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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1993
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)
Louisiana 71-0430414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 Essen Lane 70809
Baton Rouge, Louisiana (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code (504) 924-6007
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.00
(Title of Class)
-----------------------------
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
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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 by the National Association of Securities Dealers
Automated Quotation System/National Stock Market, as of February 10, 1994 was
$402,231,460.
The number of shares of $2.00 par value stock issued and outstanding
as of February 10, 1994 was 12,328,416 excluding 512,648 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Management's proxy statement in connection with the Annual Meeting of
Shareholders to be held April 28, 1994 is incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
General
United Companies Financial Corporation (the "Company" or "UCFC"),
founded in 1946, is a financial services holding company having mortgage and
insurance operations. The Company's mortgage operations are focused on the
origination, sale and servicing of first mortgage, non-conventional, home
equity loans. The Company's financial performance has significantly improved
primarily as a result of its increasing loan production and its reduced cost of
funding due to the start-up of Company-sponsored public securitization
transactions. The Company's strategy for increasing loan production includes
continued geographic expansion, the introduction of new loan products and
wholesale originations and acquisitions. Home equity loan production in 1991,
1992 and 1993 was $254 million, $301 million, and $540 million, respectively.
The Company believes its securitization strategy improves its access to funding
and thereby provides a distribution outlet capable of purchasing the Company's
expanding home equity loan production. Increased loan production and
securitization are the primary reasons that the operating income before income
taxes of the Company's mortgage operations rose from $4.4 million in 1991 to
$24.0 million in 1992 to $46.3 million in 1993. The Company's insurance
operations sell primarily single premium deferred annuities marketed in 47
states, the District of Columbia and Puerto Rico and underwrite primarily
residential title insurance in 26 states. For additional information regarding
the Company's operations by business segment, see Note 12 to Notes to
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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 1,200 employees.
Mortgage Operations
United Companies Lending Corporation ("UC Lending" or "UCLC"), the
Company's wholly-owned mortgage subsidiary, originates, sells and services
primarily first mortgage, non-conventional, home equity loans which are
typically not loans for the purchase of homes. These loans are 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 weighted average interest rate and the weighted average loan origination
fee on UC Lending home equity loans originated during 1993 was 11.8% and 7.0%,
respectively. The Company attributes these loan terms to its belief 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. Further, borrowers of non-conventional loans
may present a greater credit risk and generally pay higher interest rates and
loan origination fees. Management of the Company believes that any greater
credit risk arising out of making loans to these borrowers is compensated by
higher fees and interest rates. During 1992, the average home equity loan
amount at origination was approximately $28,000, which amount increased to
$39,000 in 1993 due primarily to an expansion into geographic areas where home
values are higher, a de-emphasis of second mortgage loans, an expansion of loan
product lines and the introduction of a wholesale loan production program. UC
Lending originated $531 million of first mortgage home equity loans in 1993, up
88% from $283 million in 1992. Loan originations are accomplished primarily
through a branch network in 23 states consisting of 116 offices as of December
31, 1993.
Historically, most of the Company's home equity loans were held or
sold to financial institutions. Since the fourth quarter of 1991, however, the
secondary mortgage market's growing acceptance of mortgage-backed securities
based on non-conventional home equity loans has allowed the Company to pool
large numbers of loans for sale as mortgage-backed securities. In late 1991
and in 1992, this was accomplished primarily through private placement
transactions. The weighted average interest spread on loans sold to third
parties (the difference between
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the stated rate on the loan and the rate paid to purchasers, less certain
recurring fees) ranged from 4.56% in 1992 to 6.06% in 1993. During 1993, UC
Lending securitized and sold publicly $451 million of home equity loans
through a Company-sponsored shelf registration statement covering up to $1
billion principal amount of mortgage-backed securities. The Company's use of
its own mortgage securitization conduit was the primary reason that the
weighted average interest spread retained on loans sold increased to 6.06% in
1993. The weighted average interest spread on loans sold is determined without
regard to expected credit losses. Therefore, the spread is not impacted by
projected or actual credit losses. Such securitization transactions are credit
enhanced and have received ratings of "Aaa" from Moody's Investors Service,
Inc. and "AAA" from Standard & Poor's Ratings Group, a division of McGraw Hill,
Inc. The Company presently intends to effect securitization transactions on a
quarterly basis, but the amount and timing of sales of securities under the
shelf registration statement will depend upon market and other conditions
affecting the operations of the Company. Servicing rights are retained on
substantially all loans sold, and as of December 31, 1993, UC Lending serviced
approximately 41,900 home equity loans having an aggregate principal balance of
approximately $1.1 billion.
Insurance Operations
United Companies Life Insurance Company ("UC Life" or "UCLIC"), the
Company's wholly-owned life insurance subsidiary domiciled in Louisiana and
organized in 1955, is currently authorized to conduct business in 47 states,
the District of Columbia and Puerto Rico. The primary products of UC Life are
single premium deferred annuities marketed principally through financial
institutions and independent agents. Premiums for these annuities currently
average approximately $20,000 per contract and are generally sold to middle
income customers seeking tax deferred insurance products, primarily to provide
savings for retirement. UC Life produced $208 million, $187 million and $176
million in sales of annuity products during the years ended December 31, 1993,
1992 and 1991, respectively. At December 31, 1993, total annuity reserves were
$1.3 billion. UC Life has also focused its efforts on improving the quality
and liquidity of its investment portfolio. At December 31, 1993, the weighted
average rating of its publicly traded bond portfolio was "AA", the assets
allocated to investments in mortgage-backed securities were $597.7 million and
the amount of non-investment grade publicly traded bonds in the portfolio was
$10.5 million or 1.2% of the portfolio. During 1993, the net interest spread
on the Company's annuity business improved to 2.20 % from 1.84% during 1992.
Measures taken by UC Life to stabilize and improve this margin included the
reduction in crediting rates on new and existing annuity contracts.
The Company is also engaged in underwriting title insurance through
its subsidiary United General Title Insurance Company ("UG Title" or "UGTIC")
which conducts operations in 26 states through independent agents. UG Title's
revenues in 1993 and 1992 totaled $25.1 million and $11.4 million,
respectively.
Discontinued Operations
In early May 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC") and reflected the resulting $17.6 million after
tax loss in its financial statements as of and for the quarter ended March 31,
1993. FMC serviced a nationwide portfolio of primarily conventional first
mortgage residential loans and mortgage-backed securities. In reaching this
decision the Company considered the continued deterioration of FMC's operations
caused by the sustained high level of mortgage prepayments and the less than
anticipated results of FMC's correspondent loan origination program. The
Company estimated the loss that would occur from disposal of FMC and the
operating losses that would occur during phaseout and, accordingly, accrued for
such losses in its financial statements for the quarter ended March 31, 1993.
The operating loss of FMC for the quarter ended March 31, 1993, was $1.5
million, net of tax benefit, and the estimated loss from disposal of FMC was
$16.1 million, net of tax benefit. The Company does not believe that further
operating losses of FMC will be reflected in the Company's financial
statements. As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the institutional lenders under FMC's primary credit facility filed a petition
in the U.S. bankruptcy court to cause the remaining affairs of FMC to be wound
up under the supervision of the bankruptcy court. FMC, as debtor in possession
in the bankruptcy proceeding, intends to file a plan of liquidation providing
for the disposal of FMC's remaining assets and distributions to FMC's
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creditors. In connection with such bankruptcy proceedings, certain payments
previously received from FMC by the Company may be determined to be
preferential thereby requiring the refund of such payments. In addition,
certain amounts now owed by FMC to its creditors, including the Company, may be
reduced. If the Company were required to refund such amounts or is unable to
collect such amounts owed to it, the Company has estimated that the potential
additional loss could range up to $2.7 million, net of income taxes. Further,
the group of institutional lenders under FMC's primary credit facility have
recently questioned the Company's computation and allocation between FMC and
the Company of the income tax benefits relating to FMC's losses. FMC recorded
a tax benefit of approximately $3.6 million equal to the refund of previously
paid income taxes computed on a separate company income tax return basis. The
Company has recorded a tax benefit of approximately $5 million from the
disposal of its investment in the preferred stock of FMC. These institutional
lenders have not yet specified the manner in which they contend the tax
benefits should be computed and allocated. Management of the Company believes
that its computation and allocation of the tax benefit is proper and that no
additional amount is owed by the Company to FMC in this regard.
FMC is in payment default under its primary credit facility and the
outstanding principal balance of $43.7 million is due. The Company has not
guaranteed any debt of FMC and believes, based upon advice of its counsel, that
it has no responsibility for the obligations of FMC under such credit facility
or (excluding potential consequences of the bankruptcy filing or potential
additional payment for tax benefits as discussed above) for any other
liabilities to FMC's lenders.
MORTGAGE OPERATIONS
UNITED COMPANIES LENDING CORPORATION - UC LENDING OR UCLC
Principal Product. UC Lending's principal product is a
non-conventional home equity loan with a fixed amount, interest rate and term
to maturity, which is typically secured by a first lien mortgage on the
borrower's residence. These types of loans are commonly referred to as "B" and
"C" grade loans. These loans are distinct from home equity revolving lines of
credit, not offered by UC Lending, which are generally secured by a second
mortgage and typically carry a floating interest rate. As of December 31,
1993, approximately 94% in aggregate principal amount of the home equity loans
owned and/or serviced by UC Lending were secured by a first mortgage with the
remaining 6% in aggregate principal amount secured by second or multi-property
mortgages. 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. During 1993, UC Lending originated $531 million in
first mortgage home equity loans and $9 million in second and multi-property
mortgage loans. During 1993, the average home equity loan amount at origination
was approximately $39,000, which amount increased from $28,000 during 1992 due
primarily to an expansion into geographic areas where home values are higher, a
de-emphasis on second mortgage loans, expansion of product lines and loan
originations through its wholesale loan production program. On most home
equity loans for home improvements, the loan proceeds are disbursed to an
escrow agent which, according to guidelines established by UC Lending, 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 originated during 1993 was 11.8%. Costs incurred by the borrower for
loan origination, including origination points (which had a weighted average
of 7.0% for 1993) and appraisal, legal and title fees, are often included in
the amount financed. Over the past five years, contractual maturities have
generally ranged from seven to twenty years, and the average effective maturity
has been approximately seven years. Prior to July, 1991, UC Lending actively
originated commercial real estate loans for sale to UC Life. However,
commercial real estate originations were generally terminated due to a change
in UC Life's investment demand and lack of a secondary market for this product.
UC Lending's target market for its home equity loans is individuals
who may not otherwise qualify for conventional loans which are readily
marketable to the government-sponsored mortgage agencies or conduits and
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available through most commercial banks and many other lending institutions.
Loans to such borrowers generally produce higher fee and interest income as
compared to loans to customers of banks and thrifts. There are generally
numerous competitors for these borrowers in each of UC Lending's geographic
markets. Principal competitors include recognized national and regional
lenders. The Company believes that prompt underwriting and response to loan
applications provides a competitive advantage in loan originations.
The following table sets forth selected home equity loan data for the
indicated periods.
Year Ended December 31
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1993 1992 1991
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(dollars in thousands)
Loan originations . . . . . . . . . . . . . . . . . $ 539,868 $ 301,234 $ 253,613
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Servicing portfolio (year-end):
Serviced for the Company . . . . . . . . . . . . . $ 318,334 $ 274,021 $ 360,346
Serviced for third party investors . . . . . . . . 806,805 545,427 343,576
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Total . . . . . . . . . . . . . . . . . . . . . . $ 1,125,139 $ 819,448 $ 703,922
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Loan sales by UC Lending to third party investors . . $ 462,873 $ 271,920 $ 161,680
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Average coupon on loans sold to
third party investors . . . . . . . . . . . . . . . 12.00% 13.69% 14.23%
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Interest spread retained on loans sold. . . . . . . 6.06% 4.56% 4.42%
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Origination and Distribution. At December 31, 1993, UC Lending was
originating home equity loans through branch offices and its correspondent
(i.e., wholesale) loan program in 23 states. During 1992, UC Lending
implemented a wholesale loan origination program to supplement its retail
program and to expand its distribution network. The Company believes that
marketing its loan products through independent mortgage brokers will provide
an efficient and cost effective method to access a larger customer base. The
Company has recently introduced a wholesale program to expand its home equity
loan distribution network through commercial banks and other financial
institutions. Regardless of the manner of origination, all home equity loans
are underwritten utilizing the appropriate underwriting guidelines of UC
Lending prior to approval and funding. The underwriting function is
centralized at the home office. Subsequent to funding, all home equity loans
are reviewed by home office personnel and a portion are subject to quality
control review by home office personnel. The branch offices generally are
responsible for sales of foreclosed real estate. Each branch office operates
as a profit center and compensation of branch personnel includes an incentive
bonus plan.
Underwriting. The following is a description of the underwriting
guidelines of UC Lending. The underwriting guidelines were modified in 1992
and 1993 for fixed-rate home equity loans; however, loans underwritten under
the guidelines prior to the modifications are not materially different from the
guidelines described below.
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. All underwriting is conducted at the
Company's headquarters following the submission of a credit package which
includes a current appraisal from an independent appraiser on UC Lending's
approved list, a property inspection, a credit report and a verification of
employment. In addition, a review appraisal is generally conducted on
wholesale loans by a second appraiser who has had no contact with other parties
in the lending process. This review appraisal is often conducted after
funding, due to time constraints, but serves as a check on the appraisal
process. On a case-by-case basis, after review and approval by
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UC Lending's field or home office underwriters, home equity loans may be made
which vary from the underwriting guidelines. However, variations from
guidelines with respect to home equity loans primarily are approved by the home
office underwriting department or, in the case of home equity loans originated
through the wholesale loan program, by executive management of UC Lending.
UC Lending originates fixed-rate loans which, in general, fully
amortize over a period not to exceed: 360 months for single family, owner
occupied first mortgages; 360 months for single family, non-owner occupied
first mortgages; 240 months for single family, combination owner
occupied/rental property first mortgages; and 180 months for single family,
owner occupied second mortgages. The maximum fixed-rate loan amount is
generally $300,000 unless a higher amount is specifically approved by the home
office. Home equity loans secured by second mortgages generally do not exceed
$75,000. Adjustable-rate home equity loans, in general, fully amortize over a
period not to exceed 360 months. The maximum amount for adjustable-rate home
equity loans is $300,000 unless a higher amount is specifically approved by
executive management of UC Lending.
The homes used for collateral to secure the fixed-rate 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, 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. Second mortgages are permitted only for
fixed-rate home equity loans and generally are limited to single family owner
occupied property. A loan secured by a second mortgage typically will not be
made if the first mortgage is a graduated payment mortgage, a balloon, an
adjustable-rate mortgage or an individual or owner financed mortgage. 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 unit or a unit in a planned unit development).
In addition, such loans may be secured by manufactured or mobile homes and the
underlying land if the manufactured or mobile homes are permanently affixed and
defined as real estate under applicable state law.
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 home office. UC Lending
selects the appraiser and orders the appraisal. The final estimate of market
value of the property must represent the appraiser's professional conclusion,
based on market data, logical analysis, and judgment. An adequately supported
estimate of value should be based as applicable on the cost, sales comparison,
and income approaches to value, with additional information provided when
appropriate. UC Lending 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. The property is analyzed by UC Lending, based on the appraisal, to
determine its acceptability as security for the loan requested.
Loan-to-Value. 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. For home equity loans originated through UC Lending's wholesale
loan program, the maximum loan-to-value is generally 80%, with the maximum for
rural properties generally being 70%. For home equity loans originated through
UC Lending's branch network, an Underwriting Loan-to-Value Ratio, as described
below, is utilized for fixed-rate loans. The total amount of a fixed-rate 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, whichever is
less. The Cash Out with respect to fixed-rate loans originated through the
branch network is limited to 80% of the lesser of the appraised value or
purchase price of the property.
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For adjustable-rate home equity loans, the maximum loan-to-value ratio
is generally 80% and an Underwriting Loan-to-Value Ratio is not utilized.
Generally, the maximum Underwriting Loan-to-Value Ratio is 70% for a
loan with a second mortgage on the property or a fixed rate loan to a borrower
who is self-employed. With respect to rural properties, only 50% of the
appraised value of land exceeding one acre is used in determining the total
Cash Out permitted and generally the maximum Underwriting Loan-to-Value Ratio
(utilizing only one acre and the improvements thereon) is 65%. The maximum
Underwriting Loan-to-Value Ratio generally applicable to non-owner occupied
homes is 70% and is generally 65% for owner occupied manufactured/mobile homes
with land. 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.
Creditworthiness. Verification of personal financial information for
each applicant is required by UC Lending. 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, the debt coverage ratio calculation
is based upon the principal and interest payment amount utilizing the initial
interest rate plus one percentage point. Generally, the borrowers are required
to have two years of employment with their current employer or two years of
like experience. In the case of fixed-rate home equity loans, applicants who
are salaried employees must provide current employment information in addition
to recent employment history. UC Lending verifies this information 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 or the most recent W-2 tax form. A self-employed applicant for a
fixed-rate home equity loan is generally required to provide personal and
business financial statements and copies of complete federal income tax returns
(including schedules) filed for the most recent two years.
Certain laws protect loan applicants by offering them a timeframe
after loan documents are signed, called the "rescission period," during which
the applicant has the right to cancel the loan. The rescission period must
have expired prior to funding a loan and may not be waived by the applicant
except as permitted by law.
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.
Generally, in the case of fixed-rate home equity loans, a borrower's mortgage
payment history should reflect no more than three payments over 30 days
delinquent or one payment over 60 days delinquent in the last twelve months.
Credit analysis is subjective and subject to interpretation in the underwriting
process.
UC Lending generally requires title insurance coverage on each home
equity loan it originates or a title opinion from an approved attorney in
connection therewith. UC Lending and its assignees are generally named as the
insured on the title insurance policies and the addressee of the title opinion.
In addition, a location map is required for every home equity loan made by UC
Lending and a survey of the property is required where the property is being
purchased by the borrower. 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. UC Lending requires that its name and address are
properly added to the "mortgagee clause" of the insurance policy. In the event
UC Lending'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 not required to obtain
flood insurance. The borrower is required to obtain
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property insurance in an amount sufficient to cover in the case of a first
mortgage the new loan and in the case of a second mortgage the new loan and any
prior mortgage.
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 Servicing. UC Lending retains the servicing on substantially all
loans it originates, including $1.1 billion of home equity loans owned and
serviced at December 31, 1993, up 37.3% from a year earlier. UC Lending
performs the following services for investors to whom it 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 hazard insurance; determining the adequacy of
hazard insurance; advising investors of delinquent loans; conducting
foreclosure proceedings, and inspecting and reporting on the physical condition
of the properties securing the mortgage loans; and disposing of foreclosed
properties. UC Lending 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 mortgaged
property 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 up to the limit specified in the related
loan sale agreement. In connection with its servicing activities, UC Lending
sends to borrowers payment coupon books that specify the monthly payment due
and the late payment amount, if any.
In 1991, UC Lending implemented centralized payment processing,
customer service and initial collection contact of all accounts. During 1993,
UC Lending completed the centralization of collection activities at the home
office.
Collection Activities. Collection calls begin at the expiration of
the grace period. Calls at this stage are targeted toward loans with a history
of slow payment. In addition, newer loans are targeted for calls to help
establish a satisfactory payment record. Collection calls continue until
corrective arrangements are made, or foreclosure is initiated.
If an account becomes 30 days past due, a collection supervisor
analyzes the account to determine the appropriate course of action. Generally,
when an account becomes 60 days past due a property inspection and borrower
interview is requested through a third party contractor. In addition, the
initial loan file is reviewed and generally an up-to-date credit report is
obtained. At 90 days past due, if appropriate corrective arrangements have not
been made with the borrower, a recommendation for foreclosure, along with an
accompanying package, is submitted to the collection supervisor. This package
generally includes the original appraisal, current inspection, credit report,
loan approval memorandum and recommendation cover sheet. If approved by the
collection supervisor, the package is forwarded to an internal review
committee. The approval of such committee is required before foreclosure
proceedings commence.
Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments, a repayment plan to return the account to an
up-to-date status, or (to the extent authorized by the related loan sale
agreement) an extension/modification may be permitted.
The course of action followed for a delinquent account is dependent
upon a number of factors, including the borrower's payment history, the amount
of equity in the mortgaged property and the reason for the current inability to
make timely payments. If a borrower is experiencing difficulty in making
payments on time, UC Lending may modify the payment schedule (as permitted by
the related loan sale agreement) but generally will not remove the loan from a
delinquency status unless an extension fee is paid by the borrower.
Modifications to payment schedules are considered on a case-by-case basis and
are limited to revisions to the contract rate and/or term only. A request for
modification must be submitted by the borrower to UC Lending. Prior to
evaluating each
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modification request, UC Lending obtains a new loan application, an updated
credit report and verification of employment. Provided that the review and
analysis of the circumstances and relevant documentation substantiates a
favorable decision to modify the related loan, the appropriate documentation is
generated by UC Lending and executed by the borrower to facilitate formal
modification of the home equity loan. Any extension fees collected by UC
Lending are retained by UC Lending as part of its servicing compensation.
Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a
senior lien is received; or (iii) UC Lending discovers circumstances indicating
potential loss exposure.
During the foreclosure process, any expenses incurred by UC Lending
are added to the amount owed by the borrower, as permitted by applicable law.
Upon completion of the foreclosure, the property is sold to an outside bidder
or passes to the mortgagee, in which case UC Lending proceeds to liquidate the
asset.
UC Lending may not foreclose on the property securing a second
mortgage loan unless it forecloses subject to each senior mortgage, in which
case UC Lending generally will pay the amount due on the senior mortgage to the
senior mortgagee, if UC Lending determines that doing so will minimize the
loss. In the event that foreclosure proceedings have been instituted on a
senior mortgage prior to the initiation of UC Lending's foreclosure action, UC
Lending may either satisfy such mortgage at the time of the foreclosure sale or
take other appropriate action.
Servicing and charge-off policies and collection practices may change
over time in accordance with UC Lending's business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations.
Regulations and practices regarding the liquidation of properties
(e.g., foreclosure) and the rights of the mortgagor in default vary greatly
from state to state. Only if UC Lending determines that a delinquency cannot
otherwise be cured will it decide that foreclosure is the appropriate course of
action. Many real estate properties owned by UC Lending are ultimately sold by
UC Lending to borrowers to whom UC Lending will provide a mortgage. If after
determining that purchasing a property securing a home equity loan will
minimize the loss associated with such defaulted loan, UC Lending may bid at
the foreclosure sale for such property or accept a deed in lieu of foreclosure.
At December 31, 1993, UC Lending's home equity portfolio of properties
acquired in foreclosure or for which deeds in lieu of foreclosure have been
accepted and held by UC Lending pending disposition represented approximately
$17.0 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.
Refinancing policy. 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, UC Lending 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 UC Lending.
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Credit Quality of Home Equity Loan Serviced Portfolio. The following
table shows selected credit quality data for the home equity loan portfolio
serviced by the Company (including loans owned by the Company) as of the dates
indicated:
December 31,
---------------------------------------------
1993 1992 1991
------------ ----------- ----------
(dollars in thousands)
Number of home equity loans . . . . . . . . . . . 41,854 37,243 34,470
Dollar amount of home equity loans . . . . . . . $ 1,125,139 $ 819,448 $ 703,922
Delinquency period (1)
30-59 days . . . . . . . . . . . . . . . . . . . 2.32% 2.27% 2.85%
60-89 days . . . . . . . . . . . . . . . . . . . 1.02% 1.32% 1.36%
90 days and over . . . . . . . . . . . . . . . . 4.92% 5.17% 5.25%
Foreclosed properties (2)
Owned by the Company . . . . . . . . . . . . . . 1.51% 1.60% 1.98%
Serviced for third parties . . . . . . . . . . . 0.74% 0.88% 0.98%
Net write-offs - for the year ended . . . . . . . 0.88% 0.59% 0.41%
(1) The dollar amount of delinquent home equity loans as a percentage of the
total "dollar amount of home equity loans" as of the date indicated.
(2) Foreclosed property as a percentage of home equity loans serviced.
Loans are placed on a non-accrual status when the interest accrual period
reaches 180 days.
The above delinquency and loan loss experience represents the Company's
recent experience. However, the delinquency, foreclosure and net loss
percentages may be affected by the increase in the size and relative lack of
seasoning of the portfolio. In addition, the Company can neither quantify the
impact of recent property value declines on the home equity loans, if any, nor
predict whether, to what extent or how long such declines may continue. In a
period of such decline, the rates of delinquencies, foreclosures and losses on
the home equity loans could be higher than those heretofore experienced in the
mortgage lending industry in general. Adverse economic conditions (which may
or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments of principal and interest on the home equity
loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses. As a result, the information in the above tables should not be
considered as a basis for assessing the likelihood, amount or severity of
delinquencies or losses in the future on home equity loans and no assurance
can be given that the delinquency and loss experience presented in the tables
will be indicative of such experience on home equity loans.
Sales, Funding and Liquidity. Substantially all of the home equity
loans originated by UC Lending are sold either to UC Life or in the secondary
market after which UC Lending continues to provide servicing for a fee. UC
Lending originated approximately $540 million of home equity loans during 1993,
substantially all of which were sold on an interim basis to UC Life. Also
during 1993, $463 million of home equity loans were sold in the secondary
market. The buyers of residential loans or the related mortgage-backed
securities receive the principal collected and the pass-through rate on the
principal balance, and UC Lending retains the excess of the interest at the
contractual rate over the pass-through rate, and, if applicable, servicing
fees, trustee fees and surety bond fees.
Since 1985, the Company has sold loans originated by it in the
secondary market, initially in transactions with government- sponsored mortgage
agencies or conduits and later in private placement transactions with financial
institutions. In 1992, the Company participated with a third party in the
securitization and sale of pass-through
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certificates backed by home equity loans originated by the Company. During the
second quarter of 1993, a $1 billion shelf registration statement filed with
the Commission by UCFC Acceptance Corporation, a wholly-owned subsidiary of UC
Lending, became effective. This registration statement relates to certificates
to be issued and backed by mortgage loans. Approximately $451 million of
mortgage-backed pass-through certificates backed primarily by first mortgage
home equity loans originated through the mortgage subsidiary were registered
under the registration statement and publicly sold in 1993. The Company
intends to increase the amount of this shelf registration statement by the
second quarter of 1994.
The purchasers of the pass-through certificates receive a
credit-enhanced security. Credit enhancement is generally achieved in part by
subordinating an amount (the "Subordinated Amount") of the excess interest
spread retained by the Company 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, a third party
insurer would pay any further losses experienced by investors in the
pass-through certificates. In connection with the issuance in 1993 of
approximately $451 million in pass-through certificates discussed above, the
aggregate Subordinated Amounts were initially set at approximately $69.8
million.
The pooling and servicing agreements that govern the distribution of
cash flows from the pooled loans require the establishment of an account (the
"Reserve Account") that may be funded with an initial deposit by the Company.
Thereafter, a portion of the excess interest is deposited in the Reserve
Account. There are no events that will require the aggregate deposits to the
Reserve Account to exceed the Subordinated Amount. To the extent that
borrowers default on the payment of principal or interest on the loans
underlying the pass-through certificates issued, losses would be paid out of
the Reserve Account to the extent that funds are available. Each issue of
pass-through certificates sold to investors has received a rating of "Aaa" from
Moody's Investors Service, Inc., and "AAA" from Standard & Poor's Ratings
Group, a division of McGraw-Hill, Inc.
In connection with the sale of loans, the Company recognizes a gain on
the sale. Loan sale gains (i.e., excess servicing income) approximate the
present value of the difference between the contractual rates on the loans sold
over the sum of the pass- through rate paid to the buyer, a normal servicing
fee, a trustee fee and a surety bond fee, if any, in mortgage-backed
securitization transactions, and an estimate of future credit losses relating
to the loans sold. The Company uses its historical prepayment and charge-off
statistics in calculating the amount of gain recognized on loan sales.
The loan servicing income the Company receives in future periods as
the result of the retained interest spread is partially offset by the
amortization of the prior capitalized excess servicing income. Amortization of
capitalized excess servicing income is recognized in proportion to and over the
estimated lives of the loans giving effect to the prepayment assumptions used
in the determination of the gain. The Company periodically reviews the
prepayment assumptions in relation to current rates of prepayment and, if
necessary, writes down the remaining asset to the net present value of the
estimated remaining future excess servicing income.
UC Lending funds its loan originations principally through the
Company's $200 million revolving credit facility, sales of loans in the
secondary market and to UC Life, and cash flow from its servicing operations.
