foster Mortgage
Corporation ("FMC"), a discontinued operation, which had been conducted under
the supervision of a bankruptcy court have been concluded. The claims of the
institutional lenders under FMC's primary credit facility (the "FMC
Institutional Lenders") relating to the Company's alleged failure to remit all
sums due FMC regarding federal income taxes under a tax agreement among the
Company and its subsidiaries, including FMC, was settled. The Company recorded a
$5.6 million charge in the fourth quarter of 1997 resulting from the settlement.
The claims of the FMC Institutional Lenders against the Company seeking
avoidance of certain payments alleged to be preferences or fraudulent
conveyances were dismissed after a trial before the bankruptcy court.
INVESTMENT CONSIDERATIONS
The Company has a continuing need for capital to finance its lending
operations. Currently, the principal cash requirements of the Company's lending
operations arise from loan originations, deposits to reserve accounts,
repayments of debt borrowed under its credit facilities and its outstanding
unsecured notes, payments of operating and interest expenses, and income taxes
related to securitization transactions. Loan production is funded principally
through proceeds of the Company's revolving credit facility with a bank group
and warehouse facilities pending sales in securitizations. The Company's
borrowings are in turn repaid with the proceeds received by the Company from
selling such loans through securitizations. There can be no assurance that such
facilities will continue to be available on terms reasonably satisfactory to the
Company or at all. Any failure to renew or obtain adequate funding under these
financing facilities or other financing arrangements, or any substantial
reduction in the size of or increase in the cost of such facilities, could have
a material adverse effect on the Company's results of operations, financial
condition and cash flows.
On March 10, 1998, Standard & Poor's ("S&P") announced that it lowered its
senior unsecured debt rating of the Company from "BBB-" to "BB+", its
subordinated debt rating from "BB+" to "BB-" and its rating on the Company's
preferred stock from "BB" to "B+". Standard & Poor's announcement stated the
Company's ratings were removed from its creditwatch and stated further that its
outlook for the Company is now stable. The announcement stated, in part, that
"the ratings reflect Standard & Poor's concern about heightened competition in
the subprime home equity market, as well as the declining trend in the company's
29
<PAGE> 30
asset quality and profitability measures." On December 17, 1997, Moody's
Investors Service confirmed its subordinated debt ratings of the Company but
changed its rating outlook to negative from stable. Moody's release stated, in
part, "the outlook change reflects the increasing level of delinquencies in UC's
securitized home equity loans, the Company's increasing effective leverage, and
the highly competitive conditions in UC's consumer business." The Company
continues to have access to diverse sources of capital, however, the lower debt
rating by S&P will increase the borrowing costs of the Company, and thereby
negatively impact the Company's profitability.
The Company relies significantly upon securitizations to generate cash
proceeds for repayment of borrowings under its credit facilities and warehouse
facilities and to create availability to originate and purchase additional
loans. The ability of the Company to sell loans and/or asset-backed securities
in the secondary market, or an alternative source of funding loan production, is
essential for continuation of the Company's loan origination operations. Several
factors affect the Company's ability to complete securitizations, including
conditions in the securities markets generally, conditions in the asset-backed
securities market, specifically, the credit quality of the Company's portfolio
of loans and the Company's ability to obtain credit enhancement. A prolonged,
substantial reduction in the size of the secondary market for home equity loans
and manufactured housing contracts may adversely affect the Company's ability to
sell its loan originations and/or asset-backed securities in the secondary
market with a consequent adverse impact on the Company's profitability and
future originations. Moreover, market and other considerations could affect the
timing of the Company's securitization transactions and delays in such sales
could reduce the amount of gains recognized from the sale of loans in a given
quarter.
In its securitization transactions, the Company retains as an investment
the Interest-only and residual certificates created as a result of such
securitizations. In addition, under Statement of Financial Accounting Standards
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS No. 125"), the Company also recognizes as
an asset the capitalized value of mortgage servicing rights. These assets
constitute a substantial portion of the Company's total assets and the loan sale
gains resulting from securitizations represent a substantial portion of its
income.
Realization of the value of these Interest-only and residual certificates
and capitalized mortgage servicing rights in cash is subject to the prepayment
and loss characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. Although
management of the Company believes that it has made reasonable estimates in its
computations of loan sale gains, it should be recognized that the rate of
prepayment and the amount of defaults utilized by the Company are estimates and
actual experience may vary from these estimates. If actual experience differs
from the assumptions used by the Company at the time of sale of the loans in its
determination of the value of these assets, (i) future cash flows and earnings
could be negatively impacted, (ii) the Company could be required to write down
the value of its Interest-only and residual certificates and capitalized
mortgage servicing rights and (iii) different assumptions could result which may
lower the income recorded as loan sale gains by the Company on future loan
securitizations. The Company believes that there is no active market for the
sale of its Interest-only and residual certificates or its capitalized mortgage
servicing rights. No assurance can be given that these assets could be sold at
their stated value on the balance sheet, if at all.
The Interest-only and residual certificates are required to be classified
as trading securities and fluctuations in the interest rate environment can also
affect the carrying value of these assets, with the changes in unrealized gain
or loss recorded in the results of operations in the period of change in value.
The Financial Accounting Standards Board ("FASB") is currently considering a
change which would permit the Company to classify this type of asset as
"available-for-sale" securities which would result in such adjustments being
made to stockholders' equity on the Company's balance sheet. Such change would
result in a reduction in the amount of earnings recognized at the time of sale
of loans.
As a purchaser and originator of sub-prime loan products, the Company faces
increasing competition. Certain large national finance companies, commercial
banks, thrifts, credit card originators and conforming mortgage originators,
with greater capitalization and financial resources, have adapted their
origination programs and allocated resources to the origination of sub-prime
loans. A large bank holding company
30
<PAGE> 31
recently announced its proposed acquisition of a major sub-prime lender with
nationwide operations. In addition, Fannie Mae and Freddie Mac have taken recent
actions which indicate an interest in becoming involved in the secondary market
for home equity loans. Such actions include the issuance of securities backed by
loans of a lower credit quality than historically has been the case and the
implementation of automated underwriting systems that could be used to originate
home equity loans. The entrance of these competitors into the Company's market
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
The quality of the loans owned and those serviced for third parties by the
Company significantly affects the profitability of the Company. The values of
and markets for these assets are dependent on a number of factors, including
without limitation 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.
The Company's operations and origination activities are subject to
extensive laws, regulations, supervision and licensing by federal and state
authorities. Regulated matters include, without limitation, maximum interest
rates and fees which may be charged by the Company, disclosure in connection
with loan originations, credit reporting requirements, servicing requirements,
federal and state taxation, and multiple qualification and licensing
requirements for doing business in various jurisdictions. In addition, the
nature of the Company's business is such that it is routinely involved in
litigation and is a party to or subject to other items of pending or threatened
litigation.
There are currently proposed various laws, rules and regulations, which if
adopted, could impact the Company. There can be no assurance that these proposed
laws, rules and regulations, or other such laws, rules or regulations, will not
be adopted in the future which could make compliance much more difficult or
expensive, restrict the Company's ability to originate, broker or sell loans,
further limit or restrict the amount of commissions, interest and other charges
earned on loans originated or sold by the Company, or otherwise adversely affect
the business or prospects of the Company.
The Company's operations are interest rate sensitive and, therefore,
fluctuations in and the level of interest rates can have a variety of effects on
the Company's profitability. Significant changes in interest rates may impact
the volume of loans produced, and will influence the funding costs of such
production and the amount of gain recognized on loans sold in the secondary
market. Although historically a lower interest rate environment has not resulted
in a significant increase in the level of prepayment of loans originated and
serviced by the Company, a significant and sustained reduction in interest rates
could cause prepayments to increase, and thereby result in a contraction of the
amount of loans owned and serviced and a reduction in the fair value of the
Interest-only and residual certificates retained by the Company in connection
with loan sales. Increased prepayments reduce the time period during which the
Company receives excess servicing income and other servicing income with respect
to prepaid loans. As stated above, adjustments to the fair value of the
Interest-only and residual certificates are reflected as a current charge to
earnings. Likewise, if delinquencies or liquidations were to occur sooner in the
portfolio of loans sold by the Company and/or with greater frequency than was
initially assumed, such would have an adverse effect on servicing income in the
period of such adjustment. In contrast, an increase in the level of interest
rates for an extended period of time could adversely affect the ability of the
Company to originate loans, as well as the profitability of the loan origination
program, by increasing the cost of funding and reducing the interest spread on
loans retained and loans sold. If actual prepayments with respect to loans sold
occur more slowly than estimated by the Company at the time of sale, total
income would exceed previously estimated amounts and positive adjustments would
generally be made on the Company's consolidated balance sheet and statement of
income. (For further discussion of loan sale gains and Interest-only and
residual certificates, see Note 2 to Notes to the Consolidated Financial
Statements.)