The Company's $200 million revolving credit facility was amended during 1993 to
permit the Company to extend the committed date through December 1995 at market
interest rates. The facility is secured by the pledge of the stock of UC
Lending and UC Life. This facility is utilized for several purposes, including
funding of UC Lending operations. At December 31, 1993, the Company had
available $45 million in unused borrowing capacity under the revolving credit
facility.
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Composition of Serviced Portfolio. The contractual balance of loans
owned and/or serviced by UC Lending, substantially all of which it originated,
were as follows for the dates indicated:
December 31,
--------------------------------------------
1993 1992 1991
----------- ----------- -----------
(in thousands)
Home equity loans . . . . . . . . . . . . . . . . . $ 1,125,139 $ 819,448 $ 703,922
Other loans:
Commercial . . . . . . . . . . . . . . . . . . . . 345,365 404,857 439,600
Conventional . . . . . . . . . . . . . . . . . . . 98,189 143,311 195,328
Consumer . . . . . . . . . . . . . . . . . . . . . 88 206 5,538
----------- ----------- -----------
Total owned and serviced . . . . . . . . . . . . . . $ 1,568,781 $ 1,367,822 $ 1,344,388
=========== =========== ===========
Total serviced for
third party investors . . . . . . . . . . . . . . $ 1,065,549 $ 886,888 $ 761,007
=========== =========== ===========
Owned by the Company:
Home equity . . . . . . . . . . . . . . . . . . . . $ 318,334 $ 274,021 $ 360,346
Commercial . . . . . . . . . . . . . . . . . . . . 183,065 204,149 212,572
Conventional . . . . . . . . . . . . . . . . . . . 1,745 2,581 6,706
Consumer . . . . . . . . . . . . . . . . . . . . . 88 183 3,757
----------- ----------- -----------
Total owned by the Company . . . . . . . . . . . . . $ 503,232 $ 480,934 $ 583,381
=========== =========== ===========
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
General. The following discussion contains summaries, which are
general in nature, of certain legal matters relating to the mortgage loans.
Because such legal aspects are governed primarily by applicable state laws
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states in which the security for the Company's mortgage loans is
situated. The summaries are qualified in their entirety by reference to the
appropriate laws of the states in which the Company's mortgage loans may be
originated.
Foreclosure/Repossession. The mortgage loans are secured by
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property subject to the
loan is located. Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. Before such non-judicial sale takes place, typically a notice
of sale must be posted in a public place and published during a specific period
of time in one or more newspapers, posted on the property, and sent to parties
having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints
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a referee or other court officer to conduct the sale of the property. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior
lienholder no longer has the right to reinstate the loan and must pay the loan
in full to prevent the scheduled foreclosure sale. If the mortgage is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notices of sale be posted
on the property and sent to all parties having an interest in the real
property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender assumes the burden of ownership, including obtaining
hazard insurance and making such repairs at its expense as are necessary to
render the property suitable for sale. The lender commonly obtains the
services of a real estate broker and pays the broker's commission in connection
with the sale. Depending upon market conditions, the ultimate proceeds of the
sale may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are designed to mitigate the legal consequences to the borrower of the
borrower's defaults. Some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
fair notice require that borrowers under deeds of trust receive notice longer
than that prescribed by statute. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that the sale by a
trustee under a deed of trust does not involve sufficient state action to
afford constitutional protection to the borrower.
Rights of Redemption. In some states, after sale pursuant to a deed
of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure.
In other states, redemption may be authorized if the borrower pays only a
portion of the sums due. The effect of a statutory right of redemption would
defeat the title of any purchaser from the lender subsequent to foreclosure or
sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have adopted statutory prohibitions restricting the right of the
beneficiary or mortgagee to obtain a deficiency judgment against borrowers
financing the purchase of their residence or following sale under a deed of
trust or certain other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, in
many instances the Company does not seek deficiency judgments against
defaulting mortgagors.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may impair the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
mortgaged property without bankruptcy court permission. The rehabilitation
plan proposed by the debtor may provide, if the court determines that the value
of the mortgaged property is less than
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the principal balance of the mortgage loan, for the reduction of the secured
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. Some states also have homestead exemption laws that
protect a principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of such loans. These laws include the federal Truth-in-
Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity
Act, Fair Credit Billing Act, Fair Credit Reporting Act and related statutes
and regulations. These federal and state laws impose specific statutory
liabilities upon lenders who fail to comply with the provisions of the law. In
some cases, this liability may affect assignees of the loans.
Due-on-Sale Clauses. The mortgage loans typically contain a
due-on-sale clause which will generally provide that if the mortgagor sells,
transfers or conveys the underlying loan collateral, the mortgage loan may be
accelerated by the mortgagee. The Garn-St. Germain Depository Institutions Act
of 1982 (the "Garn-St. Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
could include a manufactured home), the Garn-St. Germain Act sets forth
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related mortgaged property to an uncreditworthy
person, which could increase the likelihood of default.
Prepayment Charges. Under certain state laws, prepayment charges may
not be imposed after a certain period of time following origination of the
mortgage loans with respect to prepayments on mortgage loans secured by liens
encumbering owner- occupied residential properties. The absence of such a
restraint on prepayment, particularly with respect to fixed-rate loans having
higher mortgage rates, may increase the likelihood of refinancing or other
early retirement of such mortgage loans.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March 31,
1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized the states to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
an application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
Environmental Considerations. Environmental conditions may diminish
the value of the mortgage loans and give rise to liability of various parties.
There are many federal and state environmental laws concerning hazardous waste,
hazardous substances, gasoline, radon and other materials which may affect the
property securing the mortgage loans. For example, under the federal
Comprehensive Environmental Response, Compensation and Liability Act, and
possibly under state law in certain states, a secured party which takes a deed
in lieu of foreclosure or purchases a mortgaged property at a foreclosure sale
may become liable in certain circumstances for the costs of a remedial action
("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be
substantial. Moreover, certain states by statute impose a lien for any Cleanup
Costs incurred by such state on the property that is the subject of such
Cleanup Costs (a "Superlien"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens.
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The Company owns and/or services several mortgage loans that are
secured by properties that are environmentally impaired and may own and/or
service other mortgage loans secured by environmentally impaired properties of
which the Company has no present knowledge. The Company, to the best of its
knowledge, does not own any environmentally impaired real property acquired
through foreclosure or otherwise. In any event, the Company has not
experienced, and does not expect that it will experience, any material adverse
effects on its results of operations or financial condition due to
environmental contamination of properties securing loans it owns or services or
the properties which it owns.
INSURANCE OPERATIONS
UNITED COMPANIES LIFE INSURANCE COMPANY - UC LIFE OR UCLIC
Overview. UC Life, a life insurance company domiciled in Louisiana
and organized in 1955, is currently authorized to conduct business in 47
states, the District of Columbia and Puerto Rico. The primary products of UC
Life are single premium deferred annuities marketed principally through
financial institutions and independent agents. Premiums for these annuities
currently average approximately $20,000 per policy and are generally sold to
middle income customers seeking tax deferred insurance products, primarily to
provide savings for retirement. UC Life produced $208 million and $187 million
in sales of annuity products during the years ended December 31, 1993 and 1992,
respectively. At December 31, 1993, total annuity reserves were $1.3 billion.
UC Life also underwrites credit insurance products but has de-emphasized this
line of business. At December 31, 1993, the invested assets of UC Life
consisted of $871 million in investment grade fixed maturity securities (with a
weighted average rating of "AA" by nationally recognized rating agencies), $263
million of residential first mortgage loans (which were primarily originated by
UC Lending) and $189 million of commercial mortgage loans (also primarily
originated by UC Lending).
Principal Products. The principal products marketed by UC Life since
1978 have been single premium deferred annuity contracts. A single premium,
currently averaging approximately $20,000, is received on the sale of these
contracts. The contracts typically guarantee an interest crediting rate for
the first policy year. Thereafter, the interest crediting rate generally may
be adjusted by UC Life at any time (subject to certain minimum crediting rates
stated in the contract). A policyholder is permitted at any time to withdraw
all or part of the single premium plus the amount of interest credited on the
policy, less a surrender charge if applicable. The initial surrender charge is
typically 8% of the original premium and decreases to zero during a penalty
period of from five to ten years. Approximately 63% of UC Life annuity
policies at December 31, 1993 were subject to a surrender penalty.
The interest earned on the annuity contract accumulates on a
tax-deferred basis until withdrawal by the policyholder. Purchasers of UC
Life's annuity products are generally middle income individuals seeking tax
deferred interest accumulation at an interest rate currently in excess of bank
certificates of deposit and government obligations. The deferred annuity
contracts written by UC Life provide a death benefit equal to the amount of the
initial premium plus accumulated interest earned less the amount of any prior
withdrawals.
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The following table presents UC Life's annuity sales by state by
percent of total premiums for the periods indicated.
Year Ended December 31,
------------------------
State 1993 1992
----- -------- --------
Missouri . . . . . . . . . . . 22.4% 10.4%
Louisiana . . . . . . . . . . . 12.3 21.1
Illinois . . . . . . . . . . . 10.4 5.6
Oklahoma . . . . . . . . . . . 8.0 11.6
Indiana . . . . . . . . . . . . 7.6 5.5
Texas . . . . . . . . . . . . . 6.2 3.8
South Carolina . . . . . . . . 3.8 6.9
Ohio . . . . . . . . . . . . . 3.4 5.0
All others . . . . . . . . . . 25.9 30.1
---- ----
Total . . . . . . . . . . . 100.0% 100.0%
===== =====
The increased annuity sales in Missouri and Illinois in 1993 are
attributable, in the case of Missouri, primarily to the addition of certain new
financial institutions to UC Life's sales network and increased sales from
existing financial institutions, and, in the case of Illinois, to sales from a
new independent agent. Annuity sales declined in Louisiana during this period
because of lower sales by the major financial institution selling UC Life's
annuities in Louisiana.
Prior to 1992, UC Life was underwriting and marketing pre-need funeral
insurance products through funeral directors by an independent insurance agency
but discontinued this line of business in early 1992. Credit related insurance
products are underwritten and marketed primarily through financial institutions
and through automobile dealerships. In order to focus its operations and
management on underwriting and marketing its annuity contracts, UC Life has
de-emphasized the credit insurance products and discontinued underwriting this
line of business in 1993.
Distribution. UC Life's annuity contracts are sold on a commission
basis, primarily through financial institutions and independent agents. UC
Life's strategy of marketing through financial institutions and independent
agents allows it to avoid substantial sales management office expense and to
expand its sales efforts without significant development expense. Because
financial institutions and independent agents usually offer the products of
several insurance companies, UC Life must continue to provide products with
competitive terms, interest crediting rates, commissions and service to both
policyholders and the selling institutions and independent agents. UC Life's
rating of "A-" (Excellent) by A. M. Best Company ("Best"), the "A+" claims
paying ability rating by Duff and Phelps, Inc. ("D&P") and the "BBBq" qualified
solvency rating from Standard and Poor's Ratings Group, a division of McGraw
Hill, Inc. are important to successful marketing of its products.
Reinsurance. UC Life generally limits the amount of insurance risk
that it assumes with respect to any one insured to $100,000 and for larger
policies follows industry practice of reinsuring that portion of the risk in
excess of established retention limits. UC Life, however, remains contingently
liable for insurance ceded to reinsurers and remains liable to the policyholder
in the event the reinsurer is unable to meet the obligations assumed under the
reinsurance agreement. Reinsurance is currently ceded primarily to the
following companies: First Capital Life Insurance Company of Louisiana (not
affiliated with First Capital Holding Company of California), Aetna Life
Insurance Company, Continental Assurance Company, American United Life
Insurance Company and Transamerica Occidental Life Insurance Company. Each of
the foregoing companies is currently rated "A+" (Superior) by Best, except
Aetna Life Insurance Company, which is rated "A" (Excellent), and First Capital
Life Insurance Company of Louisiana, which is rated "B-" (Good). In the case
of First Capital Life Insurance Company, the dollar amount of reserve credit
taken by UC Life is held in trust for the benefit of UC Life.
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Life Insurance and Annuity Reserves. In accordance with applicable
insurance regulations, UC Life records as liabilities in its statutory
financial statements actuarially determined reserves that are calculated to
meet future obligations under outstanding insurance. The reserves are based on
statutorily recognized methods using prescribed morbidity and mortality tables
and interest rates. Reserves include unearned premiums, premium deposits,
claims that have been reported but are not yet paid, claims that have been
incurred but have not been reported, and claims in the process of settlement.
UC Life reserves satisfy minimum statutory requirements.
The annuity reserves reflected in the Consolidated Financial
Statements are calculated based on generally accepted accounting principles
("GAAP"). As of December 31, 1993, annuity reserves were $1.3 billion, policy
benefit reserves were $123 million, and unearned premium reserves related to
credit insurance were $10 million. These reserves are based upon UC Life's
best estimates of mortality, persistency, expenses and investment income, with
appropriate provisions for adverse statistical deviation and the use of the net
level premium method for all non-interest sensitive products and the
retrospective deposit method for interest-sensitive products. GAAP reserves
differ from statutory reserves due to the use of different assumptions
regarding mortality and interest rates and the introduction of lapse
assumptions into the GAAP reserve calculation. See Note 1 of Notes to
Consolidated Financial Statements for additional information regarding reserve
assumptions under GAAP.
The following table sets forth certain information regarding the
average yield on UC Life's invested assets and the average crediting rate on UC
Life's annuity reserves for the indicated periods.
Year Ended December 31,
------------------------------------------
1993 1992 1991
--------- --------- ---------
Average yield on invested assets . . . . . 8.65% 9.35% 10.14%
Average crediting rate on annuity reserves 6.45% 7.51% 8.26%
Net interest spread on annuities . . . . . 2.20% 1.84% 1.88%
Investments. The investment function of UC Life is overseen by an
investment committee comprised of senior management, with the assistance of an
outside investment advisor in the management of certain assets. UC Life's
investment policy seeks to achieve attractive returns on a diversified low to
moderate risk portfolio of investments. These investments, primarily bonds and
mortgage loans, must be within regulatory constraints to qualify as permitted
assets, and within the yield, risk and maturity limitations established by UC
Life as necessary for meeting its objectives.
The current investment strategy is focused on reducing the percentage
of UC Life's invested assets committed to commercial and residential mortgages
and increasing the allocation to investment grade corporate bonds and
mortgage-backed securities.
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The following table sets forth, at December 31, 1993, certain
information regarding UC Life's investment portfolio.
Total Percent of
Book Value Total
----------- -------------
(dollars in thousands)
Fixed Maturity Securities (1)(2)
U.S. Government, government agencies & authorities . . . . . . . . . . . $ 10,572 .7%
States, municipalities and political subdivisions . . . . . . . . . . . 18,944 1.3
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,133 17.7
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . 597,744 41.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,698 1.8
------------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 912,091 62.5
Mortgage loans on real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . 462,555 31.7
Real estate - investment properties . . . . . . . . . . . . . . . . . . . . . . . . 21,176 1.5
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,633 1.3
Capitalized excess servicing income . . . . . . . . . . . . . . . . . . . . . . . . 7,275 .5
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,851 2.5
------------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,459,581 100.0%
============ ======
- --------------------
(1) Generally stated at amortized cost adjusted for permanent impairment
in value. Total market value of fixed maturities at December 31, 1993
was approximately $943.4 million, representing net unrealized gains of
$31.3 million.
(2) See schedule of contractual maturities at Note 3 of Notes to
Consolidated Financial Statements.
As reflected in the following table, $871 million or 95.4%, of UC
Life's fixed maturity investments were classified as investment grade at
December 31, 1993:
Percent of
Investment Quality (1) Market Value Carrying Value Carrying Value
- ---------------------- ------------ -------------- ---------------
(dollars in thousands)
Aaa . . . . . . . . . . . . . . . . $ 573,061 $ 559,372 61.3%
Aa . . . . . . . . . . . . . . . . 5,523 4,957 .6
A . . . . . . . . . . . . . . . . 184,500 172,747 18.9
Baa . . . . . . . . . . . . . . . . 138,247 133,484 14.6
------------ ----------- ------
Total Investment Grade . . . . . . . 901,331 870,560 95.4
Ba and below . . . . . . . . . . . . 15,398 14,833 1.7
Non-rated securities . . . . . . . . 26,698 26,698 2.9
------------ ----------- ------
Total Fixed Maturities . . . . . . . $ 943,427 $ 912,091 100.0%
============ =========== ======
- --------------------------
(1) Fixed maturity investments are classified according to the ratings
assigned by Moody's Investors Service, Inc. or, in the absence of such
rating, by the National Association of Insurance Commissioners ("NAIC")
whose ratings operate as follows: NAIC Class 1 was assumed equivalent to
an A rating; NAIC Class 2, BBB/Baa; and NAIC Classes 3-6, BB/Ba and below.
As a significant percentage of UC Life's investment portfolio is
invested in fixed rate, fixed maturity investments, the market value of these
investments is sensitive to changes in market rates of interest. In a rising
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interest rate environment, the market value of these investments would be
expected to decrease in value. An unanticipated increase in policy surrenders
or claims could impact UC Life's liquidity and require the sale of certain
assets, such as bonds prior to their maturity at a loss.
Certain risks are associated with UC Life's investment strategy to
reduce the percentage of its invested assets in real estate mortgage loans and
to increase the percentage invested in corporate bonds and mortgage-backed
securities. This shift in asset mix could reduce the expected gross yield and
the possible advantages of diversification across asset classes.
Fixed maturity investments. As of December 31, 1993, approximately
$912 million or 62.5% of UC Life's invested assets consisted of fixed maturity
investments. The market value of fixed maturity investments at that date
exceeded its carrying value by $31.3 million. Since UC Life generally
purchases fixed maturity investments with an intent to hold them to maturity,
it does not have a trading portfolio. However, UC Life may for business or
regulatory reasons be required to sell certain of its investments prior to
maturity, and in some cases these sales may be made at times when the market
value is less than carrying value, thereby resulting in a loss for financial
and statutory reporting purposes.
At December 31, 1993, 41.0% of UC Life's total invested assets were
invested in mortgage-backed securities. These mortgage-backed securities
consist principally of collateralized mortgage obligations and mortgage-backed
pass-through securities. Mortgage-backed securities generally are
collateralized by mortgages backed by GNMA, FNMA and FHLMC. Only GNMA
mortgages are backed by the full faith and credit of the United States
Government. Certain mortgage-backed securities are subject to significant
prepayment risk. In periods of declining interest rates, mortgages may be
repaid more rapidly than scheduled as individuals refinance higher-rate
mortgages to take advantage of lower interest rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investments
that cannot be reinvested at an interest rate comparable to the rate on the
prepaid mortgage. In addition to decreased investment yields, earnings could
also be affected by capital gains or losses realized on these prepayments since
the carrying value of securities purchased at a discount or premium may be
different than the amount received upon prepayment. UC Life has reduced the
prepayment risk associated with mortgage-backed securities by investing in
planned amortization class ("PAC") instruments. These instruments are designed
to amortize in a predictable manner by shifting the primary risk of prepayment
of the underlying collateral to other investors. PAC instruments represented
approximately 39.6% of UC Life's investments in mortgage-backed securities at
December 31, 1993.
Mortgage loans on real estate. Management of the Company believes
that the ability of UC Life to rely on the first mortgage home equity loan
originations of UC Lending as a source of investments with attractive yields is
a significant advantage to UC Life. At December 31, 1993, UC Life's portfolio
of loans was comprised of $263 million in first mortgage residential home
equity loans and $189 million in first mortgage commercial real estate loans.
During 1991, UC Life decided to limit its investment in commercial real estate
mortgage loans. The mortgage loan portfolio of UC Life is serviced by UC
Lending. UC Life has full credit recourse to UC Lending with respect to all
residential mortgage loans acquired from UC Lending.
UC Life purchases on an interim basis substantially all of the first
mortgage home equity loans originated by UC Lending. These loans are typically
held by UC Life for short time periods (typically no longer than 90 days) and
then sold back to UC Lending prior to their sale in securitization
transactions. UC Lending, not UC Life, retains the contingent credit risk in
connection with these transactions.
Mortgage loans are carried at amortized cost less valuation
adjustments for permanently impaired value where appropriate. Commercial
mortgages range in size up to approximately $2 million with an average loan
size of approximately $600,000 (excluding one loan of approximately $7.6
million to a related entity). At origination, substantially all of the
mortgages were on existing leased properties rather than on properties in
construction or on start-up properties. The origination of commercial
mortgages is subject to underwriting procedures, including: (i)
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maximum loan to value ratio of 75% of the property's appraised value; (ii)
conservative debt coverage requirements; (iii) on-site inspections; (iv)
third-party appraisals; and (v) personal guarantees of borrowers. For these
reasons, the Company does not consider its commercial loans to be high risk.
The weighted average interest rate on UC Life's commercial mortgage loan
portfolio was 10.47% and 10.25% at December 31, 1992 and 1993, respectively.
UC Life's commercial mortgage portfolio is diversified by property
type, location and borrower. The following table provides information at
December 31, 1993 regarding UC Life's commercial mortgage loans on real estate
by property type, state and contractual maturity.
AMOUNT PERCENT OF TOTAL
------ ----------------
(dollars in thousands)
COMMERCIAL MORTGAGE LOANS BY PROPERTY TYPE:
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,488 38.4%
Office and Warehouse . . . . . . . . . . . . . . . . . . . 51,194 27.1
Office . . . . . . . . . . . . . . . . . . . . . . . . . . 49,231 26.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,773 8.4
----------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,686 100.0%
=========== ======
COMMERCIAL MORTGAGE LOANS BY STATE:
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,283 22.4%
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . 26,588 14.1
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . 21,330 11.3
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . 19,576 10.4
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,598 6.1
North Carolina . . . . . . . . . . . . . . . . . . . . . . 9,777 5.2
All Others . . . . . . . . . . . . . . . . . . . . . . . . 57,534 30.5
----------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,686 100.0%
=========== ======
COMMERCIAL MORTGAGE LOANS BY CONTRACTUAL MATURITY:
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,805 13.1%
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,039 11.7
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,888 20.1
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,090 13.3
After 1997 . . . . . . . . . . . . . . . . . . . . . . . . 78,864 41.8
----------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,686 100.0%
=========== ======
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UC Life's delinquent mortgage loan experience with owned commercial loans as
compared to industry averages published by the American Council of Life
Insurance for the dates indicated is as follows:
December 31,
-------------------------------------
1993 1992 1991
---------- ---------- ----------
(dollars in thousands)
UC Life experience (1):
Delinquent commercial mortgage
loans . . . . . . . . . . . . . . $ 9,692 $ 16,703 $ 16,881
Percentage of total commercial
loans owned . . . . . . . . . . . 5.1% 8.0% 7.7%
Industry experience . . . . . . . . 6.0% 6.6% 5.9%
- ---------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Quality and Reserves."
For substantially all commercial mortgages which UC Life has
foreclosed, an independent appraisal is obtained and, if warranted, UC Life has
established a specific reserve based on its judgment as to the amount which may
not be recoverable. As of December 31, 1993, the specific reserve amounted to
$3.5 million.
The Company also establishes a general reserve for all commercial
mortgages where a specific reserve or write-down has not been established. As
of December 31, 1993, the general reserve amounted to $6.3 million.
UNITED GENERAL TITLE INSURANCE CORPORATION - UG TITLE OR UGTIC
Overview. The Company's title insurance subsidiary, UG Title, was
formed in 1983. At December 31, 1993 UG Title was licensed in 26 states, is
represented by approximately 675 independent agents and has no direct
operations. Key markets for UG Title are currently Colorado, Louisiana,
Florida and California. UG Title was admitted in 1993 to do business in
California, the largest single title insurance market in the United States, and
has applications currently pending in two additional states. During 1993 and
1992, title insurance premiums were $24.4 million and $10.9 million,
respectively.
Principal Product. UG Title provides single premium products insuring
the validity of residential first and second mortgage loans and indemnifying
the policyholders against loss or damage from obtaining an invalid title to
real property. UG Title focuses on underwriting title policies for resales and
refinancings of properties which policies averaged $71,600 in 1993. Effective
September 1, 1993, risks in excess of $350,000 are reinsured primarily with
Fidelity National Title Insurance Company; however, UG Title remains
contingently liable for reinsurance ceded. UG Title, unlike some other title
insurers, operates exclusively through independent title agents.
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The following table sets forth the approximate dollars and percentages
of gross title insurance premium revenue of UG Title by state for the periods
indicated:
Year Ended December 31, 1993 Year Ended December 31, 1992
-------------------------------- ---------------------------------
Amount % of Total Amount % of Total
----------------- ----------- ------------- ------------
(dollars in thousands)
Colorado . . . . . . . . . . . . . . . . . . . $ 5,252 20.8% $ 1,971 17.2%
Louisiana . . . . . . . . . . . . . . . . . . . 3,891 15.4 2,736 23.8
Florida . . . . . . . . . . . . . . . . . . . 3,412 13.5 2,700 23.5
California . . . . . . . . . . . . . . . . . . 2,955 11.7 - -
Texas . . . . . . . . . . . . . . . . . . . 2,087 8.3 1,358 11.8
Tennessee . . . . . . . . . . . . . . . . . . . 2,083 8.3 944 8.2
Arkansas . . . . . . . . . . . . . . . . . . . 1,031 4.1 311 2.7
Ohio . . . . . . . . . . . . . . . . . . . 970 3.8 - -
Alabama . . . . . . . . . . . . . . . . . . . 900 3.6 327 2.9
All others . . . . . . . . . . . . . . . . . . 2,642 10.5 1,136 9.9
------------- ------ ------------- ------
Total . . . . . . . . . . . . . . . . . . $ 25,223 100.0% $ 11,483 100.0%
============= ====== ============= ======
The following table reflects selected financial and other data
regarding UG Title for the periods indicated:
Year Ended December 31,
------------------------------------------
1993 1992 1991
------------ ------------ ------------
(dollars in thousands, except other data)
Operating results:
Revenues . . . . . . . . . . . . . . $ 25,107 $ 11,412 $ 6,409
Expenses . . . . . . . . . . . . . . 23,796 10,657 5,849
----------- ----------- -----------
Income before income taxes . . . . . $ 1,311 $ 755 $ 560
=========== =========== ===========
Other data:
Average fee per file (1) . . . . . . $ 238 $ 194 $ 170
Net claims-paid ratio (2) . . . . . 2.32% 2.85% 3.58%
Provision for claim losses to title
insurance premiums . . . . . . . . 3.29% 4.76% 5.45%
Employees at period end . . . . . . 24 17 15
Number of licensed states at period end 26 23 20
- -----------------------
(1) Average fee per file is based upon gross title insurance premiums and
certain other title related fees divided by policies issued.
(2) The net claims-paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by gross title insurance
premiums.
OTHER OPERATIONS
The Company has developed an office park that includes its home office
building, which has approximately 77,000 square feet. In addition to its home
office building completed in 1981, the Company constructed a 200,000 square
foot office building in the park in 1984 at a cost of $12.8 million. This
building was approximately 97% leased at December 31, 1993. During 1990,
construction of a 100,000 square foot office building in the office park
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was completed by a partnership in which United Companies Realty and Development
Co., Inc., a wholly-owned subsidiary of the Company, is a general partner. The
office building was 100% leased at December 31, 1993.
The Company also engages in telecommunications business and property
management with respect to its office park and a homeowners insurance agency,
none of which are material to its operations.
GOVERNMENT REGULATION AND LEGISLATION
GENERAL
The Company's mortgage and insurance businesses 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, disclosures in connection
with loan originations, credit reporting requirements, servicing requirements,
insurance premium rates and coverage issues, federal and state taxation, and
multiple qualification and licensing requirements for doing business in various
jurisdictions. While the Company believes that it maintains all requisite
licenses, permits and approvals and is in compliance in all material respects
with applicable federal and state regulations, there can be no assurance that
more restrictive laws or regulations will not be adopted which could make
compliance in the future more difficult and/or more expensive. Legislative and
regulatory proposals are frequently advanced which, if adopted, could adversely
affect the Company's profitability or the manner in which the Company conducts
its activities. In particular, legislation has been introduced this year in
both the United States Senate and House of Representatives that would impose
disclosure requirements and prohibit prepayment penalty charges, among other
requirements, on loans with a specified level of origination fees or a
specified interest rate level. Although management of the Company does not
believe that the proposed legislation in its current form will have a material
impact on its business or results of operations, a significant percentage of
the Company's loans could be subject to the restrictions of the proposed
legislation. There can be no assurance that the proposed legislation will be
adopted in its current form.