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
United Companies Financial Corporation:
We have audited the accompanying consolidated balance sheets of United
Companies Financial Corporation and its subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of United Companies Financial
Corporation and its subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1.7 of the Notes to the Consolidated Financial
Statements, in 1997, the Company changed its method of accounting for loan sale
gains and related retained interests to conform with Statement of Financial
Accounting Standards No. 125.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
March 4, 1998
32
<PAGE> 33
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 582 $ 14,064
Interest-only and residual certificates -- net.............. 882,116 604,474
Loans -- net................................................ 206,598 118,750
Investment securities
Trading................................................... -- 17,418
Available-for-sale........................................ 16,853 17,510
Accrued interest receivable................................. 85,373 61,483
Property -- net............................................. 64,754 46,323
Capitalized mortgage servicing rights....................... 48,760 23,806
Other assets................................................ 32,172 21,445
---------- --------
Total assets...................................... $1,337,208 $925,273
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable............................................... $ 691,826 $425,671
Deferred income taxes payable............................... 97,093 52,971
Managed cash overdraft...................................... 11,363 --
Other liabilities........................................... 56,297 26,354
---------- --------
Total liabilities................................. 856,579 504,996
---------- --------
Stockholders' equity:
Preferred stock, $2 par value; Authorized -- 20,000,000
shares; Issued -- 1,898,070 and 1,955,000 shares of
6 3/4% PRIDES(SM) ($44 per share liquidation
preference)............................................ 3,796 3,910
Common stock, $2 par value; Authorized -- 100,000,000
shares; Issued -- 29,971,356 and 29,627,734 shares..... 59,943 59,255
Additional paid-in capital................................ 187,418 184,397
Net unrealized gain on securities, net of income taxes.... 98 48
Retained earnings......................................... 250,429 190,579
Treasury stock and ESOP debt.............................. (21,055) (17,912)
---------- --------
Total stockholders' equity........................... 480,629 420,277
---------- --------
Total liabilities and stockholders' equity........ $1,337,208 $925,273
========== ========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 34
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Loan sale gains.......................................... $265,122 $199,030 $142,156
Finance income, fees earned and other loan income........ 145,639 125,306 97,759
Investment income........................................ 24,230 13,156 7,403
Other.................................................... 5,820 5,066 5,332
-------- -------- --------
Total............................................ 440,811 342,558 252,650
-------- -------- --------
Expenses:
Personnel................................................ 132,164 96,313 70,762
Interest................................................. 60,812 38,626 25,559
Other operating.......................................... 121,928 73,762 53,664
-------- -------- --------
Total............................................ 314,904 208,701 149,985
-------- -------- --------
Income from continuing operations before income taxes...... 125,907 133,857 102,665
Provision for income taxes................................. 45,326 47,665 37,740
-------- -------- --------
Income from continuing operations.......................... 80,581 86,192 64,925
Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of income
tax expense (benefit) of $(3,364), $1,651 and $2,980,
respectively.......................................... (5,981) 3,199 6,020
Loss on disposal, net of income tax benefit of $868 and
$794, respectively.................................... -- (7,731) (1,477)
-------- -------- --------
Total............................................ (5,981) (4,532) 4,543
-------- -------- --------
Net income................................................. $ 74,600 $ 81,660 $ 69,468
======== ======== ========
Basic earnings per share:
Income from continuing operations........................ $ 2.58 $ 2.77 $ 2.19
Income (loss) from discontinued operations............... (.19) (.15) .16
-------- -------- --------
Net income............................................... $ 2.39 $ 2.62 $ 2.35
======== ======== ========
Diluted earnings per share:
Income from continuing operations........................ $ 2.48 $ 2.64 $ 2.10
Income (loss) from discontinued operations............... (.18) (.14) .15
-------- -------- --------
Net income............................................... $ 2.30 $ 2.50 $ 2.25
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations.................... $ 80,581 $ 86,192 $ 64,925
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
operating activities:
Increase in accrued interest receivable........... (23,890) (24,586) (14,603)
Decrease (increase) in other assets............... (12,284) 1,578 6,805
Increase (decrease) in other liabilities.......... 32,985 6,301 (5,843)
Increase in Interest-only and residual
certificates -- net............................. (277,642) (213,205) (162,080)
Increase in capitalized mortgage servicing
rights.......................................... (34,226) (20,872) (5,986)
Amortization of capitalized mortgage servicing
rights.......................................... 9,272 2,879 173
Investment losses................................. -- -- 56
Loan loss provision on owned loans................ 3,462 (267) 4,334
Amortization and depreciation..................... 7,382 4,571 2,815
Deferred income taxes............................. 45,465 11,273 31,952
Proceeds from sales and principal collections of
loans held for sale............................. 3,113,870 2,496,263 2,678,590
Originations and purchases of loans held for
sale............................................ (3,205,180) (2,534,441) (2,707,549)
Decrease (increase) from trading securities....... 17,418 (17,418) --
----------- ----------- ----------
Net cash used by continuing operating
activities................................. (242,787) (201,732) (106,411)
----------- ----------- ----------
Cash flows from discontinued operating activities...... (5,537) -- 1,569
----------- ----------- ----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale
securities........................................ 1,977 413 95
Purchase of available for sale securities............ (1,242) -- (76)
Proceeds from disposition of insurance
subsidiaries...................................... -- 106,870 --
Capital expenditures................................. (23,450) (11,417) (9,627)
----------- ----------- ----------
Net cash provided (used) by investing
activities................................. (22,715) 95,866 (9,608)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from construction and mortgage loans........ 3,846 3,293 3,719
Payments on construction and mortgage loans.......... (12,612) -- --
Proceeds from senior debt............................ -- 99,300 99,500
Proceeds from issuance of subordinated notes......... 146,855 -- --
Increase (decrease) in revolving credit facilities... 192,550 -- (72,163)
Increase (decrease) in debt with maturities of three
months or less.................................... (47,100) 47,100 (14,750)
Increase (decrease) in warehouse loan facility....... (19,007) 4,351 19,321
Proceeds from ESOP debt.............................. 850 6,350 6,283
Payments on ESOP debt................................ (1,517) (1,179) (321)
Cash dividends paid.................................. (14,750) (13,897) (8,677)
Increase (decrease) in managed cash overdraft........ 11,363 (27,052) 1,100
Purchases of treasury stock.......................... (629) -- --
Proceeds from issuance of stock...................... -- -- 83,254
Increase in unearned ESOP compensation............... (2,514) (5,171) (2,313)
Proceeds from exercise of stock options and
warrants.......................................... 222 1,551 3,086
----------- ----------- ----------
Net cash provided by financing activities.... 257,557 114,646 118,039
----------- ----------- ----------
Increase (decrease) in cash and cash equivalents....... (13,482) 8,780 3,589
Cash and cash equivalents at beginning of period....... 14,064 5,284 1,695
----------- ----------- ----------
Cash and cash equivalents at end of period............. $ 582 $ 14,064 $ 5,284
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET TREASURY
ADDITIONAL UNREALIZED STOCK AND TOTAL
PREFERRED COMMON PAID-IN GAIN (LOSS) RETAINED ESOP STOCKHOLDERS'
STOCK STOCK CAPITAL ON SECURITIES EARNINGS DEBT EQUITY
--------- ------- ---------- ------------- -------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994......... $57,082 $ 94,129 $(23) $ 62,025 $(11,128) $202,085
Net income......................... 69,468 69,468
Dividends paid..................... (8,677) (8,677)
Increase in ESOP debt.............. (1,613) (1,613)
Common stock warrants exercised.... 704 696 1,400
Common stock options exercised..... 818 5,386 6,204
Preferred stock issued............. $3,910 79,344 83,254
Release of ESOP shares............. 293 293
Mark-to-market adjustment on
investments...................... 60 60
------ ------- -------- ---- -------- -------- --------
Balance, December 31, 1995......... 3,910 58,604 179,848 37 122,816 (12,741) 352,474
Net income......................... 81,660 81,660
Dividends paid..................... (13,897) (13,897)
Increase in ESOP debt.............. (5,171) (5,171)
Common stock options exercised..... 651 4,002 4,653
Release of ESOP shares............. 547 547
Mark-to-market adjustment on
investments...................... 11 11
------ ------- -------- ---- -------- -------- --------
Balance, December 31, 1996......... 3,910 59,255 184,397 48 190,579 (17,912) 420,277
Net income......................... 74,600 74,600
Dividends paid..................... (14,750) (14,750)
Increase in ESOP debt.............. (2,514) (2,514)
Common stock options exercised..... 500 2,928 3,428
Treasury shares acquired........... (629) (629)
Release of ESOP shares............. 167 167
Preferred stock converted.......... (114) 188 (74) --
Mark-to-market adjustment on
investments...................... 50 50
------ ------- -------- ---- -------- -------- --------
Balance, December 31, 1997......... $3,796 $59,943 $187,418 $ 98 $250,429 $(21,055) $480,629
====== ======= ======== ==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ACCOUNTING POLICIES
1.1 Principles of Consolidation. The consolidated financial statements
include the accounts and operations of United Companies Financial Corporation
and subsidiaries (the "Company" or "United Companies"), all of which are
wholly-owned. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
1.2 Loan Accounting. The Company originates and purchases loans (which
includes for purposes hereof manufactured housing installment loan and
installment sale contracts) for its own portfolio and for sale and/or
securitization in the secondary market. Loans held for sale are carried at lower
of cost or market.
1.2(a) Loan Sales. The Company sells substantially all loans which it
originates or purchases and generally retains the servicing rights on loans
sold. Under the sales/servicing agreements, the buyer receives the principal
collected on the loan and an agreed upon rate of return on the outstanding
principal balance, the Company retains the excess of the interest at the
contractual rate over the sum of the rate paid to the buyer (the "pass-through"
rate), a normal servicing fee, and, where applicable, the trustee fee and surety
bond fee. At the time of sale, the Company allocates a portion of its basis in
the loans to mortgage servicing rights which is recorded as an asset
(Capitalized mortgage servicing rights), records as an asset the fair value of
the excess interest retained by it (Interest-only and residual certificates),
makes a provision for an allowance for losses on the loans sold for which it
retains the servicing, and recognizes the resulting loan sale gain as revenue.
The fair value of the Company's Interest-only and residual certificates, which
is net of the allowance for loan losses on serviced loans, is determined at the
time of sale by the Company by computing the present value of the cash flows of
the excess interest retained by the Company expected to be received by it (using
the expected dates that such interest is to be released from the related reserve
accounts), discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on a
financial instrument comprised of such cash flows. These amounts are calculated
using prepayment and default assumptions based on the actual experience of the
Company's owned and serviced portfolio for home equity loans and comparable
industry prepayment statistics for manufactured housing contracts. On a
quarterly basis, the Company reviews the fair value of the Interest-only and
residual certificates by analyzing its prepayment and other assumptions in
relation to its actual experience, and, if necessary, adjusts the carrying value
of the Interest-only and residual certificates to such fair value through a
charge or credit to earnings.
1.2(b) Nonrefundable Loan Fees. Loan origination fees and incremental
direct costs associated with loan originations are deferred and recognized over
the lives of the loans as an adjustment to yield, using the interest method.
Unamortized costs and fees are recognized upon sale of the loan or related
asset-backed securities to third parties.
1.2(c) Loan Servicing. The Company generally retains the right to service
loans it originates or purchases and subsequently sells or securitizes in the
secondary market. Fees for servicing loans are generally based on a stipulated
percentage of the outstanding principal balance of such loans. Prior to the
adoption of Statement of Financial Accounting Standards No. 122 ("SFAS No.
122"), "Accounting for Mortgage Servicing Rights", the Company recognized late
charges and other ancillary income when collected and charged costs to service
mortgage loans when incurred. The Company implemented the provisions of SFAS No.
122 in the third quarter of 1995 and, in connection therewith, changed its
method of accounting for mortgage servicing rights to recognize as separate
assets rights to service loans for others that have been acquired through either
the purchase or origination of such loans. Statement of Financial Accounting
Standards No. 125 ("SFAS No. 125") superseded SFAS No. 122. The implementation
of SFAS No. 125 did not have a material impact on the Company's calculation of
mortgage servicing rights.
1.2(d) Allowance for Loan Losses. The Company's loan sale agreements for
home equity loans generally provide for the subordination to a limited extent of
cash and excess interest spread retained relating
37
<PAGE> 38
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the loans sold. Such subordination relates to credit losses which may occur
after the sale of the loans and continues until the earlier of the payment in
full of the loans or the termination of the agreement pursuant to which the
loans were sold. In connection with the securitization of home equity loans and
sale of pass-through certificates backed by such loans, the excess interest
retained by the Company is generally subordinated to a limited extent to the
sold certificates and used to fund a reserve account, thereby providing
additional credit enhancement to the holders of the certificates. In connection
with the securitization of manufactured housing contracts and sale of
pass-through certificates backed by such contracts, a senior/subordinated
structure has generally been utilized in which credit enhancement is provided to
the senior certificates by the subordinated certificates. Regardless of the
structure of the loan sale transaction, the Company estimates the amount of
future losses under the loan sale agreements and provides a reserve for such
loss in determining the amount of gain recorded on the sale.
The Company provides for estimated loan losses on loans owned by the
Company by establishing an allowance for loan losses through a charge to
earnings. The Company conducts periodic reviews of the quality of the loan
portfolio and estimates the 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 adequacy
of the Company's allowance for loan losses. While management uses the best
information available in conducting its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions, collateral value or other elements used in conducting the review.
1.2(e) Other. Loans are placed on a nonaccrual status when they are past
due 150 days.
1.2(f) Property Acquired in Satisfaction of Debt. The Company records
properties received in settlement of loans ("real estate owned") at the lower of
their market value less estimated costs to sell ("market") or the outstanding
loan amount plus accrued interest ("cost"). The Company accomplishes this by
providing a specific reserve, on a property by property basis, for the
difference between market and cost. Market value is generally determined by
property appraisals performed either by Company personnel or independent
appraisers. The related adjustments are included in the Company's provision for
loan losses.
1.3 Investment securities. In accordance with the provisions of Statement
of Financial Accounting Standards No. 115, the Company classifies securities in
one of three categories: "held-to-maturity", "available-for-sale" or "trading".
Securities classified as held-to-maturity are carried at amortized cost, whereas
securities classified as trading or available-for-sale are recorded at fair
value. The adjustment, net of applicable income taxes, for securities classified
as available-for-sale is recorded in "Net unrealized gain (loss) on securities"
and is included in Stockholders' equity on the consolidated balance sheets and
the adjustment for securities classified as trading is recorded in "Investment
income" in the statements of income. At December 31, 1997, the Company's
investment securities primarily consisted of an investment in a limited
partnership.
1.4 Property. Property is stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line and accelerated methods over the
estimated useful lives of the assets.
1.5 Income Taxes. The Company and its subsidiaries file a consolidated
federal income tax return. The Company allocates to its subsidiaries their
proportionate share of the consolidated tax liability under a tax allocation
agreement whereby each affiliate's federal income tax provision is computed on a
separate return basis. Deferred income taxes are provided for the effect of
revenues and expenses which are reported in different periods for financial
reporting purposes than for tax purposes. Such differences result primarily from
providing for loan losses, loan income, loan sale gains and depreciation.
1.6 Cash Equivalents. For purposes of the Statements of Cash Flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At
38
<PAGE> 39
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997, cash equivalents totaled $.6 million with interest rates
ranging from 3.0% to 5.25% per annum.
1.7 Accounting Standards. On October 23, 1995, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No.
123 encourages, but does not require, the recognition of compensation expense
for grants of stock, stock options and other equity instruments to employees
based on a fair value method of accounting. Companies are permitted to continue
to apply the existing accounting rules contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"); however,
companies that choose to retain this method of accounting are required to
provide expanded disclosures of pro forma net income and earnings per share in
the notes to financial statements as if the new fair value method of accounting
had been adopted. The provisions of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. The Company has elected to continue to apply
the accounting rules contained in APB 25 and to comply with the additional
disclosure requirements as set forth in SFAS No. 123. See also Note 10.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS No. 125"). SFAS No. 125 focuses on control
of the financial asset and provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 provides certain conditions that must be met to
determine that control of the financial asset has been surrendered. SFAS No. 125
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the assets
sold and the retained interests, if any, based on their relative fair values at
the date of transfer. The Company implemented SFAS No. 125 during the quarter
ended March 31, 1997. As a result of the implementation of SFAS No. 125, net
income for 1997 was increased by $4.5 million or $.14 per share on a diluted
basis. In addition, the amounts previously reflected on the Company's balance
sheets as "Capitalized excess servicing income" and "Temporary investments --
reserve accounts" have been reclassified as "Interest-only and residual
certificates" and are net of the allowance for loan losses on serviced loans
(recorded in connection with loan sale transactions), such allowance having been
previously recorded as a liability. The allowance for loan losses on serviced
loans is a component in determining the fair value of the Interest-only and
residual certificates.
In February 1997, the FASB 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. The Company implemented SFAS No. 128 during the fourth quarter
of 1997 which changed the method previously used to compute EPS and restated all
prior periods. Basic EPS excludes common stock equivalents from the EPS
calculation, while calculation of diluted EPS is generally consistent with the
Company's prior method of determining fully diluted EPS. See also Note 9.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 129 establishes disclosure requirements regarding pertinent
rights and privileges of outstanding securities. Examples of disclosure items
regarding securities include, though are not limited to, items such as dividend
and liquidation preferences, participation rights, call prices and dates,
conversion or exercise prices or rates. The number of shares issued upon
conversion, exercise or satisfaction of required conditions during at least the
most recent annual fiscal period and any subsequent interim period must also be
disclosed. Disclosure of liquidation preferences of preferred stock in the
equity section of the Balance Sheet is also required. The provisions of SFAS No.
129 have been implemented as of December 31, 1997.
39
<PAGE> 40
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1.8 Financial Instruments. The Company from time to time enters into
interest rate hedge mechanisms to manage its exposure to interest rate changes
in connection with the securitization and sale of its loans. The Company closes
out the hedge position to coincide with the related loan sale and securitization
transactions and recognizes the results of the hedge transaction in determining
the amount of the related loan sale gain. The Company did not have any open
hedge positions at December 31, 1997 or 1996.
1.9 Reclassifications. Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications had no
effect on net income.
1.10 Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. INTEREST-ONLY AND RESIDUAL CERTIFICATES -- NET
The Company sells substantially all of the loans it originates as asset
backed securities and generally retains the servicing rights on loans sold. In
its securitization transactions, the Company receives, in addition to cash
proceeds, an investment in the Interest-only and residual certificates created
as a result of such securitizations. In addition, the Company also recognizes as
an asset the capitalized value of mortgage servicing rights (including normal
servicing and other ancillary fees). These assets constitute a substantial
portion of the Company's total assets and loan sale gains resulting from
securitizations represent the largest component of the Company's revenues.
Realization of the value of these Interest-only and residual certificates
and Capitalized mortgage servicing rights in cash is subject to the prepayment
and loss characteristics of the underlying loans and to the timing and ultimate
stream of cash flows associated with such loans. In calculating the fair value
of the Interest-only and residual certificates, the Company uses prepayment and
default assumptions based on the actual experience of the Company's owned and
serviced portfolio for home equity loans and comparable industry prepayment
statistics for manufactured housing contracts. On a quarterly basis, the Company
reviews the fair value of the Interest-only and residual certificates by
analyzing its prepayment and other assumptions in relation to its actual
experience, and, if necessary, adjusts the carrying-value of the Interest-only
and residual certificates to such value through a charge or credit to earnings.
The following assumptions are used by the Company as of December 31, 1997,
in the valuation of its Interest-only and residual certificates and in the
calculation of loan sale gains for its home equity loan products.
- With its fixed rate product, the Company assumes a life-to-date
prepayment speed of 24% based on a seasoning curve that begins at 9% in
month one, increases to 27% in month twelve, increases to 30% in month 20
and stays constant until month 36, ramps down to 17% in month 53 and
remains constant at this rate until maturity. At December 31, 1997, the
Company had $3.2 billion in fixed rate home equity loans in its servicing
portfolio.
- The Company assumes a life-to-date prepayment speed of 28%, based on a
seasoning curve, for its adjustable rate product ("ARMs"). The curve
begins at 14% in month one, reaches 32% by month 12, increases to 34% in
month 18 and stays constant until month 28 when it declines to 33% and
remains at this rate until month 48, then ramps down to 17% in month 56
and remains at 17% until maturity. At December 31, 1997, the Company had
$1.1 billion in ARMs in its servicing portfolio.
- The Company assumes a life-to-date prepayment speed of 24%, based on a
seasoning curve for its hybrid loan products, i.e., products which have
rates fixed for two or three years and become adjustable
40
<PAGE> 41
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thereafter. The curve begins at 4% in month one, increases to 22% in
month 12, continues to increase to 30% in month 30 and stays constant
until month 40, ramps down to 20% by month 56 and remains constant at
this rate until maturity. At December 31, 1997, the Company had $1.0
billion in hybrid loans in its servicing portfolio of which $644 million
have rates fixed for three years.
In addition, in its loan sale gain calculation, the Company has used a
discount rate of approximately 10% and projected cumulative losses of
approximately 250 basis points for its fixed rate products and 200 basis points
for its adjustable rate and hybrid loan products.
A summary analysis of the changes in the Company's Interest-only and
residual certificates is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year.................................. $ 604,474 $ 391,269
Interest-only and residual certificates on loans sold....... 355,743 273,726
Net increase in allowance for losses on loans sold.......... (33,462) (28,132)
Net increase in reserve accounts............................ 138,070 95,929
Amortization of Interest-only and residual certificates..... (182,709) (128,318)
--------- ---------
Balance, December 31........................................ $ 882,116 $ 604,474
========= =========
</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>
DECEMBER 31,
---------------------
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Certificated interests...................................... $ 599,426 $426,393
Temporary investments -- reserve accounts................... 389,253 251,183
Allowance for losses on loans serviced...................... (106,563) (73,102)
--------- --------
Total............................................. $ 882,116 $604,474
========= ========
</TABLE>
41
<PAGE> 42
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LOANS -- NET
3.1 Loans Owned. The following schedule sets forth the components of Loans
owned by the Company at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans held for sale......................................... $150,848 $ 69,558
Other loans................................................. 54,067 39,831
-------- --------
Total............................................. 204,915 109,389
Real estate owned:
Home equity............................................... 6,365 6,647
Commercial and other...................................... 3,173 9,446
Manufactured housing chattel contracts.................... 89 372
Nonrefundable loan fees..................................... (2,852) (2,945)
Other....................................................... (1,401) (18)
-------- --------
Total............................................. 210,289 122,891
-------- --------
Less:
Allowance for loan losses................................. (3,691) (4,141)
-------- --------
$206,598 $118,750
======== ========
</TABLE>
Included in Other loans at December 31, 1997 and 1996 were nonaccrual loans
totaling $10.1 million and $6.6 million, respectively.