A substantial amount of the Company's annuity policies are marketed
through financial institutions. In August, 1993 the United States Court of
Appeals for the Fifth Circuit held that the United States Comptroller of the
Currency's decision to permit national banks to sell annuities in towns with
more than 5,000 inhabitants violated the National Bank Act. The ruling, if it
becomes final, will effectively and immediately prohibit annuity sales by
national banks in the States of Texas, Louisiana and Mississippi. The ruling,
particularly if it is adopted by other circuit courts in other regions of the
country, could have a material adverse effect on the ability of the Company to
market its annuities. Furthermore, any future regulatory restrictions on the
authority of financial institutions to market annuities could have a material
adverse effect on the ability of the Company to market this product.
MORTGAGE OPERATIONS
The Company's mortgage 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'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.
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The Truth-in-Lending Act and Regulation Z promulgated thereunder
contains disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. The Truth-in-Lending Act also allows consumers a three day right to
cancel certain credit transactions including many loans of the type originated
by the Company. Management of the Company believes that it is in substantial
compliance in all material respects with the Truth-in-Lending Act.
The Company is also required to comply with the Equal Credit
Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from
discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires
lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for loans
increase as a result of information obtained from a consumer credit agency,
another statute, the Fair Credit Reporting Act of 1970, as amended, requires
lenders to supply the applicant with the name and address of the reporting
agency. The Company is also subject to the Real Estate Settlement Procedures
Act and is required to file an annual report with the Department of Housing and
Urban Development pursuant to the Home Mortgage Disclosure 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.
INSURANCE OPERATIONS
UC Life
General Regulation. UC Life is subject to regulation by the State of
Louisiana, its state of domicile, and the other states in which it transacts
business. The laws of such states are designed for the protection of
policyholders rather than securityholders. UC Life is a member of a holding
company system in Louisiana. All transactions within a holding company system
affecting insurers must be both reasonable in relation to its outstanding
liabilities and adequate for its needs. State laws also require prior notice
or regulatory agency approval of changes in control of an insurer or its
holding company and of material intercorporate transfers of assets within the
holding company structure. Generally, under insurance holding company
statutes, a state insurance authority must approve in advance the direct or
indirect acquisition of 10% or more of the voting securities of an insurance
company chartered in its state.
The laws of the various states establish regulatory agencies with
broad administrative powers to approve policy forms, grant and revoke licenses
to transact business, regulate trade practices, license agents, and prescribe
the type and amount of investments permitted. Insurance companies are required
to file detailed annual statements with the state insurance regulators in each
of the states in which they do business, and their business and accounts are
subject to examination by such agencies at any time. In addition, insurance
regulators periodically examine the insurer's financial condition, adherence to
statutory accounting practices, and compliance with insurance department rules
and regulations.
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As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissions ("NAIC"). UC
Life's last examination occurred during 1992 for the three year period ended
December 31, 1990. Final reports issued by the Louisiana Commissioner of
Insurance did not raise any significant issues or adjustments.
Regulation of Dividends and Other Payments from Insurance
Subsidiaries. As a Louisiana domiciled insurance company, UC Life is subject
to Louisiana requirements relating to dividends and restrictions on payments to
affiliates. The Louisiana Insurance Code (the "Code") provides that no
Louisiana stock insurance company shall declare and pay any dividends to its
stockholders unless (i) its capital is fully paid in cash and is unimpaired and
(ii) it has a surplus beyond its capital stock and the initial minimum surplus
required and all other liabilities equal to 15% of its capital stock, provided
that this restriction shall not apply to an insurance company when its paid-in
capital and surplus exceed the minimum required by the Code by 100% or more.
Additional dividend restrictions are imposed by the Louisiana Insurance Holding
Company System Regulatory Law (the "Insurance Holding Company Law").
Specifically, extraordinary dividends by insurance companies are subject to a
prior approval requirement by the Louisiana Commissioner of Insurance (the
"Louisiana Commissioner") and an insurance company's surplus as regards
policyholders following any dividends or distributions to affiliates must be
reasonable to the insurance company's outstanding liabilities and adequate to
its financial needs. Effective October 31, 1993, an extraordinary dividend is
defined as an amount in excess of the lesser of (a) 10% of surplus as of the
preceding December 31, or (b) the net gain from operations for the preceding
calendar year. The Insurance Holding Company Law also subjects all
transactions between a Louisiana insurance company and its affiliates to
certain fairness and reasonableness standards, and, furthermore, certain types
of transactions with its affiliates are subject to prior notice to the
Louisiana Insurance Commissioner who may disapprove the transaction if it is
determined that such transaction does not meet certain fairness and
reasonableness standards or if it may adversely affect the interests of
policyholders. If insurance regulators determine that payment of a dividend or
any other payment to an affiliate (such as a payment under a tax allocation
agreement or for employee or other services or pursuant to a surplus debenture)
would, because of the financial condition of the paying insurance company or
otherwise, be hazardous to such insurance company's policyholders or creditors,
the regulators may block payment of such dividend or such other payment to the
affiliate that would otherwise be permitted without prior approval. Under the
current statutory and regulatory scheme in Louisiana, UC Life has, as of
December 31, 1993, the capacity to pay dividends of $8.5 million. UC Life did
not pay any dividends to the Company during 1991, 1992 and 1993 in order to
retain capital in UC Life.
Insurance Regulatory Changes. The NAIC and insurance regulators have
undertaken a process of re-examining existing laws and regulations and their
application to insurance companies. In particular, this re-examination has
focused on insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law, the development
of new laws and the implementation of non-statutory guidelines. The NAIC has
formed committees to study and formulate regulatory proposals on such diverse
issues as the use of surplus debentures, accounting for reinsurance
transactions and the adoption of risk-based capital rules. It is not possible
to predict the future impact of changing state and federal regulation on the
operations of the Company or its insurance subsidiaries.
Statutory filings require classifications of investments and for
periods ended prior to January 1, 1992, required the establishment of a
Mandatory Securities Valuation Reserve ("MSVR"), an account designed to
stabilize a company's statutory surplus against fluctuations in the market
value of stocks and bonds, according to regulations prescribed by the NAIC. In
December 1991, the NAIC adopted changes to its rules for establishing and
maintaining reserve accounts for assets of insurance companies in financial
statements prepared under statutory accounting practices. These changes became
effective as of January 1, 1992, for annual statements to be filed for the year
ended December 31, 1992, and thereafter. Under the new rules, the MSVR account
was replaced by an Asset Valuation Reserve ("AVR") account which consists of
two main components: a "default component" to provide
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for future credit-related losses on fixed income investments and an "equity
component" to provide for losses on all types of equity investments, including
real estate. The AVR at December 31, 1993, was $19.4 million. The changes
also require the establishment of a new reserve called the Interest Maintenance
Reserve ("IMR"), which is a reserve for fixed income realized capital gains and
losses net of tax, related to changes in interest rates. The IMR is required
to be amortized into statutory earnings on a basis reflecting the remaining
period to maturity of the fixed income securities sold. The deferred realized
gains and losses included in the IMR at December 31, 1993, was $3.9 million,
net of taxes.
Insurance Regulatory Information System. The NAIC has developed the
Insurance Regulatory Information System ("IRIS") which involves calculation of
ratios covering eleven (11) categories of financial data with defined "usual
ranges" for each category. The ratios are designed to provide regulators
"early warnings" as to when a given company might warrant special attention.
UC Life had only one ratio outside the usual range in 1993.
Risk-Based Capital Requirements. The NAIC has developed risk-based
capital ("RBC") requirements for life insurance companies. The formula, which
is set forth in instructions adopted by the NAIC, is designed to take into
account asset risks, insurance risks, interest rate risks and other relevant
risks with respect to the insurer's business. The NAIC has further provided
for categorization of life insurance companies according to the extent to which
they meet specified RBC thresholds, with increasing degrees of regulatory
scrutiny or intervention provided for companies in categories of lesser RBC
compliance. The following degrees or levels of regulatory action are triggered
by certain events with respect to an insurer's RBC compliance as follows: (i)
a "company action level event" (requiring the insurer to file and obtain
approval of a comprehensive financial plan for the improvement of its RBC
compliance); (ii) a "regulatory action level event" (resulting in, in addition
to the requirement of a financial plan, regulatory actions including
examination of the insurer's assets, liabilities and operations followed by an
order specifying such corrective actions as are determined to be required);
(iii) an "authorized control level event" (resulting in, in addition to the
regulatory actions specified above, such actions as are necessary to cause the
insurer to be placed under regulatory control under the applicable
rehabilitation and/or liquidation statutes if deemed to be in the best
interests of policyholders, creditors and the public); and (iv) a "mandatory
control level event" (resulting in, on a mandatory basis, such actions as are
necessary to cause the insurer to be placed under regulatory control under the
applicable rehabilitation and/or liquidation statutes). The RBC requirements
will apply only as and when the states adopt them, taking effect at the
earliest on December 31, 1993. In light of the NAIC's proposed formula, the
Company believes that it is adequately capitalized under the RBC requirements
and that the thresholds will not have any significant regulatory effect on the
Company. However, should the Company's RBC position decline in the future, the
Company's continued ability to pay dividends and the degree of regulatory
supervision or control to which it is subject may be affected. At December 31,
1993, UC Life's risk-based capital ratio was approximately 214%. To date,
Louisiana has not adopted the NAIC risk-based capital rules. Further, the NAIC
has adopted model legislation. Substantial conformance to the NAIC model
legislation is necessary for a state insurance department to meet the minimum
standards for accreditation by the NAIC.
Assessments Against Insurers. Guaranty laws exist in all states, the
District of Columbia and Puerto Rico. Life insurers doing business in any of
these regions can be assessed for policyholder losses incurred by insolvent
life insurance companies. The amount and timing of any future assessment on
the Company's insurance subsidiary under these laws cannot be reasonably
estimated and are beyond the control of the Company and its insurance
subsidiary. Recent regulatory actions against life insurers encountering
financial difficulty have prompted the various state guaranty associations to
begin assessing life insurance companies for the deemed loss. A large part of
the assessments paid by the Company's insurance subsidiary pursuant to these
laws may be used as credits for a portion of the Company's insurance
subsidiary's premium taxes. Based on the best information presently available,
UC Life does not believe the total future assessments, net of premium tax
credits, will be material to its operating results or financial position.
Regulation at Federal Level. Although the federal government
generally does not directly regulate the insurance business, federal
initiatives often have an impact on the business in a variety of ways. Current
and
25
27
proposed federal measures that may significantly affect the insurance business
include limitations on antitrust immunity, minimum solvency requirements and
the removal of barriers restricting banks from engaging in the insurance and
mutual fund business.
Congress has from time to time in the past considered possible
legislation that would adversely affect the federal income tax treatment of
certain annuity products offered by UC Life. There can be no assurance that
future tax legislation will not contain provisions that may result in adverse
effects on UC Life's products.
Insurance Ratings. The ability of an insurance company to compete
successfully depends in part on its financial strength, operating performance
and claims-paying ability as rated by A.M. Best Company ("Best") and other
rating agencies. UC Life is currently rated "A-" (Excellent) by Best based on
its 1992 statutory financial results and operating performance.
Best's 15 categories of ratings for insurance companies currently
range from "A++" (Superior) to "F" (In Liquidation). According to Best, an "A"
or "A-" rating is assigned to companies which, in Best's opinion, have achieved
excellent overall performance when compared to the standards of the life
insurance industry and generally have demonstrated a strong ability to meet
their obligations to policyholders over a long period of time. In evaluating a
company's statutory financial and operating performance, Best reviews the
company's statutory profitability, leverage and liquidity, as well as the
company's spread of risk, quality and appropriateness of its reinsurance
program, quality and diversification of assets, the adequacy of its policy
reserves and surplus, capital structure and the experience and competency of
its management. Best ratings are based upon factors of concern to
policyholders, agents and intermediaries and are not directed toward the
protection of investors. In June 1993, UC Life was advised by Best that, after
review of the 1992 statutory financial results and operating performance, UC
Life was assigned a rating of "A-" (Excellent), an adjustment from its previous
rating of "A" (Excellent). The Company believes that UC Life's Best rating is
adequate to enable it to compete successfully.
In addition, in January, 1994 Duff and Phelps, Inc., another
nationally recognized rating agency upgraded its rating of UC Life's claim
paying ability from "A" to "A+".
UG Title
Title insurance companies are subject to extensive regulation under
applicable state laws. The laws of most states in which the Company transacts
business establish supervisory agencies with broad administrative powers
relating to issuing and revoking licenses to transact business, regulating
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, defining suitable investments for reserves and approving rate
schedules.
The insurance commissioner in each state in which UG Title conducts
business regulates its title insurance operations. The accounts and activities
of UG Title are examined by the Louisiana Commissioner, its domiciliary state,
at three year intervals.
Pursuant to statutory accounting requirements of the various states in
which UG Title is qualified, a portion of premiums earned is deferred as an
unearned premium reserve for the protection of policyholders and qualified
assets are maintained in an amount equal to statutory requirements. The level
of unearned premium reserve required to be maintained at any time is determined
on a quarterly basis by statutory formula based upon either the age and dollar
amount of policy liabilities underwritten, or the age and dollar amount of
statutory premiums written. As of December 31, 1993, the statutory unearned
premium reserves required and reported for UG Title was $3.4 million.
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28
Net worth as calculated under statutory accounting principles
determines the maximum insurable amount under any single title insurance
policy. As of December 31, 1993, the statutory single policy maximum insurable
amount for UG Title was $1.0 million.
As an insurance company, UG Title is subject to regulations that
restrict its ability to pay dividends or make other distributions of cash or
property to the Company. See discussion above in "Insurance Subsidiaries - UC
Life."
COMPETITION
As a marketer of credit products, the Company faces intense
competition from numerous providers of financial services. Traditional
competitors in the financial services business include commercial banks, credit
unions, thrift institutions, credit card issuers and finance companies. Many
of these companies are substantially larger and have more capital and other
resources than the Company. Competition among lenders can take many forms
including convenience in obtaining a loan, customer service, size of loans,
interest rates and other types of finance or service charges, duration of
loans, the nature of the risks which the lender is willing to assume and the
type of security, if any, required by the lender. The Company believes that it
competes on the basis of providing interest rates that are generally
competitive with interest rates available to borrowers in the Company's market
areas from other sources and by providing efficient service commencing with the
application process and continuing through the underwriting to closing of the
loan.
UC Life and UG Title operate in a highly competitive industry in which
many of their competitors are larger and have greater financial resources. UG
Title competes with many title insurance companies in each of the markets which
its serves and UC Life competes with numerous insurance companies as well as
many providers of retirement planning products, such as mutual funds and
issuers of certificates of deposit.
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 77,000 square feet of usable space. UC
Life and the executive offices of UC Lending are located at the Company's home
office building and adjacent investment property, both of which are owned by UC
Life. At December 31, 1993, operations of UC Lending were conducted from 10
locations owned by the Company in 10 cities in 4 states and from 106 additional
leased offices in 95 cities. The offices owned or leased by UC Lending range in
size from approximately 600 square feet to 3,200 square feet; leases expire
from 1994 to 1998, excluding renewal options. During 1993, aggregate annual
rental expense for leased office space was approximately $2.1 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.
The Company was a defendant in an action initially filed in Calhoun
County, Alabama, on November 14, 1989, as Case Number CV-89-626-M, entitled
Mattie White, Administratrix of the Estate of Bobby Ogletree v. United
Companies Financial Corporation, United Companies Mortgage of Alabama, Freddie
Rimpsey, Northeastern Financial Services, et al. The Ogletree action was a
class action suit in Alabama in which the Company and its wholly-owned
subsidiary were named as defendants. The plaintiff alleged that the Company
engaged in lending practices which violated Alabama law, including without
limitation charging excessive points at origination to borrowers and paying
undisclosed fees to brokers. Notwithstanding the view of management of the
Company
27
29
that this suit was without merit, a definitive settlement agreement was
executed and approved without opposition by the Court. The settlement
agreement and dismissal of the suit with prejudice became final on October 29,
1993. Thirteen former members of the class subject to the suit requested
exclusion from the settlement and accordingly may proceed individually with
their respective claims. The Company does not deem these individual claims to
be material. The Company recorded an estimated current settlement liability of
$2.3 million in its financial statements in the first quarter of 1993 in
connection with the terms of the settlement agreement. In addition to a cash
payment of $2.0 million, the terms of the settlement require a reduction in the
coupon rate on the outstanding loans in the subclasses over their average
remaining contractual terms, which extends over the next 10 years. The Company
does not believe that the impact on net income of this reduction will be
material in any future years.
As discussed more fully in Item 1, Business - Discontinued Operations,
the remaining affairs of the Company's subsidiary, Foster Mortgage Corporation
("FMC"), a discontinued operation, are now being wound up under the supervision
of a bankruptcy court. On December 21, 1993, the institutional lenders under
FMC's primary credit facility filed a petition in U. S. bankruptcy court
against FMC. FMC, as debtor in possession in the bankruptcy proceeding,
intends to file a plan of liquidation providing for the disposition of FMC's
remaining assets and distributions to FMC's creditors. In connection with such
bankruptcy proceedings, certain payments previously received from FMC by the
Company, may be reduced. If the Company were required to refund such amounts
or is unable to collect such amounts owed to it, the Company has estimated that
the potential additional loss could range up to $2.7 million, net of income
taxes. Further, the group of institutional lenders under FMC's primary credit
facility have recently questioned the Company's computation and allocation
between FMC and the Company of the income tax benefits relating to FMC's
losses. FMC recorded a tax benefit of approximately $3.6 million equal to the
refund of previously paid income taxes computed on a separate company income
tax return basis. The Company has recorded a tax benefit of approximately $5
million from the disposal of its investment in the preferred stock of FMC.
These institutional lenders have not yet specified the manner in which they
contend the tax benefits should be computed and allocated. Management of the
Company believes that its computation and allocation of the tax benefit is
proper and that no additional amount is owed by the Company to FMC in this
regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Common Stock Prices and Dividends
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System/National Stock Market ("the
National 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 National Stock Market and the per share cash
dividends declared. All amounts have been adjusted for stock dividends.
CASH
SALE PRICES DIVIDENDS
--------------- ---------
HIGH LOW
---- ---
1993
First Quarter . . . . . . . . . . . . . . . . . . . . . $ 9.375 $ 8.250 $.0750
Second Quarter . . . . . . . . . . . . . . . . . . . . . 9.190 8.250 .0750
Third Quarter . . . . . . . . . . . . . . . . . . . . . 32.875 8.690 .0950
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . 40.750 27.625 .0950
------
Total . . . . . . . . . . . . . . . . . . . . . . $.34
====
1992
First Quarter . . . . . . . . . . . . . . . . . . . . . $10.750 $10.000 $.0750
Second Quarter . . . . . . . . . . . . . . . . . . . . 10.625 9.500 .0750
Third Quarter . . . . . . . . . . . . . . . . . . . . . 10.125 8.625 .0750
Fourth Quarter . . . . . . . . . . . . . . . . . . . . 9.250 8.125 .0750
------
Total . . . . . . . . . . . . . . . . . . . . . . $.30
====
- --------------------
(1) On September 20, 1993, the Company announced a 100% Common Stock
dividend payable on October 18, 1993, to stockholders of record on
October 1, 1993.
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.)
Under provisions of the Company's revolving credit facility
restricting the payment of dividends, approximately $26.0 million of retained
earnings at December 31, 1993, was available for the payment of dividends by
the Company. See Note 5 of Notes to Consolidated Financial Statements.
Approximate Number of Equity Security Holders
Approximate Number of Shareholders
Title of Class As of February 10, 1994
-------------- -----------------------------------
Common Stock, $2.00 par value 3,179
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ITEM 6. SELECTED FINANCIAL DATA
Selected Financial and Other Data (1)
The selected financial data set forth below are derived from the
Company's audited Consolidated Financial Statements. The Company's
Consolidated Balance Sheets at December 31, 1993 and 1992, and Consolidated
Statements of Income, Stockholders' Equity and Cash Flows for the years ended
December 31, 1993, 1992 and 1991 and notes thereto were audited by Deloitte &
Touche, independent certified public accountants, and are included in Item 8.
The Company's audited Consolidated Financial Statements should be read in
conjunction with this table and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
Year Ended December 31,
--------------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ----------- -----------
(dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Interest, charges and fees on loans $ 95,975 $ 92,584 $ 90,169 $ 63,300 $ 56,946
Investment income . . . . . . . . . . . . . . . . . . . . 75,604 62,915 60,223 66,226 64,028
Loan sale gains . . . . . . . . . . . . . . . . . . . . . 59,441 33,475 29,627 18,613 12,193
Net insurance premiums . . . . . . . . . . . . . . . . . 43,119 33,795 42,195 42,745 44,009
Loan servicing income . . . . . . . . . . . . . . . . . . 10,077 10,611 9,492 10,592 10,525
Investment gains (losses) . . . . . . . . . . . . . . . . 595 3,110 2,089 (472) 7,392
--------- --------- ---------- ---------- -----------
Total revenues . . . . . . . . . . . . . . . . . . . . . 284,811 236,490 233,795 201,004 195,093
Total expenses . . . . . . . . . . . . . . . . . . . . . 240,439 215,120 225,419 193,737 182,947
--------- --------- ---------- ---------- -----------
Income from continuing operations
before income taxes . . . . . . . . . . . . . . . . . 44,372 21,370 8,376 7,267 12,146
Provision for income taxes . . . . . . . . . . . . . . . 15,212 7,865 3,363 2,620 4,087
--------- --------- ---------- ---------- -----------
Income from continuing operations . . . . . . . . . . . . 29,160 13,505 5,013 4,647 8,059
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . (17,585) (3,259) 6,463 3,660 -
--------- --------- ---------- ---------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 11,575 $ 10,246 $ 11,476 $ 8,307 $ 8,059
========= ========= ========== ========== ===========
PER SHARE DATA (2):
Primary:
Income from continuing operations . . . . . . . . . . . $ 2.86 $ 1.50 $ .56 $ .52 $ .90
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . (1.75) (.36) .72 .41 -
--------- --------- ---------- ---------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 1.11 $ 1.14 $ 1.28 $ .93 $ .90
========= ========= ========== ========== ===========
Fully Diluted:
Income from continuing operations . . . . . . . . . . . $ 2.71 $ 1.50 $ .56 $ .52 $ .90
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . (1.64) (.36) .72 .41 -
--------- --------- ---------- ---------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . $ 1.07 $ 1.14 $ 1.28 $ .93 $ .90
========= ========= ========== ========== ===========
Supplemental:(3)
Primary . . . . . . . . . . . . . . . . . . . . . . . . $ 2.69 - - - -
Fully diluted . . . . . . . . . . . . . . . . . . . . . $ 2.56 - - - -
Weighted average shares outstanding
Primary . . . . . . . . . . . . . . . . . . . . . . . 10,095,945 9,016,546 8,985,158 8,938,782 8,983,892
Fully diluted . . . . . . . . . . . . . . . . . . . . . 10,776,309 9,016,546 8,985,158 8,938,782 8,983,892
Cash dividends . . . . . . . . . . . . . . . . . . . . . $ .34 $ .30 $ .28 $ .26 $ .25
Stockholders' equity - year end . . . . . . . . . . . . . $ 12.60 $ 10.67 $ 9.83 $ 8.89 $ 8.71
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Year Ended December 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
---------- --------- --------- ---------- -----------
(dollars in thousands, except per share data)
BALANCE SHEET DATA - YEAR END:
Loans - net . . . . . . . . . . . . . . . . . . . . . . $ 519,634 $ 504,503 $ 606,825 $ 362,919 $ 413,634
Bonds - net . . . . . . . . . . . . . . . . . . . . . . 905,999 762,160 379,720 591,150 482,099
Capitalized excess servicing income . . . . . . . . . . 113,192 72,062 53,942 47,153 26,927
Deferred policy acquisition costs . . . . . . . . . . . 83,495 80,007 78,599 77,601 71,984
Total assets . . . . . . . . . . . . . . . . . . . . . 1,817,544 1,629,387 1,493,706 1,364,610 1,198,195
Annuity reserves . . . . . . . . . . . . . . . . . . . 1,294,983 1,147,555 1,014,649 875,346 790,786
Notes payable:
Current . . . . . . . . . . . . . . . . . . . 500 1,420 25,447 11,524 15,184
Long-term . . . . . . . . . . . . . . . . . . . . . . 155,000 205,430 175,000 205,447 169,332
Total liabilities . . . . . . . . . . . . . . . . . . . 1,664,176 1,533,129 1,405,272 1,285,180 1,120,347
Stockholders' equity . . . . . . . . . . . . . . . . . 153,368 96,258 88,434 79,430 77,848
OTHER DATA:
Mortgage operations
Total loan originations . . . . . . . . . . . . . . . $ 545,229 $ 321,198 $ 328,184 $ 397,794 $ 341,049
Home equity loan originations . . . . . . . . . . . . 539,868 301,234 253,613 224,783 163,669
Average home equity loan size . . . . . . . . . . . . 39 28 24 23 21
Home equity loans serviced -
year end . . . . . . . . . . . . . . . . . . . . . 1,125,139 819,448 703,922 575,282 472,258
Total loans serviced - year
end . . . . . . . . . . . . . . . . . . . . . 1,568,781 1,367,822 1,344,388 1,175,038 951,109
Average coupon on home equity
loans originated . . . . . . . . . . . . . . . . 11.8% 13.4% N/A N/A N/A
Loan origination fees as % of home
equity loans . . . . . . . . . . . . . . . . . . . 7.0% 7.9% 8.2% 7.9% 8.0%
Interest spread retained on home
equity loans sold . . . . . . . . . . . . . . . . . 6.06% 4.56% 4.42% 4.01% 4.32%
Insurance operations
Annuity sales . . . . . . . . . . . . . . . . . . . . $ 207,682 $ 187,050 $ 175,796 $ 102,391 $ 114,023
Net interest spread on
annuities . . . . . . . . . . . . . . . . . . . . 2.20% 1.84% 1.88% 2.18% 2.43%
Investment grade bonds as %
of invested assets . . . . . . . . . . . . . . . . 59.6% 54.3% 25.1% 45.5% 42.5%
- -------------------------
(1) 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 FMC have
been reclassified as discontinued operations and the prior years'
financial statements of the Company included herewith have been
restated accordingly.
During the first quarter of 1993, the Company implemented the
provisions of Financial Accounting Standards Board ("FASB") Statement
Nos. 109 and 113 and, in connection therewith, elected to restate
financial statements subsequent to 1989. Amounts prior to 1990 have
not been restated for FASB Statement Nos. 109 or 113 and, therefore,
the comparability of these amounts with later years may be affected.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Accounting Standards."
(2) All share and per share data have been adjusted to reflect prior stock
dividends.
(3) Supplemental earnings per share from continuing operations have been
adjusted to give effect to the December 21, 1993 sale of 1,000,000
shares of common stock and the use of the net proceeds derived
therefrom to reduce the principal balance of debt outstanding under
the Company's revolving credit facility as of the beginning of 1993.
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33
SELECTED FINANCIAL INFORMATION BY SEGMENT
Year Ended December 31,
--------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- --------- ----------
(in thousands)
MORTGAGE
Income Statement Data:
Interest, charges and fees on loans . . . . . . . . . . . $ 44,797 $ 35,003 $ 36,174 $ 33,029 $ 30,300
Investment income . . . . . . . . . . . . . . . . . . . . 1,054 696 1,137 - -
Loan sale gains . . . . . . . . . . . . . . . . . . . . . 59,220 29,679 15,571 14,636 11,422
Loan servicing income . . . . . . . . . . . . . . . . . . 15,568 15,284 12,108 10,289 7,577
--------- ----------- --------- ---------- ----------
Total revenues . . . . . . . . . . . . . . . . . . . . . 120,639 80,662 64,990 57,954 49,299
Total expenses . . . . . . . . . . . . . . . . . . . . . 74,344 56,661 60,592 54,406 41,667
--------- ----------- --------- ---------- ----------
Income from continuing operations
before income taxes . . . . . . . . . . . . . . . . . 46,295 24,001 4,398 3,548 7,632
--------- ----------- --------- ---------- ----------
INSURANCE
Income Statement Data:
Interest, charges and fees on loans . . . . . . . . . . . 45,561 51,396 51,584 32,399 29,108
Investment income . . . . . . . . . . . . . . . . . . . . 75,666 64,713 61,318 66,288 63,811
Net insurance premiums . . . . . . . . . . . . . . . . . 43,119 33,795 42,195 42,745 44,009
Loan sale gains . . . . . . . . . . . . . . . . . . . . . - 3,310 - 3,977 771
Loan servicing income . . . . . . . . . . . . . . . . . . 340 673 1,645 2,625 2,949
Investment gains (losses) . . . . . . . . . . . . . . . . 600 3,051 2,451 (335) 7,286
--------- ----------- --------- ---------- ----------
Total revenues. . . . . . . . . . . . . . . . . . . . . . 165,286 156,938 159,193 147,699 147,934
Total expenses. . . . . . . . . . . . . . . . . . . . . . 161,340 150,718 156,556 134,115 129,339
--------- ----------- --------- ---------- ----------
Income from continuing
operations before income taxes . . . . . . . . . . . 3,946 6,220 2,637 13,584 18,595
--------- ----------- --------- ---------- ----------
OTHER OPERATIONS
Income (loss) from continuing
operations before income taxes . . . . . . . . . . (275) (1,339) 13,566 262 3
CORPORATE
Loss from continuing
operations before income taxes . . . . . . . . . . . . (5,812) (5,958) (10,315) (9,654) (14,084)
ELIMINATIONS. . . . . . . . . . . . . . . . . . . . . . . 218 (1,554) (1,910) (473) -
--------- ----------- ----------- --------- ----------
CONSOLIDATED
Income from continuing operations
before income taxes . . . . . . . . . . . . . . . . . 44,372 21,370 8,376 7,267 12,146
Provision for income taxes . . . . . . . . . . . . . . . 15,212 7,865 3,363 2,620 4,087
--------- ----------- ---------- ---------- -----------
Income from continuing operations . . . . . . . . . . . . 29,160 13,505 5,013 4,647 8,059
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . (17,585) (3,259) 6,463 3,660 -
--------- ----------- ---------- ---------- -----------
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 11,575 $ 10,246 $ 11,476 $ 8,307 $ 8,059
========= =========== ========== ========== ===========
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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 financial statements and accompanying notes presented elsewhere
herein.