3.2 Loans Serviced. The following table sets forth the loans serviced by
the Company for third parties at December 31, 1997 and 1996, by type of loan.
Substantially all of these loans were originated by the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Home equity................................................. $5,353,429 $3,940,289
Manufactured housing chattel contracts...................... 295,012 107,741
Other....................................................... 33,319 44,649
---------- ----------
Total............................................. $5,681,760 $4,092,679
========== ==========
</TABLE>
3.3 Loan Loss Allowances. The Company provides an estimate for future
credit losses in an Allowance for loan losses for loans owned by the Company and
for loans serviced for others. These allowance accounts are deducted in the
Company's balance sheet from the asset to which they apply.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
OWNED SERVICED TOTAL
------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses, beginning of period... $ 4,141 $ 73,102 $ 77,243
Provision for loan losses........................ 3,955 62,804 66,759
Net loans charged off............................ (4,405) (29,343) (33,748)
------- -------- --------
Allowance for loan losses, end of period......... $ 3,691 $106,563 $110,254
======= ======== ========
</TABLE>
42
<PAGE> 43
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------
OWNED SERVICED TOTAL
------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses, beginning of period... $ 6,484 $ 44,970 $ 51,454
Provision for loan losses........................ 3,633 42,448 46,081
Net loans charged off............................ (5,976) (14,316) (20,292)
------- -------- --------
Allowance for loan losses, end of period......... $ 4,141 $ 73,102 $ 77,243
======= ======== ========
</TABLE>
As of December 31, 1997, approximately $5.4 billion of home equity loans
sold were serviced under agreements substantially all of which provide for the
subordination of cash and excess interest spread owned by the Company for credit
losses. The maximum recourse associated with sales of home equity loans
according to terms of the loan sales agreements was approximately $1.2 billion
at December 31, 1997, substantially all of which relates to the subordinated
cash and excess interest spread. The Company's estimate of its losses on home
equity loans, based on historical loan loss experience, was approximately $84.7
million at December 31, 1997 and is recorded in the Company's allowance for loan
losses on serviced loans. In addition, at December 31, 1997, the maximum
recourse associated with the sale of approximately $470 million of manufactured
housing contracts in securitization transactions according to the related
contract sale agreements was approximately $31.6 million. The Company's estimate
of its losses on these contracts, based on industry loss statistics, was
approximately $21.9 million and is also recorded in the Company's allowance for
loan losses on serviced loans. The allowance for loss on serviced loans is
reflected as a reduction in the Company's Interest-only and residual
certificates (see Note 2). Should credit losses on loans sold with limited
recourse, or subordination of cash and excess interest spread owned by the
Company materially exceed the Company's estimate for such losses, such
consequence will have a material adverse impact on the Company's operations.
3.4 Concentration of Credit Risk. The Company's serviced portfolio is
geographically diversified. Although the Company services mortgage loans in 50
states, at December 31, 1997, a substantial portion of home equity loans
serviced were originated or acquired in California (9.9%), Louisiana (7.8%),
Florida (7.3%), Ohio (6.4%) and North Carolina (5.6%), respectively, and no
other state accounted for more than 5.0% of the serviced portfolio. The
portfolio of manufactured housing contracts serviced were originated primarily
in Texas (27.2%), South Carolina (15.9%), and North Carolina (12.8%). The risk
inherent in such concentrations is dependent not only upon regional and general
economic stability which affects property values, but also the financial
well-being and creditworthiness of the borrower.
3.5 Commitments. The Company uses a prefunding feature in connection with
loan securitization transactions. At December 31, 1997 approximately $68 million
was held in a prefunding account for the purchase of the Company's loans and
contracts during the first quarter of 1998.
4. PROPERTY -- NET
Property is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings.......................................... $ 41,946 $ 36,145
Furniture, fixtures and equipment........................... 37,766 21,008
-------- --------
Total............................................. 79,712 57,153
Less accumulated depreciation............................... (14,958) (10,830)
-------- --------
Total............................................. $ 64,754 $ 46,323
======== ========
</TABLE>
43
<PAGE> 44
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense on operating leases, including real estate, computer
equipment and automobiles, totaled $12.4 million, $9.6 million and $7.7 million
during 1997, 1996 and 1995, respectively. Minimum annual commitments at December
31, 1997 under noncancellable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998....................................................... $12,074
1999....................................................... 9,664
2000....................................................... 5,595
2001....................................................... 3,160
2002....................................................... 1,686
Thereafter................................................. 23
-------
Total............................................ $32,202
=======
</TABLE>
5. CAPITALIZED MORTGAGE SERVICING RIGHTS
The following table summarizes the activity in capitalized mortgage
servicing rights for 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year.................................. $23,806 $ 5,813
Capitalized amount.......................................... 34,226 20,872
Amortization................................................ (9,272) (2,879)
------- -------
Balance, end of year........................................ $48,760 $23,806
======= =======
</TABLE>
6. NOTES PAYABLE
Notes payable consisted of the following at the dates indicated:
<TABLE>
<CAPTION>
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................................. 192,550 --
Warehouse facilities...................................... 4,665 23,672
ESOP debt................................................. 10,466 11,133
Mortgage loan............................................. -- 5,473
Construction loan......................................... -- 3,293
-------- --------
Total senior debt................................. 532,681 415,671
-------- --------
Subordinated debt:
8.375% Subordinated unsecured notes due July, 2005........ 149,145 --
Subordinated debentures................................... 10,000 10,000
-------- --------
Total............................................. $691,826 $425,671
======== ========
</TABLE>
In April 1997, the Company entered into an $800 million senior unsecured
revolving credit facility (the "Credit Facility") syndicated with a total of 22
participating lenders. The Company used a portion of the
44
<PAGE> 45
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. During 1997, letters of credit in the maximum
amount of $100 million were issued under the Credit Facility for the Company's
account and were deposited in lieu of cash into the related reserve accounts
established in connection with the 1997 third and fourth quarter home equity
loan securitization transactions. The amount of these letters of credit are not
included in Notes payable. However, to the extent there may be a draw in the
future on the letters of credit, the amount of such draw will increase Notes
payable under "Revolving credit facilities".
In addition to the Credit Facility, at December 31, 1997, the Company
maintained 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 fourth quarter home equity loan
securitization (the "Investment Bank Warehouse"), and a warehouse facility
provided by United Companies Life Insurance Company ("UCLIC"). The Investment
Bank Warehouse was directly related to the fourth 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 December 31, 1997, $150 million was available and no
amounts were outstanding under the Investment Bank Warehouse. The warehouse
facility provided by UCLIC, 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 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 December 31, 1997, $4.7 million in loans eligible for
securitization were funded under this facility.
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.
In December 1996 and in July 1995, the Company publicly sold $100 million
and $100 million, respectively, of its senior unsecured notes which mature in
July 1998 and January 2004, respectively. The Company previously publicly sold
$125 million of its senior unsecured notes in November 1994 which mature in
November 1999. All of these notes provide for interest payable semi-annually and
are not redeemable prior to maturity. The notes rank on a parity with other
unsecured and unsubordinated indebtedness of the Company. The net proceeds from
the sale of the notes were used for working capital purposes and, in 1995, to
repay the principal amount of indebtedness outstanding under the Company's
existing revolving credit facility with a group of banks.
The Company also has arrangements with banks providing for short-term
unsecured borrowings of up to $9.5 million, none of which was outstanding at
December 31, 1997. Borrowings under these lines of credit bear interest at
market or prime rates. Notes payable at December 31, 1996 included a $5.5
million mortgage loan on an office building adjacent to the Company's home
office building and $3.3 million borrowed under a $10 million committed line of
credit for the construction of an office building adjacent to the Company's home
office building. Both of these loans were paid during 1997.
In May 1993, United Companies Lending Corporation ("UC Lending"), a
wholly-owned subsidiary of the Company, entered into a subordinated debenture
agreement with UCLIC. In connection with this agreement, UC Lending borrowed $10
million from UCLIC, $3 million of which matures in 1998 and bears an interest
rate of 6.05% per annum, $3 million of which matures in 2000 and bears an
interest rate of 6.64% per annum and $4 million of which matures in 2003 and
bears an interest rate of 7.18% per annum.
45
<PAGE> 46
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company made payments for interest of $46.8 million, $36.9 million and
$23.0 million during the years ended December 31, 1997, 1996 and 1995,
respectively.
7. INCOME TAXES
The provision for income taxes attributable to continuing operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current............................................... $ 6,361 $36,391 $ 5,788
Deferred.............................................. 38,965 11,274 31,952
------- ------- -------
Total....................................... $45,326 $47,665 $37,740
======= ======= =======
</TABLE>
Reported income tax expense attributable to continuing operations differs
from the amount computed by applying the statutory federal income tax rate to
consolidated income from continuing operations before income taxes for the
following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax at statutory rate.................. $44,068 $46,850 $35,933
Differences resulting from:
State income taxes.................................. 1,224 770 511
Other............................................... 34 45 1,296
------- ------- -------
Reported income tax provisions........................ $45,326 $47,665 $37,740
======= ======= =======
</TABLE>
The significant components of the Company's net deferred income tax
liability at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses................................. $ 246 $ --
Nonrefundable loan fees................................... 998 1,030
Investments............................................... 504 --
Other..................................................... 806 1,075
------- -------
2,554 2,105
------- -------
Deferred income tax liabilities:
Loan income............................................... 76,413 41,320
Allowance for loan losses................................. -- 401
Mortgage servicing rights................................. 17,066 8,332
Real estate............................................... 4,311 4,150
Other..................................................... 1,857 873
------- -------
99,647 55,076
------- -------
Net deferred income tax liability........................... $97,093 $52,971
======= =======
</TABLE>
46
<PAGE> 47
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Payments made for income taxes during the years ended December 31, 1997,
1996 and 1995 were $3.8 million, $31.0 million and $2.6 million, respectively.
At December 31, 1997 and 1996, the Company had a current income tax
receivable of $7.2 million and $1.0 million, respectively, included in "Other
assets".
8. CAPITAL STOCK
The Company has authorization to issue up to 100,000,000 shares of its
$2.00 par value common stock. There were 28,791,239 and 28,468,052 shares
outstanding at December 31, 1997 and 1996, respectively, excluding 1,180,117 and
1,159,682 treasury shares. The Company also has authorization to issue
20,000,000 shares of preferred stock of which 1,898,070 shares are currently
issued (see discussion of "PRIDES(SM)" below). Included in the authorized
preferred stock are 1,000,000 shares of Series A Junior Participating preferred
stock and 800,000 shares of Cumulative Convertible preferred stock, none of
which is outstanding.
On June 16, 1995, the Company concluded the sale of 1,955,000 shares of its
Preferred Redeemable Increased Dividend Equity Securities(SM), 6 3/4%
PRIDES(SM), Convertible Preferred Stock, par value $2.00 per share
("PRIDES(SM)"), at a price per share of $44.00. Dividends on the PRIDES(SM) are
cumulative and are payable quarterly in arrears on each January 1, April 1, July
1 and October 1. Net proceeds to the Company were approximately $83.3 million.
The net proceeds from the sale of shares of PRIDES(SM) were used for general
corporate purposes. During 1997, 56,930 shares of PRIDES(SM) were converted into
94,102 shares of the Company's common stock.
The PRIDES(SM) rank prior to the Company's common stock as to payment of
dividends and distribution of assets upon liquidation. The shares of PRIDES(SM)
mandatorily convert into shares of common stock on July 1, 2000 (the "Mandatory
Conversion Date") on a two share to one share basis (as adjusted for the 100%
common stock dividend paid October 20, 1995), and the shares of PRIDES(SM) are
convertible into shares of common stock at the option of the holder at any time
prior to the Mandatory Conversion Date on the basis of 1.652 of a share of
common stock for each share of PRIDES(SM), in each case subject to adjustment in
certain events. In addition, the Company has the option to convert the shares of
PRIDES(SM), in whole or in part, on or after July 1, 1998 until the Mandatory
Conversion Date, into shares of its common stock according to a formula.
During 1997 and 1996, the Company paid cash dividends on its common stock
in the amount of $9.0 million and $8.1 million, or $.32 and $.29 per share,
respectively. In addition, during 1997 and 1996, the Company paid cash dividends
on its PRIDES(SM) in the amount of $5.8 million or $2.97 per share.
At December 31, 1997 and 1996, 1,180,117 and 1,159,682 shares of the
Company's common stock, or 4% of the issued common stock, were held as treasury
stock at a cost of $7.4 million and $6.8 million, respectively.
47
<PAGE> 48
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings Per Share
Income from continuing operations................... $80,581 $86,192 $64,925
Less: Income (loss) from discontinued operations.... (5,981) (4,532) 4,543
------- ------- -------
Net income.......................................... $74,600 $81,660 $69,468
======= ======= =======
Weighted average number of common and common
equivalent shares:
Average common shares outstanding................ 28,013 27,929 27,854
Add: Dilutive effect of preferred stock after
application of "if converted" method........ 3,211 3,230 1,752
------- ------- -------
31,224 31,159 29,606
======= ======= =======
Earnings (loss) per share:
Income from continuing operations................... $ 2.58 $ 2.77 $ 2.19
Income (loss) from discontinued operations.......... (.19) (.15) .16
------- ------- -------
Total....................................... $ 2.39 $ 2.62 $ 2.35
======= ======= =======
Diluted Earnings Per Share
Income from continuing operations................... $80,581 $86,192 $64,925
Less: Income (loss) from discontinued operations.... (5,981) (4,532) 4,543
------- ------- -------
Total....................................... $74,600 $81,660 $69,468
======= ======= =======
Weighted average number of common and all dilutive
shares:
Average common shares outstanding................ 28,013 27,929 27,854
Add: Dilutive effect of stock options after
application of treasury stock method........ 596 838 906
Dilutive effect of preferred stock after
application of "if converted" method........ 3,887 3,910 2,121
------- ------- -------
32,496 32,677 30,881
======= ======= =======
Earnings (loss) per share:
Income from continuing operations................ $ 2.48 $ 2.64 $ 2.10
Income (loss) from discontinued operations....... (.18) (.14) .15
------- ------- -------
Total....................................... $ 2.30 $ 2.50 $ 2.25
======= ======= =======
</TABLE>
The weighted average anti-dilutive shares that were excluded from the
computation of diluted earnings per share were 546,275, 69,836 and 10,646 for
1997, 1996 and 1995, respectively.
10. EMPLOYEE BENEFIT PLANS
10.1 Employee Stock Ownership Plan. All employees who meet minimum age and
service requirements participate in the Company's Employee Stock Ownership Plan
("ESOP"). The Company makes
48
<PAGE> 49
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annual tax deductible contributions to the ESOP which are used to purchase
additional shares of the Company's common stock or to pay debt service on shares
acquired with the proceeds of loans ("leveraged shares"). The ESOP's leveraged
shares are initially pledged as collateral for the debt incurred in connection
with the acquisition of such shares. As the debt is repaid, the shares are
released from collateral and allocated to plan participants. Contributions are
allocated among participants based on years of service and compensation. Upon
retirement, death or disability, the employee or a beneficiary receives the
designated common stock.
The Company's cash contributions to the ESOP were $3.1 million, $3.0
million and $2.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Shares held by the ESOP at December 31, 1997, 1996 and 1995 were
approximately 3.7 million, 3.7 million and 4.0 million, respectively. During
1995, the ESOP was granted a $10 million line of credit from a financial
institution, which line of credit was increased to $12 million during 1996. At
December 31, 1997 the ESOP had notes payable with a balance of $10.5 million
under this line of credit. Because the source of the loan payments is primarily
contributions received by the ESOP from the Company, such debt is included in
the Company's Notes payable with a corresponding reduction of stockholders'
equity. During 1997, the ESOP borrowed $3.4 million from the Company to purchase
shares of the Company's common stock. The Company does not report the ESOP's
notes payable or the Company's notes receivable in its balance sheet.
Accordingly, no interest cost or interest income is recognized on the Company
loans to the ESOP. At December 31, 1997, the balance of the Company's loans to
the ESOP was $3.2 million. In accordance with Statement of Position 93-6 ("SOP
93-6"), leveraged shares purchased subsequent to December 31, 1992 are, upon
release, reflected as compensation expense based on the then current market
price of the shares. Shares which have not been committed to be released are not
considered outstanding for purposes of the computation of earnings per share. At
December 31, 1997, approximately 155,000 shares of common stock were committed
to be released under the terms of the loan agreement. At December 31, 1997,
approximately 69,000 shares of common stock accounted for under the provisions
of SOP 93-6 were committed to be released resulting in additional compensation
expense of approximately $1.5 million during 1997. At December 31, 1997, the
ESOP had approximately 813,000 leveraged shares, of which approximately 578,000
were accounted for under the provisions of SOP 93-6. The fair value of the
578,000 leveraged shares accounted for under the provisions of SOP 93-6 was $9.0
million at December 31, 1997.
10.2 Stock Option Plans. At December 31, 1997, the Company had four
stock-based compensation plans for employees, which are described below. The
Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans as the exercise price of
all stock options granted thereunder is equal to the fair market value at the
date of grant. The compensation cost that has been charged against net income
for restricted stock issued under the 1993 Stock Incentive Plan and the 1996
Long-Term Incentive Compensation Plan was $2.2 million, $1.4 million and $.4
million for 1997, 1996 and 1995, respectively. Had compensation costs for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
Financial Accounting
49
<PAGE> 50
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standards Board Statement No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income As reported.......... $74,600 $81,660 $69,468
Pro forma............ 70,956 81,118 68,917
Basic earnings per share As reported.......... 2.39 2.62 2.35
Pro forma............ 2.27 2.60 2.33
Diluted earnings As reported.......... 2.30 2.50 2.25
per share Pro forma............ 2.18 2.48 2.23
</TABLE>
Fixed Stock Options. The Company has six fixed stock option plans. Under
the 1986, 1989, 1993 and 1996 employee plans, the Company may grant options for
up to 1.1 million, .8 million, 1.3 million and 1.5 million (subject to annual
increases as described below) shares of common stock, respectively. Under the
1993 and 1996 plans for non-employee directors (the "Director Plans"), the
Company may grant options for up to .9 and .4 million shares of common stock,
respectively. Under the 1996 Long-Term Incentive Compensation Plan, beginning in
1998, the number of shares of common stock available for grant increases
annually on January 1 of each year pursuant to a formula based on the number of
shares of common stock outstanding. The term of the 1986 plan has expired and no
new options may be awarded thereunder. At December 31, 1997, 11,234, 83,722 and
540,489 shares of common stock were available for award under the 1989, 1993 and
1996 employee stock plans, respectively, and 599,200 and 347,000 shares of
common stock were available for award under the 1993 and 1996 Director Plans.
Under all plans, the exercise price of each option equals the fair market value
of the Company's common stock on the date of grant and the maximum term of an
option is 10 years. Under the 1986 and 1989 employee plans, the options become
exercisable two years from the grant date, under the 1993 plan the options
become exercisable three years from the grant date. At December 31, 1997, all
options granted under the 1996 plan will become exercisable three years after
the grant date. Options awarded under the 1993 Director Plan become exercisable
three years from the date of grant and, under the 1996 Director Plan, six months
from the date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following assumptions for grants
in 1997: dividend yield of 2.0%; expected volatility of 452%; risk-free interest
rate of 6.14%; and expected life of 4.1 years. The following assumptions were
used for options granted in 1996: dividend yield of 1.2%; expected volatility of
45%; risk-free interest rate of 6.47%; and expected life of 5.4 years. The
following assumptions were used for options granted in 1995: dividend yield of
1.2%; expected volatility of 27%; risk-free interest rate of 5.95%; and expected
life of 5.4 years.