OVERVIEW
The table below sets forth income from continuing operations before
income taxes for each of the Company's business segments and certain home
equity loan data for the indicated periods:
Year Ended December 31,
-------------------------------------
1993 1992 1991
---------- --------- ----------
(dollars in thousands)
Mortgage operations
UC Lending . . . . . . . . . . . . . . . $ 46,295 $ 24,001 $ 4,398
Insurance operations
UC Life . . . . . . . . . . . . . . . . . 2,635 5,465 2,077
UG Title . . . . . . . . . . . . . . . . 1,311 755 560
Other operations . . . . . . . . . . . . . (275) (1,339) 13,566
Corporate . . . . . . . . . . . . . . . . . (5,812) (5,958) (10,315)
Eliminations . . . . . . . . . . . . . . . 218 (1,554) (1,910)
--------- -------- ----------
Total . . . . . . . . . . . . . . . . . $ 44,372 $ 21,370 $ 8,376
========= ======== ==========
Home equity loan originations . . . . . . . $ 539,868 $301,234 $ 253,613
Home equity loans sold . . . . . . . . . . 462,873 271,920 161,680
Interest spread retained on home equity
loans sold . . . . . . . . . . . . . . . 6.06% 4.56% 4.42%
The following summary identifies the major factors which influenced the
results of operations of the Company's primary operating divisions during the
indicated periods.
MORTGAGE OPERATIONS.
Historically, the Company had either held the home equity loans it
originated in its own portfolio or sold them to financial institutions. Since
the fourth quarter of 1991, however, the secondary mortgage market's growing
acceptance of mortgage-backed securities based on non-conventional home equity
loans has allowed the Company to pool large numbers of loans for sale as
mortgage- backed securities. In late 1991 and 1992, this was accomplished
primarily through private placement transactions. In 1993, the Company began
selling its loans in public securitization transactions through its own shelf
registration statement. As a primary consequence of this process, the Company
has realized an increase in the interest spread retained on loans sold from
4.56% in 1992, to 6.06% in 1993. The Company believes its securitization
strategy improves its access to funding and thereby provides a distribution
outlet sufficient to meet the Company's expanding home equity loan production.
The Company's strategy for increasing home equity loan production includes
continued geographic expansion, introduction of new loan products and wholesale
originations and acquisitions including those from financial institutions
through a recently developed program.
Prior to July 1991, UC Lending originated commercial real estate loans for
sale to UC Life. However, commercial real estate originations were generally
terminated due to a change in UC Life's investment demand and lack of a
secondary market for this product.
33
35
The positive effect on income of the mortgage operations resulting from
the wider interest margins retained on loans sold and the lower costs of
funding loan originations has been partially offset by increases in the
provision for loan losses and, in 1993, by the accrual of a $2.3 million
estimated loss arising from the settlement of litigation.
The Company's mortgage 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. In particular, significant changes
in interest rates may impact the volume of loan originations, and will
influence the funding costs of such originations and the amount of gain
recognized on loans sold in the secondary market. During periods of declining
interest rates, such as have occurred in recent periods, the mortgage banking
operations will generally experience an increase in profitability as the
interest spread should widen both on loans held by the Company as an investment
and 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 an accelerated amortization of capitalized excess servicing
income. Increased prepayments reduce the time period during which the Company
receives excess servicing income and other servicing income with respect to
prepaid loans. Increased amortization of capitalized excess servicing income
is a current charge to earnings. In contrast, an increase in the level of
interest rates for an extended period of time could adversely affect 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 at the
time of sale, total income would exceed previously estimated amounts; however,
no adjustments would be made to capitalized excess servicing income on the
Company's consolidated balance sheet as such income would be recognized
prospectively. The Company began originating adjustable rate mortgage loans in
1993 and the effects of changes in interest rates discussed above should be
less than with respect to fixed rate loans. (For further discussion of loan
sale gains and capitalized excess servicing income see Note 1.3(d) to Notes to
the Consolidated Financial Statements.)
INSURANCE OPERATIONS.
Life and annuity products. UC Life has focused its efforts on increased
annuity sales by expanding its distribution network through financial
institutions and independent general agents. In 1993, annuity sales were $208
million, the largest annual production since 1982. The lower interest rate
environment has also affected UC Life as investment yields declined thereby
reducing the margin between the interest earned on invested assets and the
interest credited on annuity contracts. The average spread on the annuity
business was 1.88% and 1.84% in 1991 and 1992, respectively, and increased to
2.20% during 1993. Measures taken by UC Life to stabilize and improve this
margin include the reduction in interest crediting rates on new and existing
annuity contracts. Reductions in renewal crediting rates have been implemented
without an adverse impact on surrender rates when compared to prior years. UC
Life has also focused its efforts on improving the quality and liquidity of its
investment portfolio. At December 31, 1993, the weighted average rating of the
publicly traded bond portfolio was "AA", the assets allocated to investments in
mortgage- backed securities were $597.7 million and the amount of
non-investment grade publicly traded bonds in the portfolio was $10.5 million
or 1.2% of the portfolio. UC Life's invested assets also include residential
and commercial real estate mortgages originated and serviced by UC Lending;
however, the percentage of assets invested in mortgage loans in recent years
has been reduced primarily as the result of their disfavor with insurance
regulatory authorities and rating agencies.
The annuities sold by UC Life are monetary in nature and therefore
sensitive to changes in the interest rate environment. Profitability of UC
Life is directly affected by its ability to invest annuity premiums at yields
above the interest crediting rates on the related policy liabilities. One of
the primary financial objectives of UC Life is to effectively manage this
interest spread over time in changing interest rate environments. This is
accomplished in part by adjusting the interest crediting rate paid on its
existing and new annuity policies. During periods of declining interest rates,
the market value of UC Life's investments, primarily fixed maturity
investments, increases; however, yields earned on investments made during such
periods decline. In contrast, during periods of rising
34
36
interest rates the market value of the investment portfolio declines and the
risk of policy surrenders increases. An unanticipated increase in surrenders
would impact the Company's liquidity, potentially requiring the sale of certain
investments prior to their maturities, which may be at a loss.
Title insurance products. The Company's title insurance unit, UG Title,
expanded its operations during 1992 and, as of December 31, 1993, operated in
26 states. UG Title was originally formed in 1983 to complement the Company's
mortgage operation; however, underwriting of affiliated transactions currently
represents less than 5% of UG Title's business. This unit operates exclusively
through approximately 675 independent agents. In 1993, UG Title began
operations in California, which is the largest title insurance market in the
United States.
OTHER OPERATIONS.
With the exception of 1991, other operations have not been a material
segment of the Company's operations. During 1991, earnings of the "Other"
business units were enhanced by an asset purchase program through which the
Company acquired at a discount approximately $190 million in aggregate
outstanding principal amount of residential mortgage loans from financial
institutions under conservatorship by the Resolution Trust Corporation ("RTC")
or from the RTC as receiver of failed institutions. Substantially all of these
loans were sold in 1991 generating loan sale gains of approximately $14.1
million. Because of a more competitive market, this opportunity was not
available in 1992.
DISCONTINUED OPERATIONS
On May 7, 1993, the Company announced its decision to dispose of the net
assets of Foster Mortgage Corporation ("FMC"). The operations of FMC have been
reclassified as discontinued operations and the prior years' financial
statements of the Company have been restated accordingly.
The assets of FMC were acquired by the Company in November of 1990. FMC
was engaged in servicing residential mortgage loans for government and
quasi-government agencies and private investors. Because the operations of FMC
during 1990 cover only a two- month period, the following discussion focuses
primarily on operations during 1992 and 1991.
During late 1991 and throughout 1992, FMC experienced a significant
reduction in its servicing portfolio as the result of mortgage refinancings
caused by a dramatic and sustained decline in mortgage interest rates.
Notwithstanding efforts to downsize operations to reduce expenses and to
develop a correspondent loan origination program to replenish its portfolio,
FMC experienced a net loss from operations of $3.3 million in 1992 compared to
net income of $6.5 million in 1991, respectively.
The principal sources of revenue for FMC were servicing fees, which
approximated 0.50% of the average principal balance of loans serviced, and
investment income earned on reinvesting funds borrowed under investment lines
of credit. The average serviced portfolio during 1992 was $6.3 billion
compared to $7.3 billion during 1991, resulting in a decrease of approximately
$5.7 million in servicing income during 1992. The lower interest rate
environment also negatively impacted investment yields causing a decrease in
investment income of $1.3 million during 1992.
The primary expense items of FMC were the amortization of purchased
mortgage servicing rights and interest. The costs of acquiring mortgage
servicing rights are capitalized and amortized in proportion to and over the
period of estimated servicing income. Amortization of purchased mortgage
servicing rights totaled $12.2 million and $9.7 million during 1992 and 1991,
respectively. As the result of the significant increase in the level of
prepayments and the sustained decline in mortgage interest rates, FMC
accelerated the amortization of servicing rights during 1992. FMC was also
required to pass through to the investors interest for the entire month on a
loan which was paid off regardless of the date of payoff of the loan during
such month; therefore, the significant increase in the
35
37
level of prepayments experienced by FMC also caused an increase of $1.8 million
in pool pass-through interest during 1992. Interest expense incurred by FMC
relates to debt incurred in connection with the acquisition of its assets.
The operating loss of FMC for the quarter ended March 31, 1993, was $1.5
million, net of tax benefit, and the estimated loss from disposal of FMC was
$16.1 million, net of tax benefit. The Company does not believe that further
operating losses of FMC will be reflected in the Company's financial
statements. As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the institutional lenders under FMC's primary credit facility filed a petition
in the U.S. bankruptcy court. FMC, as debtor in possession in the bankruptcy
proceeding, intends to file a plan of liquidation providing for the disposal of
FMC's remaining assets and distributions to FMC's creditors. In connection
with such bankruptcy proceedings, certain payments previously received from FMC
by the Company may be determined to be preferential, thereby requiring the
refund of such payments. In addition certain amounts now owed by FMC to its
creditors, including the Company, may be reduced. If the Company were required
to refund such amounts or is unable to collect such amounts owed to it, the
Company has estimated that the potential additional loss could range up to $2.7
million, net of income taxes. Further, the group of institutional lenders
under FMC's primary credit facility have recently questioned the Company's
computation and allocation between FMC and the Company of the income tax
benefits relating to FMC's losses. FMC recorded a tax benefit of approximately
$3.6 million equal to the refund of previously paid income taxes computed on a
separate company income tax return basis. The Company has recorded a tax
benefit of approximately $5 million from the disposal of its investment in the
preferred stock of FMC. These institutional lenders have not yet specified the
manner in which they contend the tax benefits should be computed and allocated.
Management of the Company believes that its computation and allocation of the
tax benefit is proper and that no additional amount is owed by the Company to
FMC in this regard.
FMC is in payment default under its primary credit facility and the
outstanding principal balance of $43.7 million is due. The Company has not
guaranteed any debt of FMC and believes, based upon advice of its counsel, that
it has no responsibility for the obligations of FMC under such credit facility
or (excluding potential consequences of the bankruptcy filing or potential
additional payment for tax benefits as discussed above) for any other
liabilities to FMC's lenders.
RESULTS OF OPERATIONS
Prior years' financial statements have been restated to present FMC as
discontinued operations. Discussed below are results of continuing operations
for the periods presented and certain financial data by business segment for
such periods.
1993 COMPARED TO 1992
The following table sets forth certain financial data for the periods
indicated.
Year Ended December 31,
------------------------------
1993 1992
----------- -----------
(in thousands)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 284,811 $ 236,490
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 240,439 215,120
Income from continuing operations
before income taxes . . . . . . . . . . . . . . . . . . . . . . 44,372 21,370
Income from continuing operations . . . . . . . . . . . . . . . . 29,160 13,505
36
38
The following table sets forth income from continuing operations
before income taxes for each of the Company's business segments for the year
ended December 31, 1993 and 1992.
Year Ended December 31,
-------------------------------------
1993 1992
--------- ---------
(in thousands)
Mortgage operations . . . . . . . . . . . . . . $ 46,295 $ 24,001
Insurance operations . . . . . . . . . . . . . . 3,946 6,220
Other operations . . . . . . . . . . . . . . . . (275) (1,339)
Corporate . . . . . . . . . . . . . . . . . . . (5,812) (5,958)
Elimination . . . . . . . . . . . . . . . . . . 218 (1,554)
--------- ---------
Total . . . . . . . . . . . . . . . . . . . $ 44,372 $ 21,370
========= =========
Operating results were positively affected by higher loan sale gains,
an increase in the spread earned on annuity products and lower borrowing costs
and negatively impacted by higher loan loss provisions and the estimated
settlement costs of litigation. By comparison to 1992, income from continuing
operations for the mortgage division was increased by higher loan sale gains in
1993 and reduced by the $2.3 million accrual of legal settlement costs and an
increase in the provision for loan losses. Earnings from insurance operations
were positively affected in 1993 by a wider margin between the interest yield
on investments and the interest crediting rates on the annuity products and an
increase in title insurance premiums; however, losses incurred on bond
investments and a probable loss associated with a previously terminated
agreement with a third-party administrator of credit life insurance
underwritten by UC Life offset the impact on earnings of these factors. In
addition, earnings of the insurance division in 1992 were increased by a $3.3
million gain on the sale of loans.
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the year ended December 31, 1993 and
1992.
Year Ended December 31,
------------------------------
1993 1992
---------- ---------
(in thousands)
Interest, charges and fees on loans . . . . . . . . . . . . . . $ 95,975 $ 92,584
Investment income . . . . . . . . . . . . . . . . . . . . . . 75,604 62,915
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . 59,441 33,795
Net insurance premiums . . . . . . . . . . . . . . . . . . . . . 43,119 33,475
Loan servicing income . . . . . . . . . . . . . . . . . . . . . 10,077 10,611
Investment gains . . . . . . . . . . . . . . . . . . . . . . 595 3,110
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . $ 284,811 $ 236,490
========= =========
Interest, charges and fees on loans increased $3.4 million for 1993.
This line item includes interest on mortgage loans owned by the mortgage and
insurance divisions and loan origination fees earned by the mortgage division.
Loan origination fees in excess of direct origination costs on loans held by
the Company are recognized over the life of the loan or recognized at the time
of sale on loans sold to third parties. During 1993 and 1992, the Company sold
approximately $463 million and $272 million, respectively, in home equity
loans and recognized approximately $18.9 million and $12.1 million,
respectively, in net loan origination fees in connection with these sales. The
average loan portfolio owned totaled approximately $487 million during 1993
compared to $540 million during 1992, due to an increased level of loan sales
which, in turn, decreased mortgage loan interest. Other loan income includes
primarily prepayment fees, late charges, and insurance commissions.
37
39
The following table presents the composition of interest, charges and
fees on loans.
Year Ended December 31,
--------------------------
1993 1992
------- --------
(in thousands)
Mortgage loan interest . . . . $ 51,763 $ 57,467
Loan origination fees . . . . . 35,987 26,340
Other loan income . . . . . . . 8,225 8,777
-------- --------
Total . . . . . . . . . . . $ 95,975 $ 92,584
======== ========
The Company estimates that non-accrual loans reduced mortgage loan
interest for 1993 and 1992 by approximately $9.5 million and $8.1 million,
respectively. During 1993 the average amount of non-accrual loans owned by the
Company was $31.7 million compared to approximately $31.6 million during 1992.
In addition, the average balance of loans serviced for third parties which were
on a non-accrual basis or in foreclosure was $43.4 million and $32.2 million
during 1993 and 1992, respectively, representing 4.5% and 3.9%, respectively,
of the average amount of loans serviced for third parties. The Company is
generally obligated to advance interest on delinquent loans to the investor or
holder of the mortgage-backed security, as the case may be, at the pass-through
rate until satisfaction of the note, liquidation of the collateral or charge
off of the delinquent loan. At December 31, 1993, the Company owned
approximately $8.1 million of commercial loans which were on an accrual status,
but which the Company considers as potential problem loans, compared to $13.8
million at December 31, 1992. The Company evaluates each of these commercial
loans to estimate its risk of loss in the investment and provides for such loss
through a charge to earnings.
Investment income totaled $75.6 million on average investments of
approximately $877 million for 1993 compared to investment income of $62.9
million on average investments of approximately $690 million during 1992. In
addition to the impact on revenue of the increased asset base, investment
income during 1993 was increased as the result of a reduction in the amount of
funds invested in short term maturities when compared to 1992. At December 31,
1993, the fixed income portfolio totaled $906 million and was comprised
principally of $598 million in investment grade mortgage-backed securities and
$238 million in investment grade corporate bonds. At December 31, 1993, the
weighted average rating of the publicly traded bond portfolio according to
nationally recognized rating agencies was "AA".
Net insurance premiums increased $9.3 million during 1993 compared to
1992. The increase in premium income is primarily the result of an increase of
$13.5 million in title insurance premiums offset by a reduction in premiums
earned on credit insurance products.
Loan sale gains recognized by the Company's mortgage unit increased
$29.5 million during 1993 over 1992. Loan sale gains approximate the present
value over the estimated life of the loan of the difference between the
contractual interest rates on the loans sold, over the sum of the pass-through
rate paid to the buyer, a normal servicing fee, a trustee fee and a surety bond
fee, if any, in mortgage-backed securitization transactions, and an estimate of
future credit losses. The increase in amount of loan sale gains was due
primarily to an increase in the excess servicing income retained by the Company
(i.e., the stated interest rate on the loan less the pass-through rate and the
normal servicing fee and other applicable recurring fees) and a $191 million
increase in the amount of home equity loans sold. Interest spread retained by
the Company on loans sold includes the normal servicing fee. The following
table presents information regarding home equity loan sale transactions by the
Company's mortgage subsidiary for the periods indicated.
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40
Year Ended December 31,
---------------------------
1993 1992
--------- ---------
(in thousands)
Home equity loans sold . . . . . . . . . . . . . . $ 462,873 $ 271,920
Average coupon on home equity loans sold . . . . . 12.00% 13.69%
Interest spread retained on home equity loans sold 6.06% 4.56%
Home equity loan sale gains . . . . . . . . . . . $ 59,220 $ 29,679
Historically, the Company has originated and sold portfolios of home
equity loans on a whole loan basis to institutional investors or
government-sponsored mortgage agencies or conduits and, during 1992, with the
participation of one of these investors, securitized and publicly sold home
equity loan pass-through certificates. In 1993, the Company began selling its
loans in public securitization transactions through its own shelf registration
statement. As a primary consequence of this process, the Company has realized
an increase in the interest spread retained on home equity loans sold from
4.56% in 1992 to 6.06% in 1993.
Loan servicing income declined in 1993 compared to 1992 as the result
of higher amortization of prior loan sale gains partially offset by an increase
in the amount of home equity loans serviced. The following table reflects the
components of loan servicing income for the periods indicated.
Year Ended December 31,
------------------------------
1993 1992
---------- ----------
(in thousands)
Servicing fees earned . . . . . . . . . . . $ 31,621 $ 23,021
Amortization of loan sale gains . . . . . . (21,544) (12,410)
---------- ----------
Total . . . . . . . . . . . . . . . . $ 10,077 $ 10,611
========== ==========
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
Year Ended December 31,
----------------------------
1993 1992
-------- --------
(in thousands)
Interest on annuity policies . . . . . . . $ 76,086 $ 77,268
Personnel . . . . . . . . . . . . . . . . . 41,525 35,250
Insurance commissions . . . . . . . . . . . 34,814 24,056
Insurance benefits . . . . . . . . . . . . 18,920 21,159
Loan loss provision . . . . . . . . . . . . 17,343 10,027
Interest . . . . . . . . . . . . . . . . . 10,158 12,082
Other operating . . . . . . . . . . . . . . 41,593 35,278
--------- ---------
Total . . . . . . . . . . . . . . . . . $240,439 $215,120
========= =========
Interest on annuity policies declined $1.2 million during 1993 compared
to 1992. Due to the sustained lower interest rate environment, the average
interest crediting rate on these annuity policies has been reduced which offset
the impact of an increase in average annuity reserves of approximately $156
million during 1993 compared to 1992. In addition, by comparison with 1992,
annuity surrenders declined during 1993 notwithstanding reductions in renewal
crediting rates on these policies.
Personnel expenses increased approximately $6.3 million primarily
because of the costs associated with the geographic expansion of the Company's
mortgage operations and incentive compensation paid in connection with loan
originations.
39
41
Insurance commissions for 1993 increased by approximately $10.8 million
over commissions for 1992 primarily as the result of commissions associated
with the increase in title policies written. Commissions paid on issuance of
the Company's single premium deferred annuity products are generally
capitalized as DPAC and amortized over the estimated life of the policy.
During 1993, the Company capitalized approximately $13.7 million in commissions
paid on sales of annuities compared to $11.6 million during 1992. Amortization
of commission expense on annuities capitalized in prior periods was $5.6
million during 1993, compared to $4.1 million during 1992.
The Company's loan loss provision was $17.3 million and $10.0 million
for 1993 and 1992, respectively. The increase in the provision resulted
primarily from an increase in the amount of losses incurred in 1993 as the
result of an increase in the number of properties placed in foreclosure and an
increase in the average amount of loss per property sold.
Interest expense for 1993 declined $1.9 million from 1992 primarily as
the result of lower borrowing costs.
Other operating expenses for 1993 were approximately $6.3 million
higher than 1992. Included in other operating expenses is the $2.3 million
accrual for the settlement of litigation and approximately $1.4 million in
estimated loss recognized in connection with the previously terminated
agreement to administer certain blocks of the Company's credit life business.
1992 COMPARED TO 1991
As reflected below, earnings during 1992 from the Company's businesses
improved substantially over 1991. The following table sets forth certain
financial data for the periods indicated.
Year Ended December 31,
----------------------------
1992 1991
-------- ---------
(in thousands)
Total revenues . . . . . . . . . . . $ 236,490 $ 233,795
Total expenses . . . . . . . . . . . 215,120 225,419
Income from continuing operations
before income taxes . . . . . . . 21,370 8,376
Income from continuing operations . . 13,505 5,013
The following table sets forth income from continuing operations
before income taxes for each of the Company's business segments for 1992 and
1991.
Year Ended December 31,
----------------------------
1992 1991
-------- ---------
(in thousands)
Mortgage operations . . . . . . . . . $ 24,001 $ 4,398
Insurance operations . . . . . . . . 6,220 2,637
Other operations . . . . . . . . . . (1,339) 13,566
Corporate . . . . . . . . . . . . . . (5,958) (10,315)
Elimination . . . . . . . . . . . . . (1,554) (1,910)
-------- ---------
Total . . . . . . . . . . . . . . $ 21,370 $ 8,376
======== =========
Increased loan production and loan sales were the primary reasons the
Company's operating income before income taxes increased in 1992. During 1991,
earnings of the "Other" business units were enhanced by an asset purchase
program through which the Company acquired at a discount residential mortgage
loans having an approximate outstanding aggregate principal balance of $190
million from financial institutions under conservatorship
40
42
by the Resolution Trust Corporation ("RTC") or from the RTC as receiver of
failed institutions. Substantially all of these loans were sold in 1991
generating loan sale gains of approximately $14.1 million. Because of a more
competitive market, this opportunity was not available in 1992.
Revenues. The following table sets forth information regarding the
components of the Company's revenues for 1992 and 1991.
Year Ended December 31,
-----------------------------
1992 1991
--------- ---------
(in thousands)
Interest, charges and fees on loans . $ 92,584 $ 90,169
Investment income . . . . . . . . . . 62,915 60,223
Net insurance premiums . . . . . . . 33,795 42,195
Loan sale gains . . . . . . . . . . . 33,475 29,627
Loan servicing income . . . . . . . . 10,611 9,492
Investment gains . . . . . . . . . . 3,110 2,089
--------- ---------
Total . . . . . . . . . . . . . . $ 236,490 $ 233,795
========= =========
The Company's average investment in mortgage loans and fixed income
securities was $1.2 billion during 1992 reflecting an increase of approximately
$70 million over 1991. Revenues generated from these assets consist
principally of mortgage loan interest, which is included in interest, charges
and fees on loans, and bond interest, which is included in investment income.
Interest, charges and fees on loans increased $2.4 million in 1992.
The Company's average loan portfolio was approximately $540 million during 1992
compared to $560 million during 1991. During 1992 and 1991, the Company sold
approximately $272 million and $162 million, respectively, in home equity loans
and recognized approximately $12.1 million and $8.8 million, respectively, in
net loan origination fees in connection with these sales. In addition, net
loan origination fees increased approximately $1.3 million in 1992 primarily as
a result of an increase in loan production.
The following table presents the composition of interest, charges and
fees on loans for the periods indicated.
Year Ended December 31,
---------------------------
1992 1991
-------- --------
(in thousands)
Mortgage loan interest . . . . . . . $ 57,467 $ 61,454
Loan origination fees . . . . . . . . 26,340 21,714
Other loan income . . . . . . . . . . 8,777 7,001
-------- --------
Total . . . . . . . . . . . . . $ 92,584 $ 90,169
======== ========
The Company estimates that non-accrual loans reduced mortgage loan
interest during 1992 and 1991 by $8.1 million and $6.5 million, respectively.
During 1992, the average amount of non-accrual loans owned by the Company was
$31.6 million compared to approximately $25.0 million during 1991. In
addition, the average balance of loans serviced for third parties by UC Lending
which were on a non-accrual basis or in foreclosure was $32.2 million and $25.2
million during 1992 and 1991, respectively. At December 31, 1992, the Company
owned approximately $13.8 million of commercial loans which were on an accrual
status but which management has identified as requiring a higher level of
monitoring and are considered as potential problem loans. The amount of loans
considered as potential problem loans at December 31, 1991 was $9.2 million.
41
43
Investment income increased $2.7 million during 1992 as the result of
an increase in average investments to approximately $690 million for 1992
compared to average investments of approximately $595 million during 1991. The
increase in investment income during 1992 was partially offset by a decrease in
the average portfolio yield resulting from a lower interest rate environment.
At December 31, 1992, the bond portfolio totaled $762 million and was comprised
principally of $428 million in investment grade mortgage-backed securities and
$245 million in investment grade corporate bonds. The amount of non-investment
grade publicly traded corporate bonds in the portfolio was $24 million at
December 31, 1992 compared with $51 million at year-end 1991. At December 31,
1992 the weighted average rating of the publicly traded bond portfolio
according to nationally recognized rating agencies was "AA".
Net insurance premiums declined $8.4 million during 1992. Net
insurance premiums reflect revenues associated primarily with sales of credit
insurance, pre-need funeral insurance and title insurance policies. The
reduction in premium income is primarily the result of a de-emphasis of
pre-need funeral insurance and credit insurance products by UC Life, while
title insurance premiums generated by UG Title increased approximately $5.0
million. Premiums from sales of the Company's annuity contracts are not
reported as revenue and related reserve increases are not reflected as expenses
in the Company's income statement, but are reported in the balance sheet.
Sales of the Company's annuity products were $187 million during 1992 compared
to $176 million during 1991.
During 1992, the amount of home equity loans sold increased by $110
million, or 68.2%, and, in connection therewith, the Company recognized a $14.1
million, or 90.6%, increase in the amount of loan sale gains.