50
<PAGE> 51
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's four stock option plans (excluding
the restricted stock awards and as adjusted for stock dividends) as of December
31, 1997, 1996 and 1995 and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 1,571,230 $13.27 1,831,860 $11.51 1,699,446 $ 5.90
Granted......................... 892,650 25.31 58,700 33.19 584,700 22.55
Exercised....................... (28,294) 7.77 (279,488) 5.55 (409,092) 4.11
Canceled........................ (45,563) 25.43 (39,842) 15.83 (43,194) 10.75
--------- --------- ---------
Outstanding at end of year........ 2,390,023 17.60 1,571,230 13.27 1,831,860 11.51
========= ========= =========
Weighted-average fair value of
options granted during the
year............................ $ 23.35 $ 15.63 $ 7.60
</TABLE>
The following table summarizes information (as adjusted for stock
dividends) about fixed stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ------------------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 to $7.00............... 814,400 3.94 $ 5.02 814,400 $ 5.02
$13.50 to $22.50............. 665,498 7.40 21.04 161,198 18.40
$22.51 to $26.00............. 437,900 9.86 24.15 -- --
$26.01 to $34.00............. 472,225 8.95 28.36 4,100 27.48
--------- -------
Total.............. 2,390,023 6.98 17.60 979,698 7.31
========= =======
</TABLE>
Restricted Stock Awards. As part of the Company's 1993 Stock Incentive Plan
and the 1996 Long-Term Incentive Compensation Plan, the Company may award
restricted stock to selected executives and other key employees. While the 1993
and the 1996 plans only require a vesting period of six months, awards of
restricted stock have generally been made with vesting periods from one year to
four years contingent upon the attainment by the Company of certain return on
equity requirements or stock price performance requirements.
The following table summarizes information about restricted stock awards
during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996
--------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RESTRICTED STOCK AWARDS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 37,000 $-- 80,000 $--
Granted.......................... 181,286 -- 3,000 --
Lapse of restriction............. (86,886) -- (46,000) --
-------- --------
Outstanding at end of year....... 131,400 -- 37,000 --
======== ========
Weighted-average fair value of
restricted stock granted during
the year....................... $ 7.89 $ 34.00
</TABLE>
51
<PAGE> 52
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the 131,400 shares of restricted stock outstanding
had a purchase price of zero and a weighted-average remaining contractual life
of two years.
10.3 Employees' Savings Plan and Trust. The United Companies Financial
Corporation Employees' Savings Plan and Trust is designed to be a qualified plan
under Sections 401(a) and 401(k) of the Internal Revenue Code. Under the plan,
employees are allowed to defer income on a pre-tax basis through contributions
to the plan and the Company matches a portion of such contributions. The
Company's matching contributions totaled $1.6 million, $1.5 million and $1.3
million during 1997, 1996 and 1995, respectively. Employees have ten investment
options, one of which is to invest in the Company's common stock. The plan held
611,678 shares and 537,117 shares of the Company's common stock at December 31,
1997 and 1996, respectively.
10.4 Deferred Compensation Plans. Postretirement benefits are provided to
eligible executive and senior officers of the Company under a deferred
compensation plan. The cost (benefit) of this plan during 1997 and 1996 was $.2
million and ($.1) million, respectively. The Company calculated its
postretirement benefit obligation as of December 31, 1997 using a weighted
average discount rate of 7.1%. A reconciliation of the funded status of the
deferred compensation plan as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NET DECEMBER 31,
1997 CHANGE 1996
------------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit cost........... $ 1,917 $146 $ 1,771
Plan assets....................................... -- -- --
------- ---- -------
Funded status..................................... 1,917 146 1,771
Unrecognized transition obligation................ (1,003) 67 (1,070)
------- ---- -------
Accrued postretirement benefit cost............... $ 914 $213 $ 701
======= ==== =======
</TABLE>
11. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107")
requires that the Company disclose the estimated fair values of its financial
instruments, both assets and liabilities recognized and not recognized in its
financial statements.
SFAS No. 107 defines financial instruments as cash and contractual rights
and obligations that require settlement in cash or by exchange of financial
instruments. Fair value is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties other than in a
forced or liquidation sale.
The carrying value and fair value of the Company's financial assets and
liabilities at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents................ $ 582 $ 582 $ 14,064 $ 14,064
Loans.................................... 196,971 209,000 102,284 107,000
Interest-only and residual
certificates.......................... 882,116 882,116 604,474 604,474
Capitalized mortgage servicing rights.... 48,760 53,918 23,806 26,000
Financial liabilities:
Notes payable............................ 691,826 705,425 425,671 431,000
Managed cash overdraft................... 11,363 11,363 -- --
</TABLE>
52
<PAGE> 53
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above values do not reflect any premium or discount from offering for
sale at one time the Company's entire holdings of a particular financial
instrument. Fair value estimates are made at a specific point in time based on
relevant market information, if available. Because no market exists for certain
of the Company's financial instruments, fair value estimates for these assets
and liabilities were based on subjective estimates of market conditions and
perceived risks of the financial instruments. Fair value estimates were also
based on judgments regarding future loss and prepayment experience and were
influenced by the Company's historical information.
The following methods and assumptions were used to estimate the fair value
of the Company's financial instruments:
Cash and cash equivalents. The carrying amount of cash and cash equivalents
approximates their fair values because these assets generally mature in 90 days
or less and do not present any significant credit concerns.
Loans. The fair value of the Company's loan portfolio was determined by
segregating the portfolio by type of loan and further by its performing and
nonperforming components. Performing loans were further segregated based on the
due date of their payments, an analysis of credit risk by category was performed
and a matrix of pricing by category was developed. Loans which had been
identified for sale were valued at their estimated sales price, which includes
the estimated value of the portion of the interest and fees which are not sold
with the securities backed by the loans. Loans which were current but not
identified for sale approximate the remaining principal balance which is
believed to represent an estimate of market discount from similar loans
identified for sale. The fair value of delinquent loans was estimated by using
the Company's historical recoverable amount on defaulted loans. Real estate
owned property is excluded from this disclosure because it is not considered a
financial instrument.
Interest-only and residual certificates. In accordance with the
requirements of SFAS No. 125, the Interest-only and residual certificates are
carried at fair value. For a discussion of the assumptions used by the Company
in determining the fair value of this asset see Note 2.
Capitalized mortgage servicing rights. The fair value of capitalized
mortgage servicing rights was based on the present value of estimated future
cash flows related to servicing income. In estimating the fair value of these
rights, the Company made assumptions which included the cost of servicing per
loan, the discount rate, an inflation rate, ancillary income per loan,
prepayment and default rates.
Notes payable. Notes payable consists primarily of amounts payable for the
Company's senior and subordinated unsecured notes. The fair value of the senior
and subordinated unsecured notes is based upon the estimated current rate
offered to the Company for debt of the same remaining maturity.
The fair values presented herein are based on pertinent information
available to management as of December 31, 1997. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
12. DISCONTINUED OPERATIONS
United Companies Life Insurance Company. On July 24, 1996, the Company
concluded the sale of all of the outstanding capital stock of its wholly-owned
life insurance subsidiary, United Companies Life Insurance Company ("UCLIC"),
for a sales price of $167.6 million. The Company recorded, in 1996, a net loss
of $6.8 million on the transaction. As a result of the sale, the assets
(including $67 million of assets transferred to the Company by UCLIC immediately
prior to closing) and the operations of UCLIC have been classified as
53
<PAGE> 54
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discontinued operations. In the fourth quarter of 1997, the Company wrote off an
additional $2.2 million related to an intercompany receivable.
United General Title Insurance Company. On February 29, 1996, the Company
closed the sale of 100% of the outstanding capital stock of its wholly-owned
subsidiary, United General Title Insurance Company ("UGTIC"). The definitive
stock sale contains a provision making the Company liable to UGTIC for claims
from defalcation and fraud losses incurred by UGTIC which were unknown and
occurred prior to closing and were discovered within 24 months thereafter. At
the end of the 24 month period, various claims for such defalcation and fraud
losses were pending and under review by the Company. Management of the Company
does not believe that the resolution of pending claims for such losses will have
a material impact upon the Company's operations. The Company is also liable, up
to $2.5 million, for policy claims paid over a ten year period after the closing
that exceed certain specified levels. The Company recorded a loss from
discontinued operations (net of income tax benefit) of $3.5 million in 1995,
$1.1 million in 1996 and $1.6 million in 1997 in connection with the sale of
UGTIC.
Foster Mortgage Corporation. The remaining affairs of the Company's
subsidiary, Foster Mortgage Corporation ("FMC"), a discontinued operation, which
had been conducted under the supervision of a bankruptcy court have been
concluded. The claims of the institutional lenders under FMC's primary credit
facility (the "FMC Institutional Lenders") relating to the Company's alleged
failure to remit all sums due FMC regarding federal income taxes under a tax
agreement among the Company and its subsidiaries, including FMC, was settled.
The Company recorded a $5.6 million charge in the fourth quarter of 1997
resulting from the settlement. The claims of the FMC Institutional Lenders
against the Company seeking avoidance of certain payments alleged to be
preferences or fraudulent conveyances were dismissed after a trial before the
bankruptcy court.
13. CONTINGENCIES
The nature of the Company's business is such that it is routinely involved
in litigation and is a party to or subject to other items of pending or
threatened litigation. Although the outcome of certain of these matters cannot
be predicted, management of the Company believes, based upon information
currently available, that the resolution of these various matters will not
result in any material adverse effect on its consolidated financial condition.
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 has ruled 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 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.
As discussed in Note 12 above, the Company, in February, 1996, concluded
the sale of its investment in UGTIC. In connection therewith, the stock sale
agreement includes a provision making the Company liable to UGTIC for claims
from defalcation and fraud losses incurred by UGTIC which were unknown and
occurred prior to closing and were discovered within 24 months thereafter. At
the end of the 24 month period, various claims for such defalcation and fraud
losses were pending and under review by the Company. Management of the Company
does not believe that the resolution of pending claims for such losses will have
a material impact
54
<PAGE> 55
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
upon the Company's operations. The Company is also liable, up to $2.5 million,
for policy claims paid over a ten year period after closing that exceed certain
specified levels.
For a discussion of letters of credit issued under the Company's credit
facility, see Note 6 above.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Total revenues........................ $92,422 $115,229 $131,034 $102,126
Income from continuing operations
before income taxes................ 31,497 37,123 43,832 13,455
Net income............................ 20,158 23,759 27,049 3,634
Per share data -- net income:
Basic:
Income from continuing
operations.................... $ .65 $ .76 $ .90 $ .28
Income (loss) from discontinued
operations.................... -- -- (.03) (.16)
------- -------- -------- --------
Total......................... $ .65 $ .76 $ .87 $ .12
======= ======== ======== ========
Diluted:
Income from continuing
operations.................... $ .62 $ .73 $ .86 $ .26
Income (loss) from discontinued
operations.................... -- -- (.03) (.15)
------- -------- -------- --------
Total......................... $ .62 $ .73 $ .83 $ .11
======= ======== ======== ========
</TABLE>
55
<PAGE> 56
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the fourth quarter of 1997, the Company increased the prepayment
assumption ("CPR") used by it in calculating loan sale gains on its hybrid
product. This adjustment to the CPR assumption for sales of this new product in
1997 resulted in a $15 million negative adjustment to earnings during the fourth
quarter of 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Total revenues......................... $71,172 $83,837 $94,185 $93,364
Income from continuing operations
before income taxes................. 26,892 33,056 37,997 35,912
Net income............................. 17,839 15,685 24,128 24,008
Per share data -- net income:
Basic:
Income from continuing
operations..................... $ .55 $ .67 $ .77 $ .77
Income (loss) from discontinued
operations..................... .02 (.17) -- --
------- ------- ------- -------
Total.......................... $ .57 $ .50 $ .77 $ .77
======= ======= ======= =======
Diluted:
Income from continuing
operations..................... $ .53 $ .64 $ .74 $ .73
Income (loss) from discontinued
operations..................... .02 (.16) -- --
------- ------- ------- -------
Total.......................... $ .55 $ .48 $ .74 $ .73
======= ======= ======= =======
</TABLE>
56
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
57
<PAGE> 58
PART III
The information called for by Part III (items 10, 11, 12 and 13) has been
omitted since the Company will file with the Commission a definitive proxy
statement pursuant to Regulation 14A or a definitive information statement
pursuant to Regulation 14C, which involves the election of directors, within 120
days after the close of the year.
58
<PAGE> 59
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
Included in Part II of this report:
<TABLE>
<S> <C> <C>
Independent Auditors' Report................................ Page 32
December 31, 1997 and 1996
Consolidated Balance Sheets............................... Page 33
For the three years ended December 31, 1997
Consolidated Statements of Income......................... Page 34
Consolidated Statements of Cash Flows..................... Page 35
Consolidated Statements of Stockholders' Equity........... Page 36
Notes to Consolidated Financial Statements.................. Pages 37-56
</TABLE>
Financial Statement Schedules
Included in Part IV of this report:
Individual financial statements of the registrant have been omitted because
consolidated financial statements of the registrant and its subsidiaries
required by Item 8 have been included in Part II of this report and, as of
December 31, 1997, the registrant was primarily an operating company and all
subsidiaries are wholly owned.
No financial statement schedules have been presented because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <S>
2(1) -- Amended and Restated Stock Purchase Agreement dated as of
July 24, 1996 by and between the Company and Pacific Life
and Accident Insurance Company
3.1(2) -- Restatement of Articles of Incorporation
3.2(3) -- By-Laws, as amended
4.1(4) -- Senior Indenture
4.2(4) -- Subordinated Indenture
4.3(4) -- First Supplemental Indenture with respect to 9.35% Senior
Notes due November 1, 1999
4.4(4) -- Form of certificate for shares of Preferred Redeemable
Increased Dividend Equity Securities 6 3/4% PRIDES(SM),
Convertible Preferred Stock, par value $2.00 per share
4.5(5) -- Second Supplemental Indenture for 7% Senior Notes due
July 15, 1998
4.6(6) -- Series A Junior Participating Preferred Stock Purchase
Rights
4.7(7) -- Third Supplemental Indenture for 7.7% Senior Notes due
January 15, 2004
4.8(8) -- First Supplemental Indenture with respect to 8 3/8%
Subordinated Notes due June 1, 2005
4.9(8) -- 8 3/8% Subordinated Note due July 1, 2005
10.1(9) -- Employee Stock Ownership Plan and Trust
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <S>
10.2(10) -- Management Incentive Plan, as amended
10.3(9) -- Employees' Savings Plan
10.4(11) -- 1989 Stock Incentive Plan
10.5(11) -- 1989 Non-Employee Director Stock Option Plan
10.6(12) -- 1992 Form 11-K, Employees' Savings Plan and Trust
10.7(13) -- Stock Purchase Warrant dated as of July 1, 1993
10.8(14) -- 1993 Form 11-K, Employees' Savings Plan and Trust
10.9(15) -- 1993 Stock Incentive Plan
10.10(15) -- 1993 Non-Employee Director Stock Option Plan
10.11(16) -- 1994 Form 11-K, Employees' Savings Plan and Trust
10.12(17) -- 1995 Form 11-K, Employees' Savings Plan
10.13(3) -- Indemnification Agreements
10.14(18) -- Change of Control Agreement
10.15(18) -- Supplemental Retirement Agreement
10.16(18) -- Split Dollar Agreement
10.17(19) -- 1996 Form 11-K, Employees' Savings Plan
10.18(20) -- Credit Agreement dated as of April 10, 1997
10.19(21) -- 1996 Long-Term Incentive Compensation Plan
10.20(21) -- 1996 Non-Employee Director Stock Plan
11.1(22) -- Statement regarding computation of per share earnings
21.1(22) -- List of Subsidiaries of the Company
23.1(22) -- Consent of Deloitte & Touche LLP
27(22) -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K filed on August 8, 1996.
(2) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated November 27, 1996.
(3) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated March 31, 1995.
(4) Incorporated herein by reference to the designated Exhibits of the
Company's Current Report on Form 8-K filed on June 16, 1995.
(5) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K filed July 26, 1995.
(6) Incorporated herein by reference to the designated Exhibit of the Company's
Form 8-A dated August 5, 1994.
(7) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated December 5, 1996.
(8) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated June 17, 1997.
(9) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, filed on March 29, 1997.
(10) Incorporated herein by reference from the designated Exhibit of the
Company's Registration Statement on Form S-8 (SEC File No. 33-63069).
60
<PAGE> 61
(11) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-8 (SEC File No. 33-29994).
(12) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992, as amended, filed on April 30,
1993.
(13) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-3 (SEC File No. 33-52739).
(14) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, as amended, filed on June 29,
1994.
(15) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-8 (SEC File No. 33-54955).
(16) Incorporated herein by reference to the Form 11-K filed July 13, 1995.
(17) Incorporated herein by reference to the Form 11-K filed June 28, 1996.
(18) Incorporated herein by reference to the designated Exhibit of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, filed
March 19, 1996.
(19) Incorporated herein by reference to the Form 11-K filed June 27, 1997.
(20) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated June 2, 1997.
(21) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-8 (SEC File No. 333-33347).
(22) Filed herewith:
Exhibit 11.1
Exhibit 21.1
Exhibit 23.1
Exhibit 27
REPORTS ON FORM 8-K
None.
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 25, 1998
UNITED COMPANIES FINANCIAL CORPORATION
By: /s/ SHERRY E. ANDERSON
--------------------------------------------
Sherry E. Anderson
Senior Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934 this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 25, 1998.
<TABLE>
<C> <S>
/s/ J. TERRELL BROWN Chairman of the Board, Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer)
J. Terrell, Brown
/s/ JOHN D. DIENES President, Chief Operating Officer and
- ----------------------------------------------------- Director (Principal Operating Officer)
John D. Dienes
/s/ DALE E. REDMAN Executive Vice President, Chief Financial
- ----------------------------------------------------- Officer, and Director (Principal Financial
Dale E. Redman Officer)
/s/ JESSE O. GRIFFIN Senior Vice President and Director of
- ----------------------------------------------------- Accounting Services (Principal Accounting
Jesse O. Griffin Officer)
/s/ JAMES J. BAILEY, III Director
- -----------------------------------------------------
James J. Bailey, III
/s/ ROBERT H. BARROW Director
- -----------------------------------------------------
Robert H. Barrow
/s/ JOHN W. BARTON, SR. Director
- -----------------------------------------------------
John W. Barton, Sr.
/s/ JON R. BURKE Director
- -----------------------------------------------------
Jon R. Burke
/s/ RICHARD A. CAMPBELL Director
- -----------------------------------------------------
Richard A. Campbell
/s/ HARRIS J. CHUSTZ, JR. Director
- -----------------------------------------------------
Harris J. Chustz, Jr.
</TABLE>
62
<PAGE> 63
<TABLE>
<C> <S>
/s/ ROY G. KADAIR, M.D. Director
- -----------------------------------------------------
Roy G. Kadair, M.D.
/s/ O. MILES POLLARD, JR. Director
- -----------------------------------------------------
O. Miles Pollard, Jr.
/s/ WILLIAM H. WRIGHT, JR. Director
- -----------------------------------------------------
William H. Wright, Jr.
</TABLE>
63
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <S>
2(1) -- Amended and Restated Stock Purchase Agreement dated as of
July 24, 1996 by and between the Company and Pacific Life
and Accident Insurance Company
3.1(2) -- Restatement of Articles of Incorporation
3.2(3) -- By-Laws, as amended
4.1(4) -- Senior Indenture
4.2(4) -- Subordinated Indenture
4.3(4) -- First Supplemental Indenture with respect to 9.35% Senior
Notes due November 1, 1999
4.4(4) -- Form of certificate for shares of Preferred Redeemable
Increased Dividend Equity Securities 6 3/4% PRIDES(SM),
Convertible Preferred Stock, par value $2.00 per share
4.5(5) -- Second Supplemental Indenture for 7% Senior Notes due
July 15, 1998
4.6(6) -- Series A Junior Participating Preferred Stock Purchase
Rights
4.7(7) -- Third Supplemental Indenture for 7.7% Senior Notes due
January 15, 2004
4.8(8) -- First Supplemental Indenture with respect to 8 3/8%
Subordinated Notes due June 1, 2005
4.9(8) -- 8 3/8% Subordinated Note due July 1, 2005
10.1(9) -- Employee Stock Ownership Plan and Trust
10.2(10) -- Management Incentive Plan, as amended
10.3(9) -- Employees' Savings Plan
10.4(11) -- 1989 Stock Incentive Plan
10.5(11) -- 1989 Non-Employee Director Stock Option Plan
10.6(12) -- 1992 Form 11-K, Employees' Savings Plan and Trust
10.7(13) -- Stock Purchase Warrant dated as of July 1, 1993
10.8(14) -- 1993 Form 11-K, Employees' Savings Plan and Trust
10.9(15) -- 1993 Stock Incentive Plan
10.10(15) -- 1993 Non-Employee Director Stock Option Plan
10.11(16) -- 1994 Form 11-K, Employees' Savings Plan and Trust
10.12(17) -- 1995 Form 11-K, Employees' Savings Plan
10.13(3) -- Indemnification Agreements
10.14(18) -- Change of Control Agreement
10.15(18) -- Supplemental Retirement Agreement
10.16(18) -- Split Dollar Agreement
10.17(19) -- 1996 Form 11-K, Employees' Savings Plan
10.18(20) -- Credit Agreement dated as of April 10, 1997
10.19(21) -- 1996 Long-Term Incentive Compensation Plan
10.20(21) -- 1996 Non-Employee Director Stock Plan
11.1(22) -- Statement regarding computation of per share earnings
21.1(22) -- List of Subsidiaries of the Company
23.1(22) -- Consent of Deloitte & Touche LLP
27(22) -- Financial Data Schedule
</TABLE>
<PAGE> 65
- ---------------
(1) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K filed on August 8, 1996.