The following table presents information regarding home equity loan
sale transactions by the Company's mortgage subsidiary for the periods
indicated.
Year Ended December 31,
-----------------------------
1992 1991
--------- ---------
(in thousands)
Home equity loans sold . . . . . . . . . . . . . . . $ 271,920 $ 161,680
Average coupon on home equity
loans sold . . . . . . . . . . . . . . . . . . . . 13.69% 14.23%
Interest spread retained on
home equity loans sold . . . . . . . . . . . . . . 4.56% 4.42%
Loan sale gains (mortgage division) . . . . . . . . . $ 29,679 $ 15,571
During 1992, substantially all of the Company's loan sales were made to Cargill
Financial Services Corporation. Included in loan sale gains during 1992 is
approximately $4.3 million of proceeds received by the Company as the result of
its participation in the securitization and public sale of home equity mortgage
loan pass-through certificates.
Loan servicing income increased $1.1 million in 1992. The prepayment
rate of the portfolio of loans serviced by UC Lending did not respond to the
general decline in mortgage interest rates. The average portfolio of loans
serviced by UC Lending for third parties was $831 million and $802 million
during 1992 and 1991, respectively.
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44
The following table reflects the components of loan servicing income
for 1992 and 1991.
Year Ended December 31,
----------------------------
1992 1991
-------- ---------
(in thousands)
Servicing fees earned . . . . . . . . $ 23,021 $ 18,005
Amortization of loan sale gains . . . (12,410) (8,513)
-------- ---------
Total . . . . . . . . . . . . . . $ 10,611 $ 9,492
======== =========
Investment gains increased $1 million in 1992. During 1992, the
Company sold approximately $147 million in corporate bonds and approximately
$106 million in bonds either matured or were called. Proceeds from these
transactions were generally reinvested in investment grade mortgage-backed
securities. At December 31, 1992, the net unrealized market gain on the bond
portfolio was $9.0 million compared to $6.8 million at December 31, 1991.
Expenses. The following table presents the components of the
Company's expenses for 1992 and 1991.
Year Ended December 31,
----------------------------
1992 1991
-------- ---------
(in thousands)
Interest on annuity policies . . . . $ 77,268 $ 75,230
Personnel . . . . . . . . . . . . . . 35,250 36,074
Insurance commissions . . . . . . . . 24,056 24,909
Insurance benefits . . . . . . . . . 21,159 27,255
Loan loss provision . . . . . . . . . 10,027 9,850
Interest . . . . . . . . . . . . . . 12,082 17,679
Other operating . . . . . . . . . . . 35,278 34,422
-------- ---------
Total . . . . . . . . . . . . . . $215,120 $ 225,419
======== =========
Interest credited on annuity policies during 1992 increased $2.0
million, reflecting the impact of a $123 million increase in the average
reserves for the Company's annuity policies, offset by lower crediting rates on
this line of business. Due to the sustained lower interest rate environment,
the Company reduced the crediting rates on certain annuity contracts. As a
result, the Company was successful during 1992 in maintaining an interest
margin between the average yields on invested assets and average crediting
rates on annuity contracts comparable to the level earned during 1991 despite
reduced investment yields.
Personnel expenses declined approximately $.8 million in 1992,
resulting primarily from a reduction in contributions to benefit and incentive
plans.
Insurance commissions declined $.8 million during 1992. Commissions
paid on issuance of the Company's annuity products are generally capitalized as
DPAC and amortized over the estimated life of the policy. During 1992, the
Company capitalized approximately $11.6 million in commissions paid on sales of
annuities compared to $10.0 million during 1991. Amortization of commission
expense on annuities capitalized in prior periods was $4.1 million during 1992
compared to $5.0 million for 1991. Commission expense related to sales of
title insurance policies was $8.8 million and $4.5 million during 1992 and
1991, respectively, reflecting increased sales in 1992.
Interest expense during 1992 declined $5.6 million primarily as the
result of lower borrowing costs and a $13 million decrease in the average
balance of debt outstanding from $204 million in 1991 to $191 million in 1992.
43
45
Other operating expenses for 1992 were approximately $ .9 million
higher than in 1991 as the result of an increase in real estate expenses as
well as in various general and administrative expenses.
FINANCIAL INFORMATION ON BUSINESS SEGMENTS
The following tables reflect income from continuing operations before
income taxes for each of the Company's business segments for the years ended
December 31, 1993, 1992 and 1991.
Year Ended December 31, 1993
---------------------------------------------------------------------------------
Corporate,
Life Title Other Operations,
Mortgage Insurance Insurance & Eliminations Total
-------- --------- --------- -------------- ---------
(in thousands)
Revenues:
Interest, charges and fees on loans . $ 44,797 $ 45,561 $ $ 5,617 $ 95,975
Investment income . . . . . . . . . . 1,054 74,994 672 (1,116) 75,604
Net insurance premiums . . . . . . . 18,684 24,435 43,119
Loan sale gains . . . . . . . . . . . 59,220 221 59,441
Loan servicing income . . . . . . . . 15,568 340 (5,831) 10,077
Investment gains (losses) . . . . . . 600 (5) 595
-------- --------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . 120,639 140,179 25,107 (1,114) 284,811
-------- --------- ---------- ---------- ---------
Expenses:
Interest on annuity policies . . . . 76,086 76,086
Personnel . . . . . . . . . . . . . . 31,987 3,878 741 4,919 41,525
Insurance commissions . . . . . . . . 13,185 20,893 736 34,814
Insurance benefits . . . . . . . . . 18,200 720 18,920
Loan loss provision . . . . . . . . . 12,349 4,994 17,343
Interest . . . . . . . . . . . . . . 4,315 628 5,215 10,158
Other operating . . . . . . . . . . . 25,693 20,573 1,442 (6,115) 41,593
-------- --------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . 74,344 137,544 23,796 4,755 240,439
-------- --------- ---------- ---------- ---------
Income (loss) from continuing operations
before income taxes . . . . . . . . . $ 46,295 $ 2,635 $ 1,311 $ (5,869) $ 44,372
======== ========= ========== ========== =========
44
46
Year Ended December 31, 1992
---------------------------------------------------------------------------------
Corporate,
Life Title Other Operations,
Mortgage Insurance Insurance & Eliminations Total
-------- --------- --------- -------------- ---------
(in thousands)
Revenues:
Interest, charges and fees on loans . $ 35,003 $ 51,396 $ 6,185 $ 92,584
Investment income . . . . . . . . . . 696 64,236 $ 477 (2,494) 62,915
Net insurance premiums . . . . . . . 22,860 10,935 33,795
Loan sale gains . . . . . . . . . . . 29,679 3,310 486 33,475
Loan servicing income . . . . . . . . 15,284 673 (5,346) 10,611
Investment gains . . . . . . . . . . 3,051 59 3,110
-------- --------- ---------- ---------- ---------
Total . . . . . . . . . . . . . 80,662 145,526 11,412 (1,110) 236,490
-------- --------- ---------- ---------- ---------
Expenses:
Interest on annuity policies . . . . 77,268 77,268
Personnel . . . . . . . . . . . . . . 26,441 3,372 548 4,889 35,250
Insurance commissions . . . . . . . . 14,328 8,773 955 24,056
Insurance benefits . . . . . . . . . 20,843 316 21,159
Loan loss provision . . . . . . . . . 5,152 4,875 10,027
Interest . . . . . . . . . . . . . . 3,995 1,197 6,890 12,082
Other operating . . . . . . . . . . . 21,073 18,178 1,020 (4,993) 35,278
-------- --------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . 56,661 140,061 10,657 7,741 215,120
-------- --------- ---------- ---------- ---------
Income (loss) from continuing operations
before income taxes . . . . . . . . . $ 24,001 $ 5,465 $ 755 $ (8,851) $ 21,370
======== ========= ========== ========== =========
45
47
Year Ended December 31, 1991
------------------------------------------------------------------------------
Corporate,
Life Title Other Operations,
Mortgage Insurance Insurance & Eliminations Total
-------- --------- --------- -------------- ---------
(in thousands)
Revenues:
Interest, charges and fees on loans . $ 36,174 $ 51,585 $ 2,410 $ 90,169
Investment income . . . . . . . . . . 1,137 60,834 $ 483 (2,231) 60,223
Net insurance premiums . . . . . . . 36,269 5,926 42,195
Loan sale gains . . . . . . . . . . . 15,571 14,056 29,627
Loan servicing income . . . . . . . . 12,108 1,645 (4,261) 9,492
Investment gains (losses) . . . . . . 2,451 (362) 2,089
-------- --------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . 64,990 152,784 6,409 9,612 233,795
-------- --------- ---------- ---------- ---------
Expenses:
Interest on annuity policies . . . . 75,230 75,230
Personnel . . . . . . . . . . . . . . 24,890 3,592 492 7,100 36,074
Insurance commissions . . . . . . . . 23,127 4,504 (2,722) 24,909
Insurance benefits . . . . . . . . . 27,003 252 27,255
Loan loss provision . . . . . . . . . 5,050 4,800 9,850
Interest . . . . . . . . . . . . . . 6,930 1,602 9,147 17,679
Other operating . . . . . . . . . . . 23,722 15,353 601 (5,254) 34,422
-------- --------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . 60,592 150,707 5,849 8,271 225,419
-------- --------- ---------- ---------- ---------
Income from continuing operations
before income taxes . . . . . . . . $ 4,398 $ 2,077 $ 560 $ 1,341 $ 8,376
======== ========= ========== ========== =========
MORTGAGE RESULTS OF OPERATIONS
The following tables reflect results of operations and selected
financial data for the indicated periods for the Company's mortgage operations.
Year Ended December 31,
-------------------------------------
1993 1992 1991
--------- ---------- ----------
(in thousands)
Revenues:
Loan sale gains . . . . . . . . . . . . . . $ 59,220 $ 29,679 $ 15,571
Loan fees . . . . . . . . . . . . . . . . . 35,987 26,340 21,714
Loan servicing income . . . . . . . . . . . 15,568 15,284 12,108
Other . . . . . . . . . . . . . . . . . . . 9,864 9,359 15,597
-------- -------- --------
Total . . . . . . . . . . . . . . . . 120,639 80,662 64,990
-------- -------- --------
Expenses . . . . . . . . . . . . . . . . . . 74,344 56,661 60,592
-------- -------- --------
Income from operations before taxes . . . . . $ 46,295 $ 24,001 $ 4,398
======== ======== ========
46
48
Year Ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ -------------
(dollars in thousands)
Selected Mortgage Financial Data
Home Equity Originations:
Loan originations . . . . . . . . . . . $ 539,868 $ 301,234 $ 253,613
Number of loans originated . . . . . . 13,857 10,689 10,710
Average loan origination amount . . . . $ 39 $ 28 $ 24
Home Equity Loan Sales:
Loan sales . . . . . . . . . . . . . . $ 462,873 $ 271,920 $ 161,680
Loan sale gains . . . . . . . . . . . . 59,220 29,679 15,571
Interest spread retained on loans sold 6.06% 4.56% 4.42%
Loan Servicing:
Total home equity portfolio (year end) $1,125,139 $ 819,448 $ 703,922
Total loan portfolio (year end) . . . . 1,568,781 1,367,822 1,344,388
Loans 30+ days past due (year end) . . 116,013 104,713 103,264
Loan servicing income . . . . . . . . . 15,568 15,284 12,108
INSURANCE RESULTS OF OPERATIONS
The following tables reflect results of operations and selected
financial data for the respective periods for the Company's insurance
operations.
Year Ended December 31,
-------------------------------------
1993 1992 1991
--------- ---------- ----------
(in thousands)
Revenues:
Investment income . . . . . . . . . . . . $ 75,666 $ 64,713 $ 61,317
Interest on loans . . . . . . . . . . . . . 45,561 51,396 51,585
Title insurance premiums . . . . . . . . . 24,435 10,935 5,926
Life insurance premiums . . . . . . . . . . 18,684 22,860 36,269
Other . . . . . . . . . . . . . . . . . . . 940 7,034 4,096
--------- ---------- ----------
Total . . . . . . . . . . . . . . . . . 165,286 156,938 159,193
--------- ---------- ----------
Expenses . . . . . . . . . . . . . . . . . . 161,340 150,718 156,556
--------- ---------- ----------
Income from operations
before income taxes . . . . . . . . . . $ 3,946 $ 6,220 $ 2,637
========== ========== ==========
47
49
Year Ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ -------------
Selected Insurance Financial Data (dollars in thousands)
Annuities:
Annuity sales . . . . . . . . . . . . . $ 207,682 $ 187,050 $ 175,796
Annuity reserves . . . . . . . . . . . 1,294,983 1,147,555 1,014,649
Net interest spread on annuities . . . 2.20% 1.84% 1.88%
Investments:
Investment and mortgage loan income . . $ 121,227 $ 116,109 $ 112,902
Net increase in invested assets . . . . 175,872 96,705 122,968
Title insurance:
Title insurance premiums . . . . . . . . $ 24,435 $ 10,935 $ 5,926
ASSET QUALITY AND RESERVES
The quality of the Company's loan and bond portfolios and of the loan
portfolio serviced for third parties significantly affects the profitability of
the Company. The values of and markets for these assets are dependent on a
number of factors, including general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors, which become more
pronounced in periods of economic decline, may affect the quality of these
assets and the Company's resulting ability to sell these assets for acceptable
prices. General economic deterioration can result in increased delinquencies
on existing loans, reductions in collateral values and declines in the value of
investments resulting from a reduced capacity of issuers to repay the bonds.
Loans. Substantially all of the loans owned by the Company were
originated by UC Lending. The Company's loan portfolio at December 31, 1993
was comprised primarily of $320 million in home equity loans and $191 million
in commercial loans. In connection with its origination of home equity loans,
the Company relies on thorough underwriting and credit review procedures by UC
Lending, a mortgage on the borrower's residence and, in some cases, other
security, and, in its retail origination program, close personal contact with
borrowers through its branch office system to manage credit risk on its loans.
In addition to servicing the loans owned by the Company, UC Lending serviced
approximately $1.1 billion in loans for third parties at December 31, 1993.
The Company is subject to risk of loss on loans in its owned portfolio and for
loans sold under certain loan sale agreements that provide limited recourse
against the Company. Such recourse relates to credit losses which may occur
after the sale of the loans and continues while the loans remain outstanding.
The Company is also obligated to repurchase or replace loans which may be
determined after the sale to violate representations and warranties relating to
them and which are made by the Company at the time of the sale. The Company
regularly evaluates the quality of the loan portfolio and estimates its risk of
loss based upon historical loss experience, prevailing economic conditions,
estimated collateral value and such other factors which, in management's
judgment, are relevant in estimating the credit risk in owned and/or serviced
loans. Estimated losses on the owned portfolio are provided for by an
increase in the allowance for loan losses through a charge to current operating
income. For loans sold with limited recourse, the Company reduces the amount
of gain recognized on the sale by the estimated amount of credit losses,
subject to the recourse limitation provisions of the loan sale agreements, and
records such amount on its balance sheet in the allowance for loss on loans
serviced. The Company's maximum contingent liability associated with such
sales of home equity loans according to terms of the loan sale agreements
totaled approximately $121 million; however, the Company's estimate of its
losses, based on historical loan loss experience, was approximately $12.9
million at December 31, 1993, and is recorded in the Company's allowance for
loss on loans serviced. Should credit losses on loans sold with limited
recourse materially exceed the Company's estimates for such losses, such
consequence will have a material adverse impact on the Company's operations.
For additional information, see Note 2.3 of Notes to Consolidated Financial
Statements.
48
50
At December 31, 1993, the contractual balance of loans serviced by UC
Lending was approximately $1.6 billion comprised of approximately $503 million
serviced for the Company and approximately $1.1 billion serviced for investors.
The geographic distribution of this portfolio by state and by loan category was
as follows at December 31, 1993:
Percent
State Home Equity Commercial Conventional Consumer Total of Total
------------ ---------- ------------ --------- ----------- ---------
(dollars in thousands)
Florida . . . . . . . . . . . . . . . $ 165,651 $ 98,266 $ 10,812 $ 19 $ 274,748 17.5%
Louisiana . . . . . . . . . . . . . . 122,605 16,993 48,675 29 188,302 12.0
Ohio . . . . . . . . . . . . . . . . . 131,683 6,159 2,256 - 140,098 8.9
Tennessee . . . . . . . . . . . . . . 100,881 23,672 6,373 9 130,935 8.3
Alabama . . . . . . . . . . . . . . . 103,258 13,588 6,130 4 122,980 7.8
Georgia . . . . . . . . . . . . . . . 62,777 53,431 3,466 12 119,686 7.6
North Carolina . . . . . . . . . . . . 98,318 16,817 1,982 - 117,117 7.5
Virginia . . . . . . . . . . . . . . . 42,758 23,989 3,324 - 70,071 4.5
Indiana . . . . . . . . . . . . . . . 52,526 3,723 1,776 - 58,025 3.7
South Carolina . . . . . . . . . . . . 52,774 1,553 1,683 - 56,010 3.6
Mississippi . . . . . . . . . . . . . 29,472 7,762 1,044 14 38,292 2.4
Other States . . . . . . . . . . . . . 162,436 79,412 10,668 1 252,517 16.2
------------ ---------- ----------- ------ ----------- -----
Total . . . . . . . . . . . . . . $ 1,125,139 $ 345,365 $ 98,189 $ 88 $ 1,568,781 100.0%
============ ========== =========== ====== =========== =====
49
51
The following table provides a summary of loans owned and/or serviced
by UC Lending which are past due 30 days or more, foreclosed properties and
loans charged off as of the dates indicated.
Foreclosed Properties
-----------------------
Contractual Delinquencies Owned Serviced for % of
Balance Contractual % of by the Third Party Net Loans Average
Period Ended of Loans Balance Amount Company Investors Charged Off Loans
- ------------ ---------------------------------------------------------------------------------------
(dollars in thousands)
December 31, 1993
- -----------------
Home equity . . . . . . . . . . . . $ 1,125,139 $ 92,974 8.26% $ 17,014 $ 8,355 $ 8,548 0.880%
Commercial . . . . . . . . . . . . 345,365 19,292 5.59% 20,871 9,275 3,579 0.950%
Conventional . . . . . . . . . . . 98,189 3,730 3.80% 148 - 112 0.090%
Consumer . . . . . . . . . . . . . 88 17 - - - (35) -
----------- ---------- ---------- --------- ---------
Total . . . . . . . . . . . . $ 1,568,781 $ 116,013 7.40% $ 38,033 $ 17,630 $ 12,204
=========== ========== ========== ========= =========
December 31, 1992
- -----------------
Home equity . . . . . . . . . . . . $ 819,448 $ 71,762 8.76% $ 13,092 $ 7,244 $ 4,498 .590%
Commercial . . . . . . . . . . . . 404,857 29,954 7.40% 20,976 7,338 4,805 1.138%
Conventional . . . . . . . . . . . 143,311 2,933 2.05% 291 - 4 -
Consumer . . . . . . . . . . . . . 206 64 - - - 82 2.855%
----------- ---------- ---------- --------- ---------
Total . . . . . . . . . . . . $ 1,367,822 $ 104,713 7.66% $ 34,359 $ 14,582 $ 9,389
=========== ========== ========== ========= =========
December 31, 1991
- -----------------
Home equity . . . . . . . . . . . . $ 703,922 $ 66,570 9.46% $ 13,963 $ 6,908 $ 2,595 0.406%
Commercial . . . . . . . . . . . . 439,600 30,115 6.85% 23,678 1,757 2,753 0.634%
Conventional . . . . . . . . . . . 195,328 5,928 3.03% - - - -
Consumer . . . . . . . . . . . . . 5,538 651 11.76% - - 271 2.848%
----------- ---------- ---------- --------- ---------
Total . . . . . . . . . . . . $ 1,344,388 $ 103,264 7.68% $ 37,641 $ 8,665 $ 5,619
=========== ========== ========== ========= =========
During 1992 and continuing into 1993, management placed additional
emphasis on reducing the level of non-earning assets owned and/or serviced by
focusing on expediting the foreclosure process. As the result of both being
more aggressive in liquidating foreclosed property and incurring a higher
incidence of loss on properties sold, the Company experienced a higher level of
charge- offs in 1992 and 1993 compared to prior years. The above delinquency
and loan loss experience represents the Company's recent experience. However,
the delinquency, foreclosure and net loss percentages may be affected by the
increase in the size and relative lack of seasoning of the portfolio. As a
result, the information in the above tables should not be considered as a basis
for assessing the likelihood, amount or severity of delinquencies or losses in
the future on home equity loans and no assurance can be given that the
delinquency and loss experience presented in the tables will be indicative of
such experience on home equity loans.
50
52
A summary analysis of the changes in the Company's allowance for loan
losses for the indicated periods is as follows.
Year Ended December 31,
-------------------------------------
1993 1992 1991
--------- ---------- ----------
(in thousands)
Balance at beginning of year . . . . . . . $ 15,842 $ 15,962 $ 10,472
Loans charged to allowance
Home equity . . . . . . . . . . . . . . . (9,114) (5,511) (3,487)
Commercial . . . . . . . . . . . . . . . . (3,579) (4,805) (2,753)
Conventional . . . . . . . . . . . . . . . (128) (4) (6)
Consumer . . . . . . . . . . . . . . . . . (14) (154) (321)
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . (12,835) (10,474) (6,567)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . 631 1,085 948
---------- ---------- ----------
Net loans charged off . . . . . . . . . . . . (12,204) ( 9,389) (5,619)
Loan loss provisions . . . . . . . . . . . . 17,343 10,027 9,850
Reserve reclassification . . . . . . . . . 36 ( 758) 1,259
----------- ---------- ----------
Balance at end of year . . . . . . . . . . $ 21,017 $ 15,842 $ 15,962
=========== ========== ==========
Specific reserves . . . . . . . . . . . . . $ 8,500 $ 7,067 $ 7,268
Unallocated reserves . . . . . . . . . . . 12,517 8,775 8,694
----------- ---------- ----------
Total reserves . . . . . . . . . . . . . . $ 21,017 $ 15,842 $ 15,962
=========== ========== ==========
Specific reserves are provided for foreclosures in which the carrying
value of the loan exceeds the market value of the collateral. Unallocated
reserves are provided for loans not in foreclosure and are calculated primarily
using objective measurement techniques. Unallocated reserves also include
reserves for active loans which have been modified or indicate potential
problems as well as reserves for a $32.5 million subordinated position the
Company acquired in connection with the securitization and sale of
approximately $230 million in commercial real estate mortgage loans in 1990.
At December 31, 1993, the Company owned $38 million of property acquired in
settlement of loans, excluding the specific reserves attributed to these
properties. These balances are included in the loans owned by the Company.
The specific reserve in the table above is provided to reduce the carrying
value of these properties to their market value.
A summary of the amounts provided by the Company for future credit
losses on loans and foreclosed properties owned by the Company and loans sold
with recourse as of the dates indicated is as follows:
Year Ended December 31,
------------------------------------
1993 1992 1991
--------- --------- ---------
(in thousands)
Allowance for loan losses
(Applicable to loans and foreclosed properties
owned by the Company) . . . . . . . . . . . . $ 21,017 $ 15,842 $ 15,962
Allowance for loss on loans serviced
(Applicable to loans
sold with recourse) . . . . . . . . . . . . . 12,938 7,015 3,737
----------- --------- ---------
Total . . . . . . . . . . . . . . . . . $ 33,955 $ 22,857 $ 19,699
=========== ========= =========
As of December 31, 1993, approximately $777 million of home equity
loans sold were serviced by UC Lending under agreements which provide limited
recourse for credit losses ("loans sold with recourse"). The Company's maximum
contingent liability associated with such sales of home equity loans according
to terms of the loan sale agreements totaled approximately $121 million;
however, the Company's estimate of its losses, based on
51
53
historical loan loss experience, was approximately $12.9 million at December
31, 1993 and is recorded in the Company's Allowance for loss on loans serviced.
Should credit losses on loans sold with limited recourse materially exceed the
Company's estimate for such losses, such consequence will have a material
adverse impact on the Company's operations.
Bonds. Investment purchases are made with the intention of holding
fixed income securities until maturity. Securities are generally carried at
cost adjusted for discount accretion and premium amortization. At December 31,
1993 and 1992, the carrying value of the Company's bond portfolio was $906
million and $762 million, respectively. At December 31, 1993, the bond
portfolio was comprised of fixed income securities consisting primarily of
$597.7 million in mortgage-backed securities and $248.1 million in corporate
bonds. At December 31, 1993, the market value of the bond portfolio was $937.5
million, including unrealized gains of $34.4 million and unrealized losses of
$2.9 million reflecting a net unrealized gain of $31.5 million compared to a
net unrealized gain of $9.0 million at December 31, 1992. Market value for
substantially all of the Company's investment portfolio is generally determined
from quoted prices for publicly traded securities; however, certain securities
may trade infrequently or not at all. Therefore, quoted prices may not be
representative of the market value of these securities.
At December 31, 1993, the Company owned publicly traded corporate
bonds classified as non-investment grade securities having a cost basis of
approximately $10.5 million. The indicated market value of these
non-investment grade bonds at December 31, 1993 was $10.8 million. These bonds
generally provide higher average yields than investment grade securities, but
at potentially greater risk. These securities generally are unsecured, are
more sensitive to adverse economic conditions and are more thinly traded than
investment grade bonds. Issuers of these securities may be more vulnerable to
current market factors including restricted credit availability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding loan
originations in its mortgage operations and the payment of policyholder claims
and surrenders incurred in its insurance operations. The Company's mortgage
operations require continued access to short-and long-term sources of debt
financing and the sale of loans to UC Life and the sale of loans and
asset-backed securities in the secondary market; whereas liquidity requirements
for the Company's insurance operations are generally met by funds provided from
the sale of annuities and cash flow from its investment in fixed income
securities and mortgage loans. The Company's net cash flow from financing
activities in 1993 reflects the sale by the Company in December, 1993 of $32
million in common stock and in June, 1993 of $20 million of convertible
preferred stock to augment its capital. The proceeds from these transactions
were used by the Company to reduce the amount outstanding under the Company's
$200 million revolving credit agreement. Pursuant to its terms, all of the
preferred stock was converted into common stock.
The following discussion reflects the primary sources of liquidity and
capital for each of the Company's primary operating divisions.
UC Lending. The principal cash requirements of the Company's mortgage
operations arise from loan originations, repayments of inter-company debt
borrowed by the Company under its $200 million revolving credit facility,
payments of operating and interest expenses, loan repurchases under recourse
obligations and deposits to reserve accounts related to loan sale transactions.
Loan originations are initially funded principally through the Company's $200
million revolving credit facility and short-term bank facilities pending loan
sales to UC Life and in the secondary market. Substantially all of the loans
originated by UC Lending are sold. Net cash used by investing activities of
the Company in 1993 and 1992 reflects approximately $600 million and $346
million, respectively, in cash used for loan originations. This use was funded
primarily from the reinvestment of proceeds from the sale of loans in the
secondary market totaling approximately $464 million and $344 million in 1993
and 1992, respectively. In connection with the loan sale transactions in the
secondary market in 1992 and 1993, surety bonds and cash deposits were provided
by the Company as credit enhancements. The loan sale transactions required the
subordination of certain cash flows payable to UC Lending to the payment of
scheduled principal and interest due to certificate holders. In connection
with each transaction, UC Lending was required to fund an initial deposit,
52
54
and thereafter, a portion of the amounts payable to UC Lending and its
subsidiary from the excess interest spread is 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 the reserve account until a specified level of
cash in excess of the initial deposit but less than the maximum subordination
amount is accumulated therein. Excess interest spread payable to the Company
is subject to being utilized first to replenish cash paid from the reserve
account to fund shortfalls in collections from borrowers who default on the
payment of principal or interest on the loans underlying the pass-through
certificates issued until the total of the Company's deposits into the reserve
account equal the maximum subordination amount. In connection with the
issuance in 1993 of approximately $451 million in pass-through certificates,
the aggregate subordination amounts were initially set at approximately $69.8
million. 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 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. At December 31, 1993, the amounts on deposit in such reserve
accounts totaled $27.7 million.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market and to UC Life,
are essential for the continuation of the Company's loan origination
operations. The Company's $200 million revolving credit facility has a
committed term to December 31, 1995. The interest rate on such credit facility
is based upon various floating rate indices as may be selected by the Company
from time to time. There can be no assurance that the Company's present credit
facilities will be available in the future on terms which the Company would
consider favorable.