(2) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated November 27, 1996.
(3) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated March 31, 1995.
(4) Incorporated herein by reference to the designated Exhibits of the
Company's Current Report on Form 8-K filed on June 16, 1995.
(5) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K filed July 26, 1995.
(6) Incorporated herein by reference to the designated Exhibit of the Company's
Form 8-A dated August 5, 1994.
(7) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated December 5, 1996.
(8) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated June 17, 1997.
(9) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, filed on March 29, 1997.
(10) Incorporated herein by reference from the designated Exhibit of the
Company's Registration Statement on Form S-8 (SEC File No. 33-63069).
(11) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-8 (SEC File No. 33-29994).
(12) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992, as amended, filed on April 30,
1993.
(13) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-3 (SEC File No. 33-52739).
(14) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, as amended, filed on June 29,
1994.
(15) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-8 (SEC File No. 33-54955).
(16) Incorporated herein by reference to the Form 11-K filed July 13, 1995.
(17) Incorporated herein by reference to the Form 11-K filed June 28, 1996.
(18) Incorporated herein by reference to the designated Exhibit of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, filed
March 19, 1996.
(19) Incorporated herein by reference to the Form 11-K filed June 27, 1997.
(20) Incorporated herein by reference to the designated Exhibit of the Company's
Current Report on Form 8-K dated June 2, 1997.
(21) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-8 (SEC File No. 333-33347).
(22) Filed herewith:
Exhibit 11.1
Exhibit 21.1
Exhibit 23.1
Exhibit 27
<PAGE> 1
EXHIBIT 11.1
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings Per Share
Income from continuing operations......................... $80,581 $86,192 $64,925
Less: Income (loss) from discontinued operations.......... (5,981) (4,532) 4,543
------- ------- -------
Net income................................................ $74,600 $81,660 $69,468
======= ======= =======
Weighted average number of common and common equivalent
shares:
Average common shares outstanding...................... 28,013 27,929 27,854
Add: Dilutive effect of preferred stock after
application of
"if converted" method............................ 3,211 3,230 1,752
------- ------- -------
31,224 31,159 29,606
======= ======= =======
Earnings (loss) per share:
Income from continuing operations...................... $ 2.58 $ 2.77 $ 2.19
Income (loss) from discontinued operations............. (.19) (.15) .16
------- ------- -------
Total............................................. $ 2.39 $ 2.62 $ 2.35
======= ======= =======
Diluted Earnings Per Share
Income from continuing operations......................... $80,581 $86,192 $64,925
Less: Income (loss) from discontinued operations....... (5,981) (4,532) 4,543
------- ------- -------
Total............................................. $74,600 $81,660 $69,468
======= ======= =======
Weighted average number of common and all dilutive shares:
Average common shares outstanding...................... 28,013 27,929 27,854
Add: Dilutive effect of stock options after application
of treasury
stock method..................................... 596 838 906
Dilutive effect of preferred stock after
application of
"if converted" method............................ 3,887 3,910 2,121
------- ------- -------
32,496 32,677 30,881
======= ======= =======
Earnings (loss) per share:
Income from continuing operations...................... $ 2.48 $ 2.64 $ 2.10
Income (loss) from discontinued operations............. (.18) (.14) .15
------- ------- -------
Total............................................. $ 2.30 $ 2.50 $ 2.25
======= ======= =======
</TABLE>
The weighted average anti-dilutive shares that were excluded from the
computation of diluted earnings per share were 546,275, 69,836 and 10,646 for
1997, 1996 and 1995, respectively.
<PAGE> 1
EXHIBIT 21.1
UNITED COMPANIES FINANCIAL CORPORATION
LIST OF SUBSIDIARIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
---- -------------
<S> <C>
United Companies Lending Group, Inc......................... Louisiana
United Companies Lending Corporation(R)(1).................. Louisiana
Pelican Mortgage Company, Inc.(2)........................... Delaware
Adobe, Inc.(3).............................................. Nevada
UCFC Acceptance Corporation(2).............................. Louisiana
United Companies Mortgage of Tennessee, Inc.(2)............. Tennessee
UNICOR MORTGAGE(R), Inc.(1)................................. Louisiana
GINGER MAE(R), Inc.(1)...................................... Louisiana
Southern Mortgage Acquisition, Inc.(1)...................... Louisiana
United Communications Corporation of Louisiana, Inc......... Louisiana
United Companies Management Company, Inc.................... Louisiana
United Companies Realty and Development Company, Inc........ Louisiana
United Plan Insurance Agency, Inc........................... Louisiana
United Companies Funding, Inc.(R)........................... Louisiana
United Credit Card, Inc..................................... Louisiana
UCFC Funding Corporation(5)................................. Louisiana
Gopher Funding, Inc.(5)..................................... Nevada
Adobe Financial, Inc. I(4).................................. Nevada
</TABLE>
- ---------------
(1) Wholly owned by United Companies Lending Group
(2) Wholly owned by United Companies Lending Corporation(R)
(3) Wholly owned by Pelican Mortgage Company, Inc.
(4) Wholly owned by Adobe, Inc.
(5) Wholly owned by United Companies Funding, Inc.(R)
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our opinion dated March 4,
1998 appearing in this Annual Report on Form 10-K of United Companies Financial
Corporation for the year ended December 31, 1997 in the following: Registration
Statement No. 33-15326 on Form S-8 pertaining to the United Companies Financial
Corporation 1986 Employee Incentive Stock Option Plan, Registration Statement
No. 33-17366 on Form S-8 pertaining to the United Companies Financial
Corporation Employees' Savings Plan and Trust, Registration Statement No.
33-29994 on Form S-8 pertaining to the 1989 Stock Incentive Plan and the 1989
Non-Employee Director Stock Option Plan, Registration Statement No. 33-54955 on
Form S-8 pertaining to the 1993 Stock Incentive Plan and the 1993 Non-Employee
Director Stock Option Plan, Registration Statement No. 33-68626 on Form S-3
pertaining to the registration of 1,951,204 shares of United Companies Financial
Corporation Common Stock, Registration Statement No. 33-60367 on Form S-3
pertaining to the registration of $200 million of United Companies Financial
Corporation Debt Securities and Preferred Stock, Registration Statement No.
33-52739 on Form S-3 pertaining to the registration of 200,000 shares of United
Companies Financial Corporation Common Stock, 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.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 582
<SECURITIES> 16,853
<RECEIVABLES> 206,598
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 79,712
<DEPRECIATION> (14,958)
<TOTAL-ASSETS> 1,337,208
<CURRENT-LIABILITIES> 0
<BONDS> 691,826
0
3,796
<COMMON> 59,943
<OTHER-SE> 416,890
<TOTAL-LIABILITY-AND-EQUITY> 1,337,208
<SALES> 0
<TOTAL-REVENUES> 440,811
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 254,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,812
<INCOME-PRETAX> 125,907
<INCOME-TAX> 45,326
<INCOME-CONTINUING> 80,581
<DISCONTINUED> (5,981)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,600
<EPS-PRIMARY> 2.39
<EPS-DILUTED> 2.30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY RESTATED FINANCIAL INFORMATION EXTRACTED FROM
FORMS 10-Q AND 10-K FOR THE RESPECTIVE PERIODS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 5,284 29,495 18,254 824 14,064
<SECURITIES> 219 212 217 33,591 34,928
<RECEIVABLES> 68,393 91,542 123,804 109,186 118,750
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 0 0 0 0 0
<PP&E> 15,239 16,153 17,893 43,106 46,323
<DEPRECIATION> 0 0 0 0 0
<TOTAL-ASSETS> 708,730 803,933 863,509 796,020 925,273
<CURRENT-LIABILITIES> 0 0 0 0 0
<BONDS> 265,756 336,883 388,764 302,010 425,671
0 0 0 0 0
3,910 3,910 3,910 3,910 3,910
<COMMON> 58,604 58,731 58,808 59,132 59,255
<OTHER-SE> 289,960 303,611 315,918 338,184 357,112
<TOTAL-LIABILITY-AND-EQUITY> 708,730 803,933 863,509 796,020 925,273
<SALES> 0 0 0 0 0
<TOTAL-REVENUES> 252,650 71,172 155,009 249,195 342,558
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 0 0 0 0 0
<OTHER-EXPENSES> 124,426 36,607 78,242 123,664 170,075
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 25,559 7,673 16,819 27,586 38,626
<INCOME-PRETAX> 102,665 26,892 59,948 97,945 133,857
<INCOME-TAX> 37,740 9,663 21,892 35,761 47,665
<INCOME-CONTINUING> 64,925 17,229 38,056 62,184 86,192
<DISCONTINUED> 4,543 610 (4,532) (4,532) (4,532)
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 69,468 17,839 33,524 57,652 81,660
<EPS-PRIMARY> 2.35 .57 1.07 1.84 2.62
<EPS-DILUTED> 2.25 .55 1.03 1.77 2.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY RESTATED FINANCIAL INFORMATION EXTRACTED FROM
FORMS 10-Q AND 10-K FOR THE RESPECTIVE PERIODS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 619 591 583
<SECURITIES> 17,101 16,939 17,434
<RECEIVABLES> 119,811 166,369 174,713
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 51,066 56,784 60,627
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 991,326 1,149,535 1,234,814
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 446,996 552,403 595,886
0 0 0
3,910 3,910 3,910
<COMMON> 59,309 59,714 59,725
<OTHER-SE> 372,780 393,397 418,066
<TOTAL-LIABILITY-AND-EQUITY> 991,326 1,149,535 1,234,814
<SALES> 0 0 0
<TOTAL-REVENUES> 92,422 207,651 338,685
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 48,695 112,564 182,860
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 12,230 26,467 43,373
<INCOME-PRETAX> 31,497 68,620 112,452
<INCOME-TAX> 11,339 24,703 40,483
<INCOME-CONTINUING> 20,158 43,917 71,969
<DISCONTINUED> 0 0 (1,003)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 20,158 43,917 70,966
<EPS-PRIMARY> .65 1.41 2.28
<EPS-DILUTED> .62 1.35 2.18
</TABLE>