UC Life. The principal cash requirements of UC Life consist of
contractual obligations to policyholders, principally through policy claims and
surrenders. The primary sources of funding these obligations, in addition to
cash flow from investments, are the sale of annuities. Net cash flow from
underwriting operations is used to build an investment portfolio, which in turn
produces future cash flows from investment income and provides a secondary
source of liquidity for this division. Net cash provided by operating
activities of the insurance division in 1993 and 1992 was approximately $78
million and $69 million, respectively, resulting primarily from cash earnings
on investments. The Company monitors available cash and cash equivalents to
maintain adequate balances for current payments while maximizing cash available
for longer term investment activities. The Company's financing activities in
1993 and 1992 reflect approximately $208 million and $187 million,
respectively, in cash received from sales by UC Life of its annuity and
interest sensitive products. As reflected in the net cash used by investing
activities during 1993 and 1992, investment purchases were approximately $293
million and $631 million, respectively, reflecting the investment of these
funds and the reinvestment of proceeds from maturities of investments as well
as a decrease, primarily in 1992, in cash equivalents. Cash used by financing
activities in 1993 and 1992, also reflects payments of $136 million and $131
million on annuities and interest sensitive products resulting from
policyholder surrenders and claims. In response to the decline in interest
rates in 1992 and 1993, the Company reduced the crediting rates on its annuity
policies; however, in comparison with 1992, the percentage of annuities
surrendered has declined during 1993 notwithstanding reductions in renewal
crediting rates on these policies. UC Life's investments at December 31, 1993,
included approximately $463 million in residential and commercial mortgage
loans, $315 million in corporate and government bonds and private debt
placements and $597 million in mortgage-backed securities. The investment
portfolio is also managed to provide a secondary source of liquidity as
investments can be sold, if necessary, to fund abnormal levels of policy
surrenders, claims and expenses. An unanticipated increase in surrenders would
impact the Company's liquidity, potentially requiring the sale of certain
assets, such as bonds and loans prior to their maturities, which may be at a
loss.
Reserves for annuity policies comprise the primary liabilities of UC
Life. The Company believes it has established adequate reserves on these
products as well as on its other insurance products. The effective life of
these liabilities is influenced by a number of factors, including interest
rates, surrender penalties, ratings, public confidence in the insurance
industry generally, and in the Company specifically, governmental regulations
and tax laws. The Company employs an actuarial model to measure the interest
rate sensitivity of these liabilities to assist in the selection of assets with
appropriate characteristics.
53
55
As a Louisiana domiciled insurance company, UC Life is subject to
certain regulatory restrictions on the payment of dividends. UC Life has the
capacity at December 31, 1993 to pay dividends of $8.5 million. UC Life did
not pay any dividends to the Company during 1991, 1992 and 1993 in order to
retain capital in UC Life.
UG Title. Liquidity requirements for the Company's title insurance
business are generally met from funds provided by the sale of title insurance
policies and cash flow from its investment portfolio. UG Title's investments
at December 31, 1993 included approximately $1.9 million in residential
mortgage loans and $3.9 million in U.S. government and agency securities. An
unanticipated increase in policy claims would impact UG Title's liquidity,
potentially requiring the sale of its investments prior to their maturities,
which may be at a loss. The principal liability of UG Title is the loss
reserve established for title policy claims.
ACCOUNTING STANDARDS
The financial statements included herewith have been restated to
reflect the implementation during the first quarter of 1993 of Statements of
Financial Accounting Standards Nos. 109 and 113 ("SFAS 109" and "SFAS 113,"
respectively) issued by the Financial Accounting Standards Board ("FASB").
Under the provisions of SFAS 109, "Accounting for Income Taxes,"
deferred income taxes are recognized using the liability method whereby enacted
statutory rates are applied to cumulative temporary differences based on when
and how they are expected to affect the tax return. Implementation of the
provisions of SFAS 109 did not have a material effect on each of the three
years ended December 31, 1993; however, adoption of SFAS 109 resulted in a $2.8
million increase in the Company's deferred income tax liability and a $2.8
million decrease in its retained earnings at December 31, 1989.
The provisions of SFAS 113 revised the method of reporting reinsurance
contracts by a ceding enterprise. Prior to implementation of SFAS 113, the
Company reported reinsurance receivables net of the related reserve
liabilities. As the result of application of the provisions of SFAS 113, these
assets and liabilities are required to be reported gross, and, therefore, for
comparative purposes, the Company has elected to restate prior years financial
statements. Implementation of the provisions of SFAS 113 had no effect on
previously reported net income.
During the first quarter of 1993, the Company also implemented
Statement of Financial Accounting Standards No. 106 ("SFAS 106"). Under SFAS
106, postretirement benefits are viewed as deferred compensation agreements
whereby an employer agrees to provide future benefits in exchange for
employees' current services. Prior to implementation of SFAS 106, the Company
accounted for such benefits at the time of payment. In connection with its
implementation of SFAS 106, the Company elected to amortize its prior liability
for these benefits under the transition method. Amortization of such prior
liability under the new rules did not and will not have a material effect on
the Company's financial condition or the results of operations.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), a pronouncement revising the method of
accounting for certain investments in debt and equity securities which mandates
certain standards under which securities are classified as "held-to-maturity"
and carried at cost, adjusted for premium amortization and discount accretion.
Securities not meeting these standards would be considered "trading securities"
or "available for sale" and carried at market value. The Company generally
carries its bonds at cost, adjusted for discount accretion and premium
amortization, and recognizes gains and losses on such investments at the date
of disposition. The Company provides for estimated default risk by
establishing a reserve for bond losses through a charge to earnings. When a
decline in market value of an investment is considered to be other than
temporary, the Company provides a specific reserve on the investment through a
charge to earnings. The provisions of SFAS 115 will require the Company to
change the method used to account for certain of its bonds which may affect the
timing of recognition of gains or losses for these securities. SFAS 115 is
effective for fiscal years beginning after December 15, 1993. The Company is
currently analyzing the investment portfolio to determine the appropriate
security classifications under SFAS 115 and will implement its provisions in
the first quarter of 1994. At December 31, 1993, the net unrealized gain on
the Company's bonds was $31.5 million.
54
56
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114 ("SFAS 114") which addresses the accounting by creditors for
impairment of loans and specifies how allowances for credit losses related to
certain loans should be determined. SFAS 114 also addresses the accounting by
creditors for all loans that are restructured in a troubled debt restructuring
involving modification of terms of a receivable. SFAS 114 is effective for
financial statements for fiscal years beginning after December 15, 1994. The
Company is reviewing the provisions of this pronouncement but has not yet
determined the effect of its implementation on the Company's financial
condition or results of operations.
55
57
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, 1993
and 1992, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1993. Our audits also included the financial statement schedules listed in
the Index at Item 14. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules 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, 1993 and 1992, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
Baton Rouge, Louisiana
February 18, 1994
56
58
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------------
1993 1992
------------------- --------------------
(in thousands)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 45,530 $ 54,707
Temporary investments - reserve accounts . . . . . . . . . . . 27,672 7,627
Bonds - net . . . . . . . . . . . . . . . . . . . . . . . . . . 905,999 762,160
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542,633 523,605
Less: Allowance for loan losses . . . . . . . . . . . . . . (21,017) (15,842)
Unearned loan charges . . . . . . . . . . . . . . . . (1,982) (3,260)
------------- -------------
Loans - net . . . . . . . . . . . . . . . . . . . . . . . . 519,634 504,503
Capitalized excess servicing income . . . . . . . . . . . . . . 113,192 72,062
Deferred policy acquisition costs . . . . . . . . . . . . . . . 83,495 80,007
Due from reinsurers . . . . . . . . . . . . . . . . . . . . . . 36,558 37,716
Accrued interest and accounts receivable . . . . . . . . . . . 30,266 28,825
Property - net . . . . . . . . . . . . . . . . . . . . . . . . 28,988 30,933
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . 19,633 19,966
Net assets of discontinued operations . . . . . . . . . . . . . - 23,087
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 6,577 7,794
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . $ 1,817,544 $ 1,629,387
============= =============
Liabilities and Stockholders' Equity
Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . $ 1,294,983 $ 1,147,555
Notes payable:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . 500 1,420
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . 155,000 205,430
Policy benefit reserves . . . . . . . . . . . . . . . . . . . . 125,340 126,386
Repurchase agreement . . . . . . . . . . . . . . . . . . . . . 30,000 -
Allowance for loss on loans serviced . . . . . . . . . . . . . 12,938 7,015
Unearned premium reserves . . . . . . . . . . . . . . . . . . . 10,260 17,138
Deferred income taxes payable . . . . . . . . . . . . . . . . . 5,468 8,996
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 29,687 19,189
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . 1,664,176 1,533,129
============= =============
Stockholders' equity:
Common stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 12,684,858 and 9,364,666 shares . . . . . . . . 25,370 18,730
Additional paid-in capital . . . . . . . . . . . . . . . . . 76,312 31,461
Retained earnings . . . . . . . . . . . . . . . . . . . . . 59,988 52,037
Treasury stock and ESOP debt . . . . . . . . . . . . . . . . (8,302) (5,970)
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 153,368 96,258
------------- -------------
Total liabilities and stockholders' equity . . . . . $ 1,817,544 $ 1,629,387
============= =============
See notes to consolidated financial statements.
57
59
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-------------------------------------
1993 1992 1991
-------- -------- --------
(in thousands, except per share data)
Revenues:
Interest, charges and fees on loans . . . . . . . . . . . . . . $ 95,975 $ 92,584 $ 90,169
Investment income . . . . . . . . . . . . . . . . . . . . . . . 75,604 62,915 60,223
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . 59,441 33,475 29,627
Net insurance premiums . . . . . . . . . . . . . . . . . . . . 43,119 33,795 42,195
Loan servicing income . . . . . . . . . . . . . . . . . . . . . 10,077 10,611 9,492
Investment gains . . . . . . . . . . . . . . . . . . . . . . . 595 3,110 2,089
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,811 236,490 233,795
--------- --------- ---------
Expenses:
Interest on annuity policies . . . . . . . . . . . . . . . . . 76,086 77,268 75,230
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,525 35,250 36,074
Insurance commissions . . . . . . . . . . . . . . . . . . . . . 34,814 24,056 24,909
Insurance benefits . . . . . . . . . . . . . . . . . . . . . . 18,920 21,159 27,255
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . 17,343 10,027 9,850
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,158 12,082 17,679
Other operating . . . . . . . . . . . . . . . . . . . . . . . . 41,593 35,278 34,422
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,439 215,120 225,419
--------- --------- ---------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 44,372 21,370 8,376
Provision for income taxes (benefit):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,739 11,767 3,094
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,527) (3,902) 269
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,212 7,865 3,363
--------- --------- ---------
Income from continuing operations . . . . . . . . . . . . . . . . . 29,160 13,505 5,013
Income (loss) from discontinued operations:
Income (loss) from discontinued operations net
of applicable income tax (benefit) of $(782),
$(1,627) and $2,855, respectively . . . . . . . . . . . . . . (1,519) (3,259) 6,463
Loss on disposal of discontinued operations,
including estimated operating losses during
phaseout, less income tax benefit of $8,326 . . . . . . . . . (16,066) - -
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,585) (3,259) 6,463
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,575 $ 10,246 $ 11,476
========= ========= =========
Per share data:
Primary:
Income from continuing operations . . . . . . . . . . . . . . . $ 2.86 $ 1.50 $ .56
Income (loss) from discontinued operations . . . . . . . . . . (1.75) (.36) .72
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.11 $ 1.14 $ 1.28
========= ========= =========
Fully diluted:
Income from continuing operations . . . . . . . . . . . . . . . $ 2.71 $ 1.50 $ .56
Income (loss) from discontinued operations . . . . . . . . . . (1.64) (.36) .72
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.07 $ 1.14 $ 1.28
========= ========= =========
See notes to consolidated financial statements.
58
60
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------
1993 1992 1991
-------- -------- ---------
(in thousands)
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . $ 29,160 $ 13,505 $ 5,013
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating activities:
Increase in deferred policy acquisition costs . . . . . . . . . . . . (3,488) (1,409) (998)
Decrease (increase) in due from reinsurers . . . . . . . . . . . . . 1,158 884 (3,564)
Decrease in policy loans . . . . . . . . . . . . . . . . . . . . . . 333 532 2,271
Decrease (increase) in accrued interest and accounts receivable . . . (3,397) (4,097) 451
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . (1,259) 885 2,569
Increase (decrease) in policy benefit reserves . . . . . . . . . . . (1,046) (254) 4,907
Interest on annuity policies . . . . . . . . . . . . . . . . . . . . 76,086 77,268 75,230
Decrease in unearned premium reserves . . . . . . . . . . . . . . . . (6,878) (10,549) (5,890)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . (3,527) (3,902) 269
Increase (decrease) in other liabilities . . . . . . . . . . . . . . 18,895 (909) (4,645)
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . . . . 17,343 10,027 9,850
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . 3,653 4,226 3,926
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,441) (33,475) (29,627)
Amortization of prior loan sale gains . . . . . . . . . . . . . . . . 21,544 12,410 8,513
Provision for bond losses . . . . . . . . . . . . . . . . . . . . . . 500 - 2,000
Investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . (1,095) (3,110) (4,089)
--------- --------- ----------
Net cash provided by continuing operating activities . . . . . . . 88,541 62,032 66,186
--------- --------- ----------
Cash flows from discontinued operating activities . . . . . . . . . . . . . . . (612) 210 1,390
--------- --------- ----------
Cash flows from investing activities:
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . 463,763 343,565 376,326
Principal collected on loans . . . . . . . . . . . . . . . . . . . . . . . 107,703 101,450 68,139
Loan originations and acquisitions . . . . . . . . . . . . . . . . . . . . (600,453) (346,494) (684,771)
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . . . . . (20,045) (7,627) -
Proceeds from sales of investments . . . . . . . . . . . . . . . . . . . . 25,475 147,122 316,188
Proceeds from maturities or calls of investments . . . . . . . . . . . . . 117,767 106,041 35,471
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . (285,605) (632,943) (138,502)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (941) (1,033) (4,630)
--------- --------- ----------
Net cash used by investing activities . . . . . . . . . . . . . . . . (192,336) (289,919) (31,779)
--------- --------- ----------
Cash flows from financing activities:
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (15,750) (4,697) (2,184)
Increase (decrease) in revolving credit debt . . . . . . . . . . . . . . . (35,000) 15,000 (10,000)
Increase in repurchase agreement . . . . . . . . . . . . . . . . . . . . . 30,000 - -
Decrease in debt with maturities of three months or less . . . . . . . . . (600) (3,900) (4,340)
Deposits received from annuities and interest sensitive products . . . . . 207,682 187,050 175,796
Payments on annuities and interest sensitive products . . . . . . . . . . . (136,490) (130,944) (107,542)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,624) (2,705) (2,556)
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . . . . 48,714 - -
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . - - (369)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 298 60 753
--------- --------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . 95,230 59,864 49,558
--------- --------- ----------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . (9,177) (167,813) 85,355
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . 54,707 222,520 137,165
--------- --------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . $ 45,530 $ 54,707 $ 222,520
========= ========= ==========
See notes to consolidated financial statements.
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61
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Treasury Total
Common Preferred Paid-in Retained Stock and Stockholders'
Stock Stock Capital Earnings ESOP Debt Equity
--------- --------- ---------- ---------- --------- -------------
(dollars in thousands, except per share data)
Balance, December 31, 1990 as
previously reported . . . . . $ 8,045 $ 26,728 $ 52,563 $ (5,120) $ 82,216
Effect of stock split . . . . . 8,045 (8,045) -
Restatement for income taxes . (2,786) (2,786)
--------- ---------- ---------- --------- -----------
Balance, December 31, 1990 as
restated . . . . . . . . . . 16,090 18,683 49,777 (5,120) 79,430
Net income . . . . . . . . . . 11,476 11,476
Dividends paid
Cash - $.28 per share . . . . (2,556) (2,556)
Stock - 15% stock dividend . 2,344 11,857 (14,201) -
Increase in ESOP debt . . . . . (301) (301)
Common stock issued under
stock option plans -
93,764 shares . . . . . . . . 188 617 805
Cost of treasury shares acquired -
37,278 shares . . . . . . . . (420) (420)
--------- ---------- ---------- --------- -----------
Balance, December 31, 1991 . . 18,622 31,157 44,496 (5,841) 88,434
Net income . . . . . . . . . . 10,246 10,246
Dividends paid
Cash - $.30 per share . . . . (2,705) (2,705)
Decrease in ESOP debt . . . . . 223 223
Common stock issued under
stock option plans -
53,938 shares . . . . . . . 108 304 412
Cost of treasury shares acquired -
34,672 shares . . . . . . . (352) (352)
--------- ---------- ---------- --------- -----------
Balance, December 31, 1992 . . 18,730 31,461 52,037 (5,970) 96,258
Net income . . . . . . . . . . 11,575 11,575
Dividends paid
Cash - $.34 per common
share . . . . . . . . . . . (3,291) (3,291)
Cash - preferred stock . . . (333) (333)
Decrease in ESOP debt . . . . . 147 147
Common stock issued under
stock option plans -
368,988 shares . . . . . . 738 2,039 2,777
Issuance of preferred stock . . $ 20,000 (1,239) 18,761
Conversion of preferred stock
into 1,951,204 shares of
common stock . . . . . . . 3,902 (20,000) 16,098 -
Issuance of 1,000,000 shares
of common stock . . . . 2,000 27,953 29,953
Cost of treasury shares acquired -
169,168 shares . . . . . . (2,479) (2,479)
---------- --------- ---------- ---------- --------- -----------
Balance, December 31, 1993 . . $ 25,370 $ - $ 76,312 $ 59,988 $ (8,302) $ 153,368
========== ========= ========== ========== ========= ===========
See notes to consolidated financial statements.
60
62
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1. ACCOUNTING POLICIES
1.1 Principles of Consolidation. The consolidated financial statements
include United Companies Financial Corporation (the "Company" or "United
Companies") and subsidiaries, all of which are wholly-owned. The Company's
principal lines of business include mortgage and insurance operations.
Mortgage operations are conducted through United Companies Lending Corporation
("UC Lending" or "UCLC") and its insurance operations are conducted through
United Companies Life Insurance Company ("UC Life" or "UCLIC") and United
General Title Insurance Company ("UG Title" or "UGTIC"). The consolidated
financial statements also include Foster Mortgage Corporation ("Foster" or
"FMC") as discontinued operations. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
1.1(a) Discontinued Operations. On May 7, 1993, the Company made a
decision to dispose of the net assets and operations of FMC. FMC was engaged
in servicing residential mortgage loans primarily for government and
quasi-government agencies and private investors. As a result of the Company's
decision to divest FMC, the operations of FMC have been reclassified as
discontinued operations and, accordingly, the consolidated financial statements
and the related notes of the Company have been restated to segregate continuing
and discontinued operations.
1.2 Insurance Accounting.
1.2(a) Life and Annuity Contracts. Income on short duration single
premium contracts, primarily credit insurance products, is recognized over the
contract period. Premiums on other insurance contracts, principally
traditional life insurance and limited payment life insurance policies, are
recognized as revenue when due.
Policy benefit reserves for traditional life insurance policies have
been provided on a net level premium method including assumptions as to
investment yield, mortality and withdrawals based on the Company's experience
and industry standards with provisions for possible adverse deviation.
Investment yield assumptions range from 5.5% to 8.5% per annum. Policy benefit
reserves include certain deferred profits on limited payment policies. These
profits are being recognized in income over the policy term.
Reserves for annuity policies and interest sensitive life policies
represent the policy account balance, or accumulated fund value, before
applicable surrender charges. Benefit claims incurred in excess of related
policy account balances and interest credited during the period to policy
account balances are charged to expense.
Commissions and other costs related to the production of new and
renewal business have been deferred. The deferred costs related to traditional
life insurance are amortized over the premium payment period using assumptions
consistent with those used in computing policy benefit reserves. Deferred
costs related to annuities and interest sensitive products are amortized over
the estimated life of the policy in relation to the present value of estimated
gross profits on the contract. The Company periodically reviews the
appropriateness of assumptions used in calculating the estimated gross profits
on annuity contracts. Any change required in these assumptions may result in
an adjustment to deferred policy acquisition costs which would affect income.
Participating business, primarily related to the Company's pre-need
funeral policy, represented 5.3%, 4.3% and 3.8% of the life insurance in force
as of December 31, 1993, 1992 and 1991, respectively. The amount of
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dividends paid on participating policies is based on published dividend scales
and totaled $1.5 million, $1.8 million and $1.5 million for the years ended
December 31, 1993, 1992 and 1991, respectively.
The Company generally reinsures with other insurance companies the
portion of any one risk which exceeds $100,000. On certain types of policies
this limit is $25,000. The Company is contingently liable for insurance ceded
to reinsurers. Premiums ceded under reinsurance agreements were $3.0 million,
$5.0 million and $10.9 million in 1993, 1992 and 1991, respectively. Reserve
credit taken under reinsurance agreements totaled $35.2 million, $30.4 million
and $37.3 million at December 31, 1993, 1992 and 1991, respectively.
UC Life has assumed the following reinsurance from other insurers:
Insurance
in Force Premiums
----------- --------
(in thousands)
1993 . . . . . . . . . . . . . $1,106,721 $ 2,892
1992 . . . . . . . . . . . . . 963,449 2,446
1991 . . . . . . . . . . . . . 959,170 2,166
The Company has a receivable at December 31, 1993 of approximately $35.5
million from one reinsurer; however, the funds supporting the receivable are
escrowed in a separate trust account for the benefit of UC Life by the
reinsurer. The following table reflects the effect of reinsurance agreements
on premiums and the amounts earned for the periods indicated.
Year Ended December 31,
--------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
Direct premiums . . . . . . . . . . . $43,234 $36,375 $50,889
Reinsurance assumed . . . . . . . . . 2,892 2,446 2,166
Reinsurance ceded . . . . . . . . . . (3,007) (5,026) (10,860)
-------- -------- --------
Net insurance premiums . . . . . . $43,119 $33,795 $42,195
======== ======== ========
1.2(b) Title Insurance. Premiums from sales of title insurance policies
are recognized upon receipt. Policy acquisition costs are expensed when
incurred. Reserves for losses on title insurance policies are computed based
on Company experience as a percentage of premiums collected. The Company
generally reinsures risks in excess of $250,000 and is contingently liable for
reinsurance ceded. During 1993, the Company increased its retention level to
$350,000.
1.3 Loan Accounting. The Company originates loans for its own portfolio
and for sale and/or securitization in the secondary market.
1.3(a) Nonrefundable Loan Fees. Loan origination fees and incremental
direct costs associated with loan originations are deferred and recognized over
the life 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
mortgage-backed securities to third parties.
1.3(b) Allowance for Loan Losses. 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
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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.
1.3(c) Property Acquired in Satisfaction of Debt. The Company records
properties received in settlement of loans ("foreclosed property") 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 determined
by property appraisals performed either by UC Lending personnel or independent
appraisers. The related adjustments are included in the Company's provision
for loan losses.
1.3(d) Loan Sales. The Company sells substantially all loans which it
originates and generally retains the servicing rights on loans sold. At the
time of sale, the Company recognizes a gain on loans sold in an amount equal to
the present value of the difference between the interest spread retained by the
Company and a normal servicing fee and other expenses over the estimated life
of the loan. 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) and, where applicable, the trustee fee and surety bond
fee. Generally, this interest spread retained by the Company differs
significantly from a normal servicing fee and is reflected on the Company's
balance sheet as a receivable, capitalized excess servicing income.
Capitalized excess servicing income is calculated using prepayment, default and
interest rate assumptions that the Company believes market participants would
use for similar financial instruments at the time of the sale but is not
reduced for estimated credit losses under recourse provisions of the sale.
Such estimated credit losses are shown separately as a liability on the
Company's balance sheet as allowance for loss on loans serviced. The Company
has developed its assumptions based on experience with its own loan portfolio
and available market data. The Company uses prepayment assumptions based on
the prepayment experience of its owned and serviced loan portfolio for fixed
rate loans. Prepayment rates for adjustable rate mortgages sold were derived
from available market data. The weighted average discount rates used by the
Company to determine the present value of expected cash flows from excess
servicing arising from loan sale transactions occurring in 1993, 1992 and 1991
were 10.0%, 9.1% and 10.1%, respectively . Gains from partial sales of loans
are adjusted based on fair value on the date that the loan was acquired or, if
not practicable, the date of the sale. The Company believes that the
capitalized excess servicing income recognized at the time of sale does not
exceed the amount that would have been received if it were sold in the
marketplace.
In calculating loan sale gains, the Company considers current economic and
market conditions at the date of sale. In subsequent periods, the Company
reviews as of each balance sheet date its prepayment assumptions in relation to
current rate of prepayment and, if necessary, revises its estimates using the
original discount rate. Any losses arising from adverse prepayment experience
are recognized immediately. Favorable experience is recognized prospectively.
1.3(e) Other. Loans are placed on a nonaccrual status when the interest
accrual period reaches 180 days.
1.4 Loan Servicing. The Company generally retains the right to service
loans it originates and subsequently sells or securitizes in the secondary
market.
1.4(a) Servicing Revenue. Fees for servicing loans and mortgage-backed
securities relating to loans originated by the Company and sold with servicing
rights retained are generally based on a stipulated percentage of the
outstanding principal balance of such loans and are recognized when earned.
Interest received on loans sold, less amounts paid to investors, is reported as
loan servicing income. Capitalized excess servicing income is amortized
systematically to reduce loan servicing income to an amount representing normal
servicing income and the present value discount. Late charges and other
ancillary income are recognized when collected. Costs to service mortgage
loans are charged to income as incurred.
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1.4(b) Allowance for Loss on Loans Serviced. The Company's loan sale
agreements generally provide limited recourse against the Company for credit
losses on loans sold. The Company estimates the amount of future losses under
such provisions and provides a reserve for such loss in determining the amount
of gain recorded on the loan sale. On certain loan sale transactions, the
Company has funded a portion of such recourse through the pledge of
certificates of deposit or U.S. Treasury Bills. In addition, in connection
with the securitization and sale of home equity pass-through certificates
subsequent to 1991, the interest retained by the Company was subordinated to a
limited extent to the sold certificates and will be used to fund a reserve
account, thereby providing a credit enhancement to the holders of the
certificates.
1.5 Temporary Investments - Reserve Accounts. The Company, in connection
with its loan sale transactions, has made initial cash deposits and has
subordinated certain cash flows (excess servicing income) payable to the
Company to the payment of scheduled principal and interest to investors. To
the extent amounts on deposit exceed specified levels required by the
subordination requirements, distributions are made to the Company, and, at the
termination of the transaction, any remaining amounts on deposit will be
distributed to the Company.
1.6 Bonds. The Company's investment purchases are made with the intention
of holding the security to maturity; therefore, these securities are generally
carried at cost, adjusted for discount accretion and premium amortization. The
Company provides for estimated default risk by establishing a reserve for bond
losses through a charge to earnings. When a decline in market value of an
investment is considered to be other than temporary, the Company provides a
specific reserve on the investment, through a charge to earnings.
1.7 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.
1.8 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 deferring policy acquisition costs, providing for bond and loan losses,
differences in the methods of computing reserves, loan income, loan sale gains
and depreciation.
1.9 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 December 31, 1993,
cash equivalents totaled $47.4 million bearing interest rates ranging from
2.75% to 2.88% per annum.
1.10 Repurchase Agreement. At December 31, 1993, UC Life had a $30 million
liability incurred pursuant to securities sold under an agreement to repurchase
(the "repurchase agreement"). The carrying value of the securities sold under
this agreement in December, 1993 was $30.0 million and the market value was
$31.2 million. The repurchase agreement bears interest at 7% and matures in
February, 1994.
1.11 Accounting Standards. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 106 in
December of 1990. Under SFAS 106, postretirement benefits are viewed as
deferred compensation agreements whereby an employer agrees to provide future
benefits in exchange for employees' current services. Prior to implementation
of SFAS 106, the Company accounted for such benefits at the time of payment.
The Company implemented the provisions of SFAS 106 in the first quarter of 1993
and elected to amortize its prior liability for these benefits under the
transition method. Application of the new rules did not have a material effect
on the Company's financial condition or the results of operations.
During the first quarter of 1993, the Company also implemented the
provisions of SFAS 113 which revised the method of reporting reinsurance
contracts by a ceding enterprise. Prior to implementation of SFAS 113, the
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Company reported reinsurance receivables net of the related reserve
liabilities. As the result of application of the provisions of SFAS 113, these
assets and liabilities are required to be reported gross. The Company also
implemented SFAS 109, "Accounting for Income Taxes," in the first quarter of
1993 (see Note 6). For comparative purposes, the Company has elected to
restate prior year financial statements. Implementation of the provisions of
SFAS 113 and 109 had no effect on previously reported net income for the years
ended December 31, 1992 and 1991.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 115 ("SFAS 115"), a pronouncement revising the method of accounting for
certain investments in debt and equity securities which mandates certain
standards under which securities are classified as "held-to-maturity" and
carried at cost, adjusted for premium amortization and discount accretion.
Securities not meeting these standards would be considered "trading securities"
or "available for sale" and carried at market value. The Company generally
carries its bonds at cost, adjusted for discount accretion and premium
amortization, and recognizes gains and losses on such investments at the date
of disposition. The Company provides for estimated default risk by
establishing a reserve for bond losses through a charge to earnings. When a
decline in market value of an investment is considered to be other than
temporary, the Company provides a specific reserve on the investment through a
charge to earnings, The provisions of SFAS 115 will require the Company to
change the method used to account for certain of its bonds which may affect the
timing of recognition of gains or losses for these securities. SFAS 115 is
effective for fiscal years beginning after December 15, 1993. The Company is
currently analyzing the investment portfolio to determine the appropriate
security classifications under SFAS 115 and will implement its provisions in
the first quarter of 1994. At December 31, 1993, the net unrealized gain on
the Company's bonds was $31.5 million.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114 ("SFAS 114") which addresses the accounting by creditors for impairment
of loans and specifies how allowances for credit losses related to certain
loans should be determined. SFAS 114 also addresses the accounting by
creditors for all loans that are restructured in a troubled debt restructuring
involving modification of terms of a receivable. SFAS 114 is effective for
financial statements for fiscal years beginning after December 15, 1994. The
Company is reviewing the provisions of this pronouncement but has not yet
determined the effect of its implementation on the Company's financial
condition or results of operations.
1.12 Earnings Per Share. The weighted average number of shares outstanding
used in computing net income per share were as follows:
Year Ended December 31,
-------------------------------
1993 1992 1991
-------- ------- -------
(in thousands)
Primary . . . . . . . . . . . . . . 10,096 9,017 8,985
Fully Diluted . . . . . . . . . . . 10,776 9,017 8,985
All number of shares outstanding and per share amounts have been adjusted to
reflect a 15% common stock dividend distributed on September 15, 1991, and a
100% common stock dividend distributed on October 18, 1993.
1.13 Reclassifications. Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications had no
effect on net income.
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2. LOANS
2.1 Loans Owned. The following schedule sets forth the components of
Loans owned by the Company at December 31, 1993 and 1992 and maximum terms in
months of such loans at origination.
December 31,
---------------------- Maximum
1993 1992 Terms
---------- ---------- -------
(in thousands)
Home equity . . . . . . . . . . . . . . . . . $ 320,122 $ 276,637 360
Commercial . . . . . . . . . . . . . . . . . 190,771 211,549 240
Conventional . . . . . . . . . . . . . . . . 1,745 7,699 360
Foreclosed properties . . . . . . . . . . . . 38,062 34,314
Nonrefundable loan fees . . . . . . . . . . . (8,278) (6,999)
Consumer and other . . . . . . . . . . . . . 211 405
---------- ----------
Total . . . . . . . . . . . . . . . . . . $ 542,633 $ 523,605
========== ==========
Included in owned loans at December 31, 1993 and 1992 were nonaccrual
loans totaling $30.9 million and $33.6 million, respectively.
Contractual maturities of the above loans owned by the Company at
December 31, 1993 were as follows:
After
Total 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- --------
(in thousands)
Home equity . . . . . . $320,122 $ 19,065 $ 19,480 $ 19,746 $ 19,715 $242,116
Commercial . . . . . . 190,771 26,815 22,039 37,888 25,090 78,939
Conventional . . . . . 1,745 143 138 146 143 1,175
-------- -------- -------- -------- -------- --------
Total . . . . . . . $512,638 $ 46,023 $ 41,657 $ 57,780 $ 44,948 $322,230
======== ======== ======== ======== ======== ========
Contractual maturities are not necessarily indicative of estimated
collections of the Company's loan portfolio, as many loans are sold, prepaid or
refinanced prior to contractual maturity. Loan originations were approximately
$545 million and $321 million during 1993 and 1992, respectively. Principal
payments received during 1993 and 1992 as the result of loan sales, prepayments
and refinancings were $571 million and $445 million, respectively.
2.2 Loans Serviced. The following table sets forth the loans serviced by
the Company for third parties at December 31, 1993 and 1992, by type of loan.
The right to service these loans was retained upon their sale in the secondary
market. These loans had been originated by the Company.
December 31,
-------------------------
1993 1992
---------- ----------
(in thousands)
Home equity . . . . . . . . . . . . $ 806,805 $ 545,427
Commercial . . . . . . . . . . . . . 162,300 200,708
Conventional . . . . . . . . . . . . 96,444 140,730
Consumer . . . . . . . . . . . . . . - 23
---------- ----------
Total . . . . . . . . . . . . . $1,065,549 $ 886,888
========== ==========
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2.3 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 in an Allowance for Loss on Loans Serviced for loans serviced for others.
A summary analysis of the changes in the Company's allowance for loan
losses is as follows:
Year Ended December 31,
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(in thousands)
Balance at beginning of year . . . . . . . . . $ 15,842 $ 15,962 $ 10,472
Loans charged to allowance
Home equity . . . . . . . . . . . . . (9,114) (5,511) (3,487)
Commercial . . . . . . . . . . . . . . (3,579) (4,805) (2,753)
Conventional . . . . . . . . . . . . . (128) (4) (6)
Consumer . . . . . . . . . . . . . . . (14) (154) (321)
---------- ---------- ----------
Total . . . . . . . . . . . . . . . (12,835) (10,474) (6,567)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . . 631 1,085 948
---------- ---------- ----------
Net loans charged off . . . . . . . . . . . . (12,204) (9,389) (5,619)
Loan loss provision . . . . . . . . . . . . . 17,343 10,027 9,850
Reserve reclassification . . . . . . . . . . 36 (758) 1,259
---------- ---------- ----------
Balance at end of year . . . . . . . . . . . $ 21,017 $ 15,842 $ 15,962
========== ========== ==========
Specific reserves . . . . . . . . . . . . . . $ 8,500 $ 7,067 $ 7,268
Unallocated reserves . . . . . . . . . . . . 12,517 8,775 8,694
---------- ---------- ----------
Total reserves . . . . . . . . . . . . $ 21,017 $ 15,842 $ 15,962
========== ========== ==========
At December 31, 1993 and 1992, the Company owned $38.0 million and
$34.4 million, respectively, of property acquired in settlement of loans,
excluding the specific reserves attributed to these properties, which is
included in the Company's allowance for loan losses to reduce the carrying
value of these properties to their market value.
A summary of the amounts provided by the Company for future credit
losses on loans and foreclosed properties owned by the Company and loans sold
with recourse is as follows:
Year Ended December 31,
---------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
Allowance for loan losses
(applicable to loans and
foreclosed properties owned
by the Company) . . . . . . . . . . . . . $ 21,017 $ 15,842 $ 15,962
Allowance for loss on loans serviced
(applicable to loans sold with recourse). 12,938 7,015 3,737
-------- -------- --------
Total . . . . . . . . . . . . . . . . $ 33,955 $ 22,857 $ 19,699
======== ======== ========
As of December 31, 1993, approximately $777 million of the home equity
loans sold are serviced by UC Lending under agreements which provide limited
recourse for credit losses ("loans sold with recourse"). As of
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December 31, 1993, the Company's maximum contingent liability associated with
sales of home equity loans according to terms of the loan sale agreements
totaled approximately $121 million; however, the Company's estimate of its
losses, based on historical loan loss experience, was $12.9 million at December
31, 1993 and $7.0 million at December 31, 1992. In addition, in connection
with the securitization and sale of approximately $230 million in commercial
loans during 1990, the Company acquired a subordinated interest in the loans
totaling approximately $32.5 million.
2.4 Concentration of Credit Risk. The Company's serviced portfolio
is geographically diversified. Although the Company originates mortgage loans
in 23 states, at December 31, 1993, a substantial portion of loans serviced
were originated in Florida (18%), Louisiana (12%) and Ohio (9%), respectively,
and no other state accounted for more than 8.5% of the serviced portfolio.
Included in the serviced portfolio are commercial loans originated by the
Company, a substantial portion of which were originated in Florida (28%) and
Georgia (15%) and no other state accounted for more than 7% of the commercial
loans serviced. The risk inherent in such concentrations is dependent not only
upon regional and general economic stability which affects property values, but
also the financial well-being and creditworthiness of the borrower.
3. BONDS
The Company's portfolio of bonds consisted of the following:
Unrealized Unrealized
Cost Gains Losses Market
----------- -------- -------- ----------
(in thousands)
December 31, 1993
Corporate . . . . . . . . . . $ 248,133 $ 17,218 $ 379 $ 264,972
U.S. Treasury . . . . . . . . 14,480 826 11 15,295
Mortgage-backed . . . . . . . 597,744 14,464 2,481 609,727
Other . . . . . . . . . . . . 45,642 1,878 - 47,520
----------- -------- -------- ----------
Total . . . . . . . . . $ 905,999 $ 34,386 $ 2,871 $ 937,514
=========== ======== ======== ==========
December 31, 1992
Corporate . . . . . . . . . . $ 269,235 $ 7,393 $ 3,071 $ 273,557
U.S. Treasury . . . . . . . . 18,006 570 65 18,511
Mortgage-backed . . . . . . . 427,623 5,655 2,501 430,777
Other . . . . . . . . . . . . 47,296 1,027 - 48,323
----------- -------- -------- ----------
Total . . . . . . . . . $ 762,160 $ 14,645 $ 5,637 $ 771,168
=========== ======== ======== ==========
The cost and estimated market value of bonds at December 31, 1993, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because certain issues may have the right to call or
prepay obligations with or without call or prepayment penalties.
Cost Market Value
---------- ------------
(in thousands)
1 year or less . . . . . . . . . . . . . . . . . . . . $ 4,770 $ 4,952
Over 1 year through 5 years . . . . . . . . . . . . . 78,884 83,656
Over 5 years through 10 years . . . . . . . . . . . . 207,282 220,522
After 10 years . . . . . . . . . . . . . . . . . . . . 17,319 18,657
Mortgage-backed securities . . . . . . . . . . . . . . 597,744 609,727
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 905,999 $ 937,514
========== ==========
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Proceeds from the sales of investments in debt securities during 1993
totaled $23 million and resulted in realized investment gains of $1.5 million
and realized investment losses of $1.8 million. In addition to losses incurred
in connection with the sale of investments during 1993, the Company reduced the
carrying value of a corporate bond by $.5 million to reflect the Company's
estimate of a permanent decline in the value of this investment. At December
31, 1993, securities with a cost of $10.8 million were on deposit with
insurance regulatory authorities.
4. EMPLOYEE BENEFIT PLANS
4.1 Employee Stock Ownership Plan. All employees who meet minimum age and
service requirements participate in the Company's Employee Stock Ownership Plan
("ESOP"). Under the ESOP, the Company makes tax deductible contributions of
its common stock (or cash which is used to purchase its common stock or to
repay debt used by the ESOP to purchase such stock) to a trust for the benefit
of participating employees. 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.
Contributions to the Company's ESOP are determined on an annual basis.
The Company's contributions to the ESOP were $906,000, $709,000 and $1,404,000
for the years ended December 31, 1993, 1992 and 1991, respectively. Shares
held by the ESOP at December 31, 1993, 1992 and 1991 were approximately
2,125,000, 2,182,000 and 2,152,000, respectively. During 1991 and 1990, the
ESOP borrowed $.6 million and $2.0 million, respectively, from the Company.
These loans bear interest at 8.5% and 9.5% per annum, respectively, and will be
paid in quarterly installments over a ten year period. The balance on these
loans at December 31, 1993 was $2.1 million and is reflected as a decrease in
the Company's stockholders' equity.
Incentive Stock Option Plans. The following is a summary of options
granted, exercised or canceled during 1991, 1992 and 1993.
Option Price
Shares Per Share
--------- --------------------
January 1, 1991 . . . . . . . . . . 818,686 $ 6.09 to $ 8.18
Granted . . . . . . . . . . . 266,570 $ 9.08
Exercised . . . . . . . . . . (106,870) $ 6.09 to $ 9.08
Canceled . . . . . . . . . . (25,964)
---------
December 31, 1991 . . . . . . . . . 952,422 $ 6.09 to $ 9.08
Granted . . . . . . . . . . . 3,450 $10.00
Exercised . . . . . . . . . . (53,938) $ 6.09 to $ 8.18
Canceled . . . . . . . . . . (51,376)
---------
December 31, 1992 . . . . . . . . . 850,558 $ 6.09 to $10.00
Granted . . . . . . . . . . . 409,758 $ 9.06 to $14.13
Exercised . . . . . . . . . . (368,988) $ 6.09 to $ 9.08
Canceled . . . . . . . . . . (44,362)
---------
December 31, 1993 . . . . . . . . . 846,966 $ 6.09 to $14.13
=========
At December 31, 1993, options for 397,578 of the Company's common
stock were exercisable and 726,996 shares were available for the granting of
options.
The Board of Directors of the Company approved and adopted effective
as of July 22, 1993, two additional stock options plans. The United Companies
Financial Corporation 1993 Stock Incentive Plan (the "1993 Stock Incentive
Plan") permits grants of stock options to employees of the Company and its
subsidiaries of up to 600,000 shares of common stock of the Company. The
Compensation Committee of the Board of Directors of the Company
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was delegated authority to administer the Company's stock option plans (except
for non-employee directors). Effective as of July 22, 1993, employees of the
Company were awarded options to purchase 257,158 shares of common stock of the
Company at an exercise price of $14.125 per share. A stock option granted
pursuant to the 1993 Stock Incentive Plan is not exercisable, except in limited
circumstances, until three years elapse from the date the option is granted.
The United Companies Financial Corporation 1993 Non-Employee Director
Stock Option Plan (the "1993 Non-Employee Director Plan") provides for the
automatic grant of non-qualified stock options to purchase 4,000 shares of the
Common Stock of the Company per year to each non-employee director of the
Company upon his or her election or re-election to the Board of Directors.
Effective as of July 22, 1993, each non-employee director of the Company was
awarded an option to purchase an additional 8,000 shares of Common Stock of the
Company at an exercise price of $14.125 per share. A stock option granted
under the 1993 Non-Employee Director Plan is not exercisable, except in
limited circumstances, until three years elapse from the date the option is
granted. The Company has reserved 400,000 shares of Common Stock of the
Company for issuance under the 1993 Non-Employee Director Plan.
4.2 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 $394,000, $380,000
and $337,000 during 1993, 1992 and 1991, respectively. Employees have five
investment options, one of which is to invest in the Company's common stock.
The plan held 264,001 and 288,038 shares of the Company's common stock at
December 31, 1993 and 1992, respectively.
4.3 Deferred Compensation Plans. Postretirement benefits are provided to
eligible executive and senior officers of the Company under a deferred
compensation plan. The cost of this plan in 1993 was $277,000, which included
$67,000 in transition obligation amortization expense. The Company calculated
its postretirement benefit obligation as of December 31, 1993 using a weighted
average discount rate of 6.4%. A reconciliation of the funded status of the
deferred compensation plan as of December 31, 1993 and 1992 is as follows:
December 31, 1992 Net Change December 31, 1993
----------------- -------------- -----------------
(in thousands)
Accumulated postretirement
benefit obligation . . . . . . $ (1,338) $ (210) $ (1,548)
Plan assets . . . . . . . . . . -
--------- --------- ---------
Funded status . . . . . . . . . (1,338) (210) (1,548)
Unrecognized transition
obligation . . . . . . . . . . 1,338 (67) 1,271
--------- --------- ---------
Accrued postretirement
benefit cost . . . . . . . . . $ - $ (277) $ (277)
========= ========= =========
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5. NOTES PAYABLE
Notes payable consisted of the following:
December 31,
-------------------------
1993 1992
---------- ----------
(in thousands)
Revolving credit agreement . . . . . . . . . . . . . . . . . $ 155,000 $ 190,000
Short-term borrowings . . . . . . . . . . . . . . . . . . . 500 1,100
Mortgage loan . . . . . . . . . . . . . . . . . . . . . . . - 15,750
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . 155,500 206,850
Less current portion . . . . . . . . . . . . . . . . . . . . (500) (1,420)
---------- ----------
Long-term notes payable . . . . . . . . . . . . . . . . $ 155,000 $ 205,430
========== ==========
The revolving credit agreement is a $200 million facility providing
for revolving credit borrowing with interest at market or prime rates. This
facility was amended during 1993 to permit the Company to extend its maturity
to December 31, 1995. The facility is secured by the pledge of the common
stock of UC Lending and UC Life and a security interest in the Company's
intercompany receivable from UC Lending. This debt facility is also guaranteed
by all subsidiaries of the Company except UG Title, UC Life and FMC. The
Company is required under the agreement to maintain certain financial ratios
and meet certain net worth and indebtedness tests. At December 31, 1993, $26.0
million of retained earnings were available for cash dividends.
In addition to the above facilities, the Company has arrangements with
banks providing for short-term unsecured borrowings of up to $8.5 million, of
which $.5 million was outstanding at December 31, 1993. Borrowings under
similar arrangements at December 31, 1992 were $1.1 million. All of these
loans bear interest at market or prime rates.
The long-term notes payable outstanding as of December 31, 1993
represents borrowings under the Company's revolving credit facility which
matures on December 31, 1995.
The Company made payments for interest of $9.5 million, $13.2 million
and $18.4 million during the years ended December 31, 1993, 1992 and 1991,
respectively.
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6. INCOME TAXES
The Company implemented the provisions of SFAS 109, "Accounting for
Income Taxes," in the first quarter of 1993. Under the provisions of SFAS 109,
deferred income taxes are recognized using the liability method whereby enacted
statutory rates are applied to cumulative temporary differences based on when
and how they are expected to affect the tax return. Implementation of the
provisions of SFAS 109 did not have a material effect on previously reported
net income. Adoption of SFAS 109 resulted in a $2.8 million increase in the
Company's deferred income tax liability and a $2.8 million decrease in retained
earnings at December 31, 1989. Prior year financial statements have been
restated accordingly.
Deferred income taxes attributable to continuing operations were
provided for timing differences as follows:
Year Ended December 31,
----------------------------------------
1993 1992 1991
--------- --------- ---------
(in thousands)
Reserves for future policy benefits . . . . . . . . $ (4,049) $ (4,389) $ (3,186)
Policy acquisition costs . . . . . . . . . . . . . 2,271 977 124
Operating loss carryforward . . . . . . . . . . . . - - 7,758
Loan income . . . . . . . . . . . . . . . . . . . . (1,944) 787 (1,373)
Accelerated depreciation . . . . . . . . . . . . . 385 270 270
Loan servicing income . . . . . . . . . . . . . . . (715) (3,582) (2,244)
Bond valuation adjustments . . . . . . . . . . . . 505 506 489
Alternative minimum tax . . . . . . . . . . . . . . - 1,838 (1,685)
Other . . . . . . . . . . . . . . . . . . . . . . . 20 (309) 116
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ (3,527) $ (3,902) $ 269
========= ========= =========
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:
Year Ended December 31,
---------------------------------------
1993 1992 1991
--------- --------- ---------
(in thousands)
Federal income tax at statutory rate . . . . . . . $ 15,530 $ 7,266 $ 2,848
Differences resulting from:
Reversal of timing differences at
prior tax rates . . . . . . . . . . . . . . 15 19 (2)
State income taxes . . . . . . . . . . . . . . 89 634 214
Other . . . . . . . . . . . . . . . . . . . . (422) (54) 303
--------- --------- ---------
Reported income tax provision . . . . . . . . . . . $ 15,212 $ 7,865 $ 3,363
========= ========= =========
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On August 10, 1993, the Omnibus Budget Reconciliation Act (the "Act")
of 1993 was signed into law. The principal provision of the Act affecting the
Company increased the top corporate rate from 34% to 35% effective January 1,
1993.
The significant components of the Company's net deferred income tax
liability at December 31, 1993 and 1992 are as follows:
December 31,
--------------------------
1993 1992
----------- -----------
(in thousands)
Deferred income tax assets:
Allowance for loan losses . . . . . . . . . . . . . . $ 3,216 $ 5,360
Nonrefundable loan fees . . . . . . . . . . . . . . . 2,897 2,264
Policy reserves . . . . . . . . . . . . . . . . . . . 16,214 12,664
Investment securities . . . . . . . . . . . . . . . . 1,026 1,642
Other . . . . . . . . . . . . . . . . . . . . . . . . 649 234
----------- -----------
24,002 22,164
----------- -----------
Deferred income tax liabilities:
Loan income . . . . . . . . . . . . . . . . . . . . . (1,262) 2,359
Real estate . . . . . . . . . . . . . . . . . . . . . 3,932 3,230
Deferred policy acquisition costs . . . . . . . . . . 26,800 25,128
Other . . . . . . . . . . . . . . . . . . . . . . . . - 443
----------- -----------
29,470 31,160
----------- -----------
Net deferred income tax liability . . . . . . . . . . . . $ 5,468 $ 8,996
=========== ===========
Payments made for income taxes during the years ended December 31,
1993, 1992 and 1991 were $5.4 million, $8.8 million and $5.2 million,
respectively.
Consolidated retained earnings at December 31, 1993 include
approximately $5.2 million of "Policyholders' Surplus" on which no federal
income tax payment will be required unless it is distributed as a dividend or
exceeds the limits prescribed by tax laws applicable to life insurance
companies. A deferred income tax liability has not been recognized for this
amount. The maximum federal income tax provision possibly required based on
the current federal income tax rate would be $1.8 million.
At December 31, 1993 and 1992, the Company had a current income tax
payable, which is included in "Other liabilities," in the amount of $6.1
million and $2.0 million, respectively.
7. PROPERTY
Property is summarized as follows:
December 31,
-------------------------
1993 1992
----------- ----------
(in thousands)
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,885 $ 33,026
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . 17,873 18,350
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,758 51,376
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (21,770) (20,443)
----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,988 $ 30,933
=========== ==========
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Rental expense on operating leases, including real estate, computer
equipment and automobiles, totaled $3.3 million, $2.2 million and $2.2 million
during 1993, 1992 and 1991, respectively. Minimum annual commitments at
December 31, 1993 under noncancellable operating leases are as follows (in
thousands):
1994 . . . . . . . . . . . . . . . . . . . . . . . $ 3,212
1995 . . . . . . . . . . . . . . . . . . . . . . . 2,464
1996 . . . . . . . . . . . . . . . . . . . . . . . 1,169
1997 . . . . . . . . . . . . . . . . . . . . . . . 209
1998 . . . . . . . . . . . . . . . . . . . . . . . 19
----------
Total . . . . . . . . . . . . . . . . . . $ 7,073
==========
8. CAPITAL STOCK
On December 21, 1993, the Company sold 1,000,000 shares of its $2.00
par value common stock through a public offering, resulting in net proceeds of
$30 million after deducting underwriting discounts and expenses of the
offering. The net proceeds were used to reduce debt and for general corporate
purposes. In January, 1994, the underwriters of the common stock offering
exercised their over-allotment rights and, in connection therewith, the Company
sold an additional 150,000 shares of its common stock resulting in net proceeds
of $4.6 million.
On September 20, 1993, the Company's Board of Directors declared a
two-for-one common stock split effected in the form of a 100% stock dividend on
outstanding stock which was distributed October 18, 1993, to stockholders of
record on October 1, 1993. Accordingly, all per share amounts, numbers of
shares and related amounts for all periods presented in the accompanying
financial statements and notes thereto have been retroactively adjusted to
reflect the stock split. The par value of the additional shares of common
stock issued in connection with the stock split was credited to common stock
and charged to additional paid-in-capital.
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On June 29, 1993 the Company issued 800,000 shares of 6.5% Cumulative
Convertible Preferred Stock Series A, Issue Price of $25.00 per share (the
"preferred stock"). Each share of the preferred stock was convertible at the
option of the holder into shares of the Company's common stock, par value $2.00
per share (the "common stock") at a conversion price of $20.50 per share of
common stock (equivalent to 1.2195 shares of common stock for each share of
preferred stock converted), subject to adjustment in certain events. The terms
of the preferred stock issued allowed the Company, at its option, to redeem the
preferred stock, in whole or in part, beginning August 1, 1993, at a price of
$26.50 per share plus accrued and unpaid dividends, declining $.25 per share to
$25.00 per share on and after August 1, 1999; except that the preferred stock
was not redeemable prior to August 1, 1997 unless certain conditions were met.
On August 26, 1993, the Company, having satisfied the conditions
permitting the redemption of the preferred stock, called for redemption the
outstanding shares of its preferred stock. All of the holders of the
preferred stock exercised their right to convert their shares into common stock
of the Company resulting in the issuance by the Company of approximately
1,951,204 additional shares of its common stock (as adjusted for the 100%
common stock dividend paid October 18, 1993). A shelf registration statement
has been filed by the Company with the U.S. Securities and Exchange Commission
(the "SEC") to register the resale of the shares of common stock issued in
connection with this conversion and such registration statement was declared
effective by the SEC on December 13, 1993.
Effective as of July 1, 1993, the Company entered into an agreement to
issue a warrant to an investment banking firm, granting the right to purchase
200,000 shares of common stock of the Company at an exercise price of $8.25,
equal to the average of the high and low sale prices of the Company's common
stock on June 30, 1993. The warrant was issued in exchange for financial
advisory services to be performed over a twenty-four month period and is
exercisable from February 1, 1994 through July 1, 1995. The Company is
obligated to file a shelf registration statement with the SEC to register the
shares of the common stock issuable upon exercise of the warrant.
On May 13, 1991, the Board of Directors reinstated the Company's stock
repurchase plan under which the Company is authorized to purchase up to a total
of 10% of its outstanding common stock. The plan, initially implemented in
August, 1988, had expired in September, 1990. Under the terms of the plan, the
Company is authorized but not obligated to purchase, in open market or in
negotiated transactions, up to a total of 10% of its common stock, adjusted for
prior stock dividends. As of December 31, 1993, 511,602 shares of the
Company's common stock, or 4.0% of the issued common stock, were held by the
Company at a cost of $6.2 million, compared to 342,434 shares held at December
31, 1992 at a cost of $3.7 million.
On February 1, 1989, the Board of Directors adopted a Stockholder
Rights Plan and declared a dividend distribution of one Preferred Share
Purchase Right for each outstanding share of the Company's common stock. The
Rights will be exercisable only upon the occurrence of certain events, the
consummation of which would result in ownership by a person or group of 50% or
more of the Company's outstanding common stock.
The Company has 5,000,000 shares of authorized preferred stock of
which none is currently issued. Included in the authorized preferred stock are
200,000 shares of Series A Junior Participating preferred stock and 800,000
shares of Cumulative Convertible preferred stock.
9. REGULATORY ACCOUNTING
Accounting records of UC Life are also maintained in accordance with
practices prescribed or authorized by insurance regulatory authorities. UC
Life's capital and surplus pursuant to the regulatory accounting basis as of
December 31, 1993 and 1992 was $84.8 million and $67.6 million, respectively.
UC Life's regulatory accounting basis net gain from operations for the years
ended December 31, 1993, 1992 and 1991 was $13.0 million, $14.0 million and
$9.0 million, respectively. Net income (loss) of UC Life on a regulatory
accounting
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basis, which includes realized capital gains and losses, was $(1.7) million,
$11.0 million and $11.5 million for the years ended December 31, 1993, 1992 and
1991, respectively.
10. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 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 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 values of the Company's financial assets
and liabilities at December 31, 1993 were as follows:
Carrying
Value Fair Value
-------- -----------
(in thousands)
Financial assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 45,530 $ 45,560
Temporary investments - reserve accounts . . . . . . 27,672 27,672
Loans - net . . . . . . . . . . . . . . . . . . . . . 490,006 503,232
Capitalized excess servicing income . . . . . . . . . 113,192 113,192
Bonds . . . . . . . . . . . . . . . . . . . . . . . . 905,999 937,514
Policy loans . . . . . . . . . . . . . . . . . . . . 19,633 19,633
Other assets . . . . . . . . . . . . . . . . . . . . 30,266 28,498
Financial liabilities:
Annuity reserves . . . . . . . . . . . . . . . . . . 1,294,983 1,250,535
Notes payable . . . . . . . . . . . . . . . . . . . . 155,500 155,500
Allowance for loss on loans serviced . . . . . . . . 12,938 12,938
Other liabilities . . . . . . . . . . . . . . . . . . 7,363 7,363
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.
Temporary investments - reserve accounts. The carrying value of
temporary investments is considered to be a reasonable estimate of fair value.
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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 were valued at 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.
Capitalized excess servicing income. The value of capitalized excess
servicing, which relates to the excess interest retained on loans sold, was
estimated by discounting the future cash flows, adjusted for prepayments and
estimated losses on loans sold with recourse. The carrying value is considered
to be a reasonable estimate of fair value.
Bonds. The estimated fair value for the Company's investment portfolio
was generally determined from quoted market prices for publicly traded
securities. Certain of the securities owned by the Company may trade
infrequently or not at all; therefore, fair value for these securities was
determined by management by evaluating the relationship between quoted market
values and carrying value and assigning a liquidity factor to this segment of
the investment portfolio.
Policy loans. Policy loans are generally settled at the loan amount
plus accrued interest; therefore, the carrying value of these assets is a
reasonable estimate of their fair values.
Allowance for loss on loans serviced. In estimating the fair value of
the allowance for loss on loans serviced with recourse, Company estimated the
timing of cash flows and discounted these cash flows using a risk-free interest
rate.
Other assets and other liabilities. Other assets include primarily
accrued interest and accounts receivable. Other liabilities are comprised
primarily of accrued interest payable and current income taxes payable. In
estimating the fair value of these assets and liabilities, the Company
scheduled the timing of their estimated cash flows and discounted these cash
flows based on a market rate of interest.
Annuity reserves. The Company's annuity contracts generally do not
have a defined maturity and are considered as deposits under SFAS 97. SFAS 107
states that the fair value to be disclosed for deposit liabilities with no
defined maturities is the amount payable on demand at the reporting date.
Accordingly, the Company has estimated the fair value of its annuity reserves
as the cash surrender value of these contracts at December 31, 1993.
Notes payable. Notes payable consists primarily of amounts payable
under the Company's revolving credit facility. The revolving credit facility
provides for revolving credit borrowing at market or prime rates through
December 1995. Because of the short term nature of this facility and its
pricing structure, its carrying value is considered a reasonable estimate of
its fair value.
The fair values presented herein are based on pertinent information
available to management as of December 31, 1993. 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.
11. DISCONTINUED OPERATIONS
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As a result of this decision, the operations of
FMC have been reclassified as discontinued operations, and, accordingly, the
consolidated financial statements and the related notes of the Company have
been restated to
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segregate continuing and discontinued operations. In connection with the
decision to dispose of FMC, the Company recorded a $17.6 million after tax loss
in its financial statements as of and for the quarter ended March 31, 1993,
reflecting the operating loss of FMC for the quarter ended March 31, 1993 of
$1.5 million, net of tax benefit and the estimated loss from disposal of FMC of
$16.1 million, net of tax benefit. The Company does not believe that further
operating losses of FMC will be reflected in the Company's financial
statements. As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the institutional lenders under FMC's primary credit facility filed a petition
in the U.S. bankruptcy court. FMC, as debtor in possession in the bankruptcy
proceeding, intends to file a plan of liquidation providing for the disposal of
FMC's remaining assets and distributions to FMC's creditors. In connection
with such bankruptcy proceedings, certain payments previously received from FMC
by the Company may be determined to be preferential, thereby requiring the
refund of such payments. In addition, certain amounts now owed by FMC to its
creditors, including the Company, may be reduced. If the Company were required
to refund such amounts or is unable to collect such amounts owed to it, the
Company has estimated that the potential additional loss could range up to $2.7
million, net of income taxes. Further, the group of institutional lenders
under FMC's primary credit facility have recently questioned the Company's
computation and allocation between FMC and the Company of the income tax
benefits relating to FMC's losses. FMC recorded a tax benefit of approximately
$3.6 million equal to the refund of previously paid income taxes computed on a
separate company income tax return basis. The Company has recorded a tax
benefit of approximately $5 million from the disposal of its investment in the
preferred stock of FMC. These institutional lenders have not yet specified the
manner in which they contend the tax benefits should be computed and allocated.
Management of the Company believes that its computation and allocation of the
tax benefit is proper and that no additional amount is owed by the Company to
FMC in this regard.
FMC is in payment default under its primary credit facility and the
outstanding principal balance as of December 31, 1993 of approximately $43.7
million is due. The Company has not guaranteed any debt of FMC and believes,
based upon advice of its counsel, that it has no responsibility for the
obligations of FMC under such credit facility or (excluding potential
consequences of the bankruptcy filing or potential additional payment for tax
benefits as discussed above) for any other liabilities to FMC's lenders.
Assets and liabilities of the discontinued business at December 31,
1993 and 1992 were as follows:
December 31,
--------------------------
1993 1992
------- -------
(in thousands)
Assets:
Investor advances . . . . . . . . . . . . . . . . . $ 2,961 $ 10,708
Purchased mortgage servicing rights - net . . . . . - 88,704
Other . . . . . . . . . . . . . . . . . . . . . . . 18,746 12,483
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . $ 21,707 $ 111,895
========= =========
Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . $ 46,167 $ 78,257
Other . . . . . . . . . . . . . . . . . . . . . . . 9,071 10,551
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . $ 55,238 $ 88,808
========= =========
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Operating results of the discontinued operations were as follows:
Year Ended December 31,
-------------------------------------------
1993 1992 1991
--------- --------- ---------
(in thousands)
Revenues:
Loan servicing income . . . . . . . . . . . . . . . $ 18,907 $ 34,267 $ 39,953
Investment income . . . . . . . . . . . . . . . . . 1,072 4,568 5,902
Servicing gains (losses) . . . . . . . . . . . . . . (26,669) 2,383 -
Other . . . . . . . . . . . . . . . . . . . . . . . 475 461 1,857
---------- --------- ---------
Total revenues . . . . . . . . . . . . . . . . . $ (6,215) $ 41,679 $ 47,712
========== ========= =========
Expenses:
Amortization of purchased mortgage
servicing rights . . . . . . . . . . . . . . . . $ 13,424 $ 12,220 $ 9,723
Interest . . . . . . . . . . . . . . . . . . . . . . 5,633 8,535 8,964
Personnel . . . . . . . . . . . . . . . . . . . . . 6,467 7,458 7,550
Loan loss provision . . . . . . . . . . . . . . . . - 5,116 1,775
Other operating . . . . . . . . . . . . . . . . . . 21,320 13,236 10,382
---------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . $ 46,844 $ 46,565 $ 38,394
========== ========= =========
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12. SEGMENT INFORMATION
The following table sets forth the Company's revenues, income from
continuing operations before income taxes and assets for each of its business
segments for the years ended December 31, 1993, 1992 and 1991:
Year Ended December 31,
-------------------------------------------
1993 1992 1991
------------ ------------ ------------
Revenues (in thousands)
Mortgage Operations
UC Lending . . . . . . . . . . . $ 120,639 $ 80,662 $ 64,990
Insurance Operations
UC Life . . . . . . . . . . . . 140,179 145,526 152,784
UG Title . . . . . . . . . . . . 25,106 11,412 6,409
------------- ------------- ------------
Total . . . . . . . . . . . . 165,285 156,938 159,193
Other Operations . . . . . . . . . . 1,391 720 15,434
------------- ------------- ------------
Total business segments . . . . 287,315 238,320 239,617
Corporate . . . . . . . . . . . . . . 452 2,290 1,979
Intersegment eliminations . . . . . . (2,956) (4,120) (7,801)
------------- ------------- ------------
Total . . . . . . . . . . . . . $ 284,811 $ 236,490 $ 233,795
============= ============= ============
Income from continuing operations
before income taxes
Mortgage Operations
UC Lending . . . . . . . . . . . $ 46,295 $ 24,001 $ 4,398
Insurance Operations
UC Life . . . . . . . . . . . . 2,635 5,465 2,077
UG Title . . . . . . . . . . . . 1,311 755 560
------------- ------------- ------------
Total . . . . . . . . . . . . 3,946 6,220 2,637
Other Operations . . . . . . . . . . (275) (1,339) 13,566
------------- ------------- ------------
Total business segments . . . . 49,966 28,882 20,601
Corporate . . . . . . . . . . . . . . (5,812) (5,958) (10,315)
Intersegment eliminations . . . . . . 218 (1,554) (1,910)
------------- ------------- ------------
Total . . . . . . . . . . . . . $ 44,372 $ 21,370 $ 8,376
============= ============= ============
Assets - Year-end
Mortgage Operations
UC Lending . . . . . . . . . . . $ 182,672 $ 140,893 $ 129,182
Insurance Operations
UC Life . . . . . . . . . . . . 1,622,879 1,464,475 1,342,661
UG Title . . . . . . . . . . . . 15,084 7,928 6,840
------------- ------------- ------------
Total . . . . . . . . . . . . 1,637,963 1,472,403 1,349,501
Other Operations . . . . . . . . . . 9,131 9,733 14,458
------------- ------------- ------------
Total business segments . . . . 1,829,766 1,623,029 1,493,141
Corporate . . . . . . . . . . . . . . 317,986 297,571 268,827
Intersegment eliminations . . . . . . (330,208) (291,213) (268,262)
------------- ------------- ------------
Total . . . . . . . . . . . . . $ 1,817,544 $ 1,629,387 $ 1,493,706
============= ============= ============
Other Operations in 1991 include the operations of the whole loan asset
purchase program. Corporate loss before income taxes represents unreimbursed
expenses of the holding company.
80
82
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
Three Months Ended
----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(in thousands, except per share data)
1993
Total revenues . . . . . . . . . . . . . . . . . . . . . $ 60,933 $ 67,883 $ 72,468 $ 83,527
Income from continuing operations before income taxes . . 875 9,701 15,016 18,780
Net income (loss) . . . . . . . . . . . . . . . . . . . . (17,016) 6,377 9,827 12,387
Per share data:
Primary:
Income from continuing operations . . . . . . . . . . . $ .06 $ .71 $ .97 $ 1.02
Loss from discontinued operations . . . . . . . . . . . (1.95) - - -
---------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ (1.89) $ .71 $ .97 $ 1.02
========== ========== ========== =========
Fully diluted:
Income from continuing operations . . . . . . . . . . . $ .06 $ .71 $ .84 $ 1.02
Loss from discontinued operations . . . . . . . . . . . (1.95) - - -
---------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ (1.89) $ .71 $ .84 $ 1.02
========== ========== ========== =========
1992
Total revenues . . . . . . . . . . . . . . . . . . . . . $ 57,705 $ 61,855 $ 57,921 $ 59,009
Income from continuing operations before income taxes . . 4,085 4,980 6,639 5,666
Net income . . . . . . . . . . . . . . . . . . . . . . . 3,034 3,081 2,089 2,043
Per share data:
Primary:
Income from continuing operations . . . . . . . . . . . $ .29 $ .35 $ .43 $ .42
Income (loss) from discontinued operations . . . . . . .05 (.01) (.20) (.19)
---------- ---------- ---------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . $ .34 $ .34 $ .23 $ .23
========== ========== ========== =========
Fully diluted:
Income from continuing operations . . . . . . . . . . . $ .29 $ .35 $ .43 $ .42
Income (loss) from discontinued operations . . . . . . .05 (.01) (.20) (.19)
---------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ .34 $ .34 $ .23 $ .23
========== ========== ========== =========
Revenues and income before income taxes have been restated to reflect
results of continuing operations. For a discussion of discontinued operations,
see Note 11.
81
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
82
84
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:
Independent Auditors' Report Page 56
December 31, 1993 and 1992
Consolidated Balance Sheets Page 57
For the three years ended December 31, 1993
Consolidated Statements of Income Page 58
Consolidated Statements of Cash Flows Page 59
Consolidated Statements of Stockholders' Equity Page 60
Notes to Consolidated Financial Statements Pages 61-81
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, 1993, the registrant was primarily an operating company and all
subsidiaries are wholly owned.
Schedule I* Marketable Securities - Other Investments, December 31, 1993. Page 88
Schedule V* Supplementary Insurance Information, for the three years ended December 31, 1993. Page 89
Schedule VI* Reinsurance, for the three years ended December 31, 1993. Page 90
Schedule VIII Valuation and Qualifying Accounts, for the three years ended December 31, 1993. Page 91
Schedule IX Short-Term Borrowings, for the three years ended December 31, 1993.
Page 92
- -----------------
* Filed in compliance with Article 7 of Regulation S-X.
83
85
Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1(1) Articles of Incorporation, as amended
3.1A(2) Amendment to Articles of Incorporation effective June 18, 1993
3.2(1) By-Laws, as amended
4.2(1) Series A Junior Participating Preferred Stock Purchase Rights
10.1(1) 1986 Employee Incentive Stock Option Plan
10.2(1) Employee Stock Ownership Plan and Trust
10.3(1) Management and compensatory contracts with executive officers and
directors
10.4(1) Deferred compensation agreements
10.5(1) Management Incentive Plan
10.6(1) Employees' Savings Plan and Trust
10.7(1) Agreement for termination of employee agreement
10.8(1) Credit agreement dated October 11, 1988, as amended
10.9(1) Agreement for termination of employment agreement
10.10(1) Unfunded Salary Deferral Agreement dated April 1, 1989 with
executive officer
10.11(1) Split-Dollar Insurance Agreement dated April 1, 1989 with
executive officer
10.12(1) 1989 Stock Incentive Plan
10.13(1) 1989 Non-Employee Director Stock Option Plan
10.14(1) FMCA, Inc. Note Agreement dated as of October 1, 1990
10.15(1) 1992 Form 11K, Employees' Savings Plan and Trust
10.16(3) Stock Purchase Warrant dated as of July 1, 1993
10.17(4) 1993 Form 11K, Employees' Savings Plan and Trust
11.1(5) Statement regarding computation of per share earnings
21.1(5) List of Subsidiaries of the Company
23.1(5) Consent of Deloitte & Touche
==============================================================================================================================
(1) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-K/A-2 dated December 31, 1992.
(2) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-Q dated June 30, 1993.
84
86
(3) Incorporated herein by reference to the designated Exhibit of the
Company's Registration Statement on Form S-1 (SEC File No. 33- 70040).
(4) To be filed as Amendment #1 to Form 10-K for the year ended December 31,
1993.
(5) Filed herewith.
Exhibit No. 11.1 - Page 95
Exhibit No. 21.1 - Page 96
Exhibit No. 23.1 - Page 97
Reports on Form 8-K
None
85
87
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: February 24, 1994
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 February 24, 1994.
/s/ HARRIS J. CHUSTZ
- ------------------------------------------ Chairman of the Board
Harris J. Chustz (Principal Executive Officer)
/s/ J. TERRELL BROWN
- ------------------------------------------ Chief Executive Officer, President and
J. Terrell Brown Director (Principal Executive Officer)
/s/ DALE E. REDMAN
- ------------------------------------------ Executive Vice President, Chief Financial
Dale E. Redman Officer, and Director (Principal
Financial Officer)
/s/ JESSE O. GRIFFIN
- ------------------------------------------ Senior Vice President and Controller
Jesse O. Griffin (Principal Accounting Officer)
/s/ JAMES J. BAILEY, III
- ------------------------------------------ Director
James J. Bailey, III
/s/ ROBERT H. BARROW
- ------------------------------------------ Director
Robert H. Barrow
/s/ RICHARD A. CAMPBELL
- ------------------------------------------ Director
Richard A. Campbell
86
88
SIGNATURES
/s/ ROBERT D. KILPATRICK
- ----------------------------------------------------------- Director
Robert D. Kilpatrick
/s/ O. MILES POLLARD, JR.
- ----------------------------------------------------------- Director
O. Miles Pollard, Jr.
/s/ CHARLES S. PROSSER, M.D.
- ----------------------------------------------------------- Director
Charles S. Prosser, M.D.
/s/ WILLIAM H. WRIGHT, JR.
- ----------------------------------------------------------- Director
William H. Wright, Jr.
87
89
SCHEDULE I
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
MARKETABLE SECURITIES - OTHER INVESTMENTS
DECEMBER 31, 1993
==================================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Principal Amount Amount at
Name of Issuer and of Bonds Cost of Market Value Which Carried
Title of Each Issue (1) and Notes Each Issue at 12/31/93 in Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
BONDS
Corporate
Investment grade . . . . . . . . . . . . . $ 234,252 $ 233,300 $ 249,574 $ 233,300
Non-investment grade . . . . . . . . . . . 16,933 14,833 15,398 14,833
-------------- ------------- ------------- ---------------
Total Corporate . . . . . . . . . . . . 251,185 248,133 264,972 248,133
Mortgage-Backed
FHLMC . . . . . . . . . . . . . . . . . . 131,045 130,919 132,316 130,919
FNMA . . . . . . . . . . . . . . . . . . . 211,031 211,267 213,361 211,267
GNMA . . . . . . . . . . . . . . . . . . . 203,483 202,990 212,364 202,990
UC Life Remic . . . . . . . . . . . . . . 51,245 48,944 47,874 48,944
Other . . . . . . . . . . . . . . . . . . 3,624 3,624 3,812 3,624
-------------- ------------- ------------- ---------------
Total Mortgage-Backed . . . . . . . . . 600,428 597,744 609,727 597,744
U.S. Treasury . . . . . . . . . . . . . . . . 14,790 14,480 15,295 14,480
Other . . . . . . . . . . . . . . . . . . 45,123 45,642 47,520 45,642
-------------- ------------- ------------- ---------------
Total . . . . . . . . . . . . . . . . 59,913 60,122 62,815 60,122
TOTAL BONDS . . . . . . . . . . . . . . . . . . $ 911,526 $ 905,999 $ 937,514 $ 905,999
============== ============= ============= ===============
NOTES:
(1) Investments of any issuer in excess of 2% of total assets or 10% of
stockholders' equity are separately identified.
88
90
SCHEDULE V
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
===================================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J
Deferred Policy
Deferred Acquisition Cost
Policy Benefits Amortization and
Acquisition Future Policy Unearned Premium Net Investment Claims, Other
Costs Benefits(1) Premium Revenue(3) Income Losses, Etc. Operating Expenses(4)
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Year ended December 31, 1993. . $83,495 $1,420,323 $10,260 $43,119 $110,400 $20,619 $47,714
Year ended December 31, 1992. . $80,007 $1,273,941 $17,138 $33,795 $108,138 $22,357 $32,896
Year ended December 31, 1991. . $78,599 $1,141,289 $27,686 $42,195 $106,298 $26,852 $34,420
NOTES:
(1) Column C includes accumulated fund values on annuity and interest
sensitive products.
(2) Column E is omitted as amounts are not material and are included with
Column C.
(3) Column F excludes premiums on annuity and interest sensitive products
which are accounted for as deposits.
(4) Column I and J are combined as actuarial method employed to determine
Deferred Policy Acquisition Cost provides only the net asset change for
the period.
89
91
SCHEDULE VI
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
========================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Percentage
Ceded to Assumed of Amount
Direct Other From Other Net Assumed to
Amount Companies Companies Amount Net Amount
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
December 31, 1993
- -----------------
Life insurance in force . . . . $ 956,788 $ 215,918 $ 1,106,721 $ 1,847,591 59.9%
============ ============ ============ ============
Premiums
Life insurance . . . . . . . $ 12,260 $ 2,672 $ 2,893 $ 12,481 23.2%
Title insurance . . . . . . . 24,556 121 - 24,435 -
Accident and health
insurance . . . . . . . . 6,418 214 (1) 6,203 -
------------ ------------ ------------ ------------
Total premiums . . . $ 43,234 $ 3,007 $ 2,892 $ 43,119 6.7%
============ ============ ============ ============
December 31, 1992
- -----------------
Life insurance in force . . . . $ 1,220,191 $ 267,942 $ 963,449 $ 1,915,698 50.3%
============ ============ ============ ============
Premiums
Life insurance . . . . . . . $ 18,437 $ 4,761 $ 2,468 $ 16,144 15.3%
Title insurance . . . . . . . 10,996 61 - 10,935 -
Accident and health
insurance . . . . . . . . 6,942 204 (22) 6,716 -
------------ ------------ ------------ ------------
Total premiums . . . $ 36,375 $ 5,026 $ 2,446 $ 33,795 7.2%
============ ============ ============ ============
December 31, 1991
- -----------------
Life insurance in force . . . . $ 1,537,109 $ 340,416 $ 959,170 $ 2,155,863 44.5%
============ ============ ============ ============
Premiums
Life insurance . . . . . . . $ 36,304 $ 9,919 $ 2,225 $ 28,610 7.8%
Title insurance . . . . . . . 5,961 35 - 5,926 -
Accident and health
insurance . . . . . . . . 8,624 906 (59) 7,659 -
------------ ------------ ------------ ------------
Total premiums . . . $ 50,889 $ 10,860 $ 2,166 $ 42,195 5.1%
============ ============ ============ ============
90
92
SCHEDULE VIII
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
==================================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E(3)
ADDITIONS DEDUCTIONS(2)
Charged
Balance at to costs Charged Balance at
Beginning and to Other End
Description of Year Expenses Accounts(1) of Year
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
December 31, 1993
- -----------------
Allowance for loan losses . . . . . . . . $ 15,842 $ 17,343 $ 36 $ 12,204 $ 21,017
Allowance for bond losses . . . . . . . . - 500 - - 500
Unearned loan charges . . . . . . . . . . 3,260 - - 1,278 1,982
------------- ------------ ------------- ------------ ------------
Total . . . . . . . . . . . . . . $ 19,102 $ 17,843 $ 36 $ 13,482 $ 23,499
============= ============ ============= ============ ============
December 31, 1992
- -----------------
Allowance for loan losses . . . . . . . . $ 15,962 $ 10,027 $ (758) $ 9,389 $ 15,842
Allowance for bond losses . . . . . . . . 3,000 - - 3,000 -
Unearned loan charges . . . . . . . . . . 5,914 - 1,079 3,733 3,260
------------- ------------ ------------- ------------ ------------
Total . . . . . . . . . . . . . . $ 24,876 $ 10,027 $ 321 $ 16,122 $ 19,102
============= ============ ============= ============ ============
December 31, 1991
- -----------------
Allowance for loan losses . . . . . . . . $ 10,472 $ 9,850 $ 1,259 $ 5,619 $ 15,962
Allowance for bond losses . . . . . . . . 1,000 2,000 - - 3,000
Unearned loan charges . . . . . . . . . . 4,035 - 4,818 2,939 5,914
------------- ------------ ------------- ------------ ------------
Total . . . . . . . . . . . . . . $ 15,507 $ 11,850 $ 6,077 $ 8,558 $ 24,876
============= ============ ============= ============ ============
NOTES:
(1) Represents the approximate amount of unearned loan charges on
installment loans originated during the period.
(2) Represents loans and bonds charged off and loan charges earned during
the period.
(3) All of the above are deducted in the balance sheet from the asset to
which they apply.
91
93
SCHEDULE IX
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
SHORT-TERM BORROWINGS
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
==================================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Category of Balance at Weighted Average Maximum Amount Average Amount Weighted Average
Short-term End of Interest Outstanding Outstanding Interest Rate
Borrowings Year Rate During the Year During the Year During the Year(1)
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Year Ended
December 31,
1993 . . . . . . . . Bank $ 500 6.0% $ 4,500 $ 649 6.0%
Year Ended
December 31,
1992 . . . . . . . . Bank $ 1,100 6.0% $ 6,100 $ 1,481 6.3%
Year Ended
December 31,
1991 . . . . . . . . Bank $ 5,000 6.5% $28,440 $11,279 7.7%
NOTE:
(1) Calculated using actual rates in effect and days and amounts
outstanding as applicable.
92
94
INDEX TO EXHIBITS
Exhibit No. Description of Document
----------- -----------------------
3.1(1) Articles of Incorporation, as amended
3.1A(2) Amendment to Articles of Incorporation effective June 18, 1993
3.2(1) By-Laws, as amended
4.2(1) Series A Junior Participating Preferred Stock Purchase Rights
10.1(1) 1986 Employee Incentive Stock Option Plan
10.2(1) Employee Stock Ownership Plan and Trust
10.3(1) Management and compensatory contracts with executive officers and
directors
10.4(1) Deferred compensation agreements
10.5(1) Management Incentive Plan
10.6(1) Employees' Savings Plan and Trust
10.7(1) Agreement for termination of employee agreement
10.8(1) Credit agreement dated October 11, 1988, as amended
10.9(1) Agreement for termination of employment agreement
10.10(1) Unfunded Salary Deferral Agreement dated April 1, 1989 with
executive officer
10.11(1) Split-Dollar Insurance Agreement dated April 1, 1989 with
executive officer
10.12(1) 1989 Stock Incentive Plan
10.13(1) 1989 Non-Employee Director Stock Option Plan
10.14(1) FMCA, Inc. Note Agreement dated as of October 1, 1990
10.15(1) 1992 Form 11K, Employees' Savings Plan and Trust
10.16(3) Stock Purchase Warrant dated as of July 1, 1993
10.17(4) 1993 Form 11K, Employees' Savings Plan and Trust
11.1(5) Statement regarding computation of per share earnings
21.1(5) List of Subsidiaries of the Company
23.1(5) Consent of Deloitte & Touche
=======================================================================================
(1) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-K/A-2 dated December 31, 1992.
(2) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-Q dated June 30, 1993.
93
95
(3) Incorporated herein by reference to the designated Exhibit of the
Company's Registration Statement on Form S-1 (SEC File No. 33-70040).
(4) To be filed as Amendment #1 to Form 10-K for the year ended December 31,
1993.
(5) Filed herewith.
Exhibit No. 11.1 - Page 95
Exhibit No. 21.1 - Page 96
Exhibit No. 23.1 - Page 97
94
96
EXHIBIT 11.1
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
--------------------------------------------
1993 1992 1991
----------- ------------ -----------
(in thousands, except per share amounts)
Primary Earnings Per Share
- --------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . $ 29,160 $ 13,505 $ 5,013
Less: Income (loss) from discontinued operations (17,585) (3,259) 6,463
------------ ------------ -----------
Net income . . . . . . . . . . . . . . . . . . . 11,575 10,246 11,476
Less: Dividends on preferred stock . . . . . . . (333) - -
------------ ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . $ 11,242 $ 10,246 $ 11,476
============ ============ ===========
Weighted average number of common and
common equivalent shares:
--------------------------------------------
Average common shares outstanding . . . . . . . 9,685 9,017 8,985
Add: Dilutive effect of stock options after
application of treasury stock method . . 411 - -
------------ ------------ -----------
10,096 9,017 8,985
============ ============ ==========
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . $ 2.86 $ 1.50 $ .56
Income (loss) from discontinued operations . . . (1.75) (.36) .72
------------ ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . $ 1.11 $ 1.14 $ 1.28
============ ============ ===========
Fully Diluted Earnings Per Share
- --------------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . $ 29,160 $ 13,505 $ 5,013
Less: Income (loss) from discontinued operations (17,585) (3,259) 6,463
------------ ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . $ 11,575 $ 10,246 $ 11,476
============ ============ ===========
Weighted average number of common and
all dilutive contingent shares:
-----------------------------------------------
Average common shares outstanding . . . . . . . 9,685 9,017 8,985
Add: Dilutive effect of stock options after
application of treasury stock method . . 624 - -
Dilutive effect of preferred stock after
application of "if converted" method . . 467 - -
------------ ------------ -----------
10,776 9,017 8,985
============ ============ ===========
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . $ 2.71 $ 1.50 $ .56
Income (loss) from discontinued operations . . . (1.64) (.36) .72
------------ ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . $ 1.07 $ 1.14 $ 1.28
============ ============ ===========
95
97
EXHIBIT 21.1
UNITED COMPANIES FINANCIAL CORPORATION
LIST OF SUBSIDIARIES
DECEMBER 31, 1993
State of
Name Incorporation
- ---- -------------
UNITED COMPANIES LIFE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES LENDING CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED PLAN INSURANCE AGENCY, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES MORTGAGE OF TENNESSEE, INC. (2) . . . . . . . . . . . . . . . . . . . . . . . . . Tennessee
PELICAN MORTGAGE COMPANY, INC. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
UCFC ACCEPTANCE CORPORATION (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES REALTY AND DEVELOPMENT COMPANY, INC. . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES MANAGEMENT COMPANY, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMMUNICATIONS CORPORATION OF LOUISIANA, INC. . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED GENERAL TITLE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES INVESTOR SERVICES, INC. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
FOSTER MORTGAGE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
FMC INSURANCE PRODUCTS AGENCY, INC. (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
SOUTHERN MORTGAGE ACQUISITION, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
- --------------------
(1) Wholly-owned by United Companies Life Insurance Co.
(2) Wholly-owned by United Companies Lending Corporation.
(3) Wholly-owned by Foster Mortgage Corporation.
96
98
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our opinion dated February 18,
1994 appearing in this Annual Report on Form 10-K of United Companies Financial
Corporation for the year ended December 31, 1993 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, and
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.
Baton Rouge, Louisiana
February 28, 1994
97