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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, 1995
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
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(Title of Class)
6 3/4% PRIDES(sm), Convertible Preferred Stock, Par Value $2.00
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(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. [ ]
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 March 11, 1996, was
$589,182,237.
The number of shares of $2.00 par value common stock issued and
outstanding as of March 11, 1996 was 28,146,480 excluding 1,159,682 treasury
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Management's proxy statement in connection with the Annual Meeting of
Shareholders to be held May 30, 1996 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,
purchase, sale and servicing of first mortgage, non-conventional, home equity
loans. Home equity loan production in 1995, 1994, and 1993 was $1.5 billion,
$909 million and $540 million, respectively. The Company sells substantially
all of its home equity loan production through loan securitizations pursuant to
which mortgage-backed securities are issued and publicly sold under a Company
sponsored shelf registration statement. The operating income before income
taxes of the Company's mortgage operations increased from $46.3 million in 1993
to $81.2 million in 1994 and to $107.7 million in 1995. The Company's insurance
operations sell primarily deferred annuities marketed in 47 states, the
District of Columbia and Puerto Rico. On February 2, 1996, the Company signed
an agreement to sell all of the outstanding capital stock of its life insurance
subsidiary. The proposed sale is subject to the approval of the Company's
shareholders and regulatory authorities and the satisfaction of other
conditions. See "Life Insurance - Recent Developments". For additional
information regarding the Company's operations by business segment, see Note 14
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 1,900 employees.
MORTGAGE
Overview. The Company's mortgage operations consist of the origination,
purchase, sale and servicing of primarily first mortgage, non-conventional,
home equity loans which are typically not loans for the purchase of homes.
These loans, which are fixed and variable rate mortgage 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.
Distribution network. At December 31, 1995, the Company's mortgage
activities were primarily conducted through the following distribution
channels:
Retail. The Company's retail operations are conducted through United
Companies Lending Corporation ("UCLC") which consists of a branch network
of 150 offices in 39 states.
Wholesale. The wholesale loan distribution network consists of two
separate divisions of UCLC which offer home equity loans through distinct
distribution channels. Both of these divisions, UNICOR MORTGAGE(R)
("UNICOR") and GINGER MAE(R) ("GINGER MAE") , operate under registered
service marks. UNICOR offers home equity loan products through
correspondents and brokers in 44 states, while GINGER MAE offers these
products to financial institutions, which include banks, savings and loan
associations and credit unions, in 23 states. UNICOR began operating as a
separate subsidiary of the Company in January, 1996.
Bulk purchasing. The Company also conducts a bulk loan purchase program
through Southern Mortgage Acquisition, Inc. ("SMA"), which from time to
time purchases pools of home equity loans from other lenders.
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Manufactured housing finance. During the fourth quarter of 1995 the
Company expanded its lending operations to include additional
manufactured housing loan products. The manufactured housing lending is
conducted through a wholly owned subsidiary, United Companies Funding,
Inc., based in Minneapolis, Minnesota, with servicing provided by UCLC.
Products and Production. The Company's principal products are home equity
loans with a fixed amount and term to maturity, which are secured by a first
lien mortgage on the borrower's residence. Typically the proceeds of the loan
will be used by the borrower to refinance an existing first mortgage in order
to finance home improvements or for debt consolidation. These types of loans
are commonly referred to as "B" and "C" grade loans. These loans are distinct
from home equity revolving lines of credit, not offered by the Company, which
are generally secured by a second mortgage and typically carry a floating
interest rate. The Company offers fixed rate and adjustable rate ("ARM") home
equity loan products.
The following table reflects home equity loan production by distribution
network by product type:
1995 1994 1993
---------------------- -------------------- ---------------------
Average Average Average
Loan Loan Loan
Amount Size Amount Size Amount Size
------------ --------- ---------- --------- ---------- ----------
(in thousands)
Retail
Fixed...............$ 740,707 37 $ 679,466 38 $ 460,164 36
ARM................. 198,369 78 11,560 90 23,037 83
Wholesale
UNICOR
Fixed............... 337,802 50 146,832 48 40,736 53
ARM................. 85,208 104 45,248 97 15,931 103
GINGER MAE
Fixed............... 44,497 59 9,864 55 - -
ARM................. 6,351 115 201 101 - -
Bulk Purchase
Fixed............... 7,709 50 1,739 38 - -
ARM................. 120,894 156 13,911 58 - -
------------ ---------- ----------
Total Production...........$ 1,541,537 $ 908,821 $ 539,868
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As of December 31, 1995, approximately 96.5% in aggregate principal
amount of the home equity loans owned and/or serviced by the Company were
secured by a first mortgage with the remaining 3.5% in aggregate principal
amount secured by second or multi-property mortgages. During 1995,
approximately $1,486 million first mortgage home equity loans were originated
and $56 million in second and multi-property mortgage loans. On most home
equity loans for home improvements, the loan proceeds are disbursed to an
escrow agent which, according to guidelines established by the Company,
releases such proceeds upon completion of the improvements or in draws as the
work on the improvements progresses. The weighted average interest rate on home
equity loans produced during 1995 was 11.6%, compared to 11.7% during 1994.
Costs incurred by the borrower for loan origination, including origination
points 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 weighted average effective life
using the historical constant prepayment rate for the Company's home equity
loans has been approximately three and one-half years. Prior to July, 1991, the
Company actively originated commercial real estate loans for sale to United
Companies Life Insurance Company ("UCLIC") with servicing rights retained by
the lending operations of the Company. From July 1991 to early 1995, the
Company limited commercial real estate originations due to a change in UCLIC's
investment demand and lack of a secondary market for this product. However, in
1995,
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originations of commercial real estate loans on behalf of UCLIC resumed with
$21.3 million of such loans being originated. The servicing of the commercial
loans owned by UCLIC and pass-through certificates owned by third parties and
UCLIC, which are backed by commercial real estate loans originated by UCLC,
will be transferred from UCLC to UCLIC under the terms of the proposed sale of
UCLIC. At December 31, 1995, the principal balance of such loans and
pass-through certificates was approximately $251 million. See "Life Insurance -
Recent Developments" below.
The Company's principal 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 available through most commercial banks and many other lending
institutions. Loans to such borrowers may present a greater credit risk and
therefore produce higher loan origination fees and interest rates as compared
to loans to customers of banks and thrifts. The Company believes that its
customers generally place a higher priority on the amount of the monthly
payment and prompt credit approval than on the interest rate and origination
fees associated with the loan. Management of the Company believes that any
greater credit risk arising out of making loans to these borrowers is
compensated by higher fees and interest rates. There are generally numerous
competitors for these borrowers in each of the Company's geographic markets.
Principal competitors include recognized national and regional lenders. The
Company believes that prompt underwriting and response to loan applications
provides a competitive advantage in loan originations.
Underwriting. Regardless of the manner of origination, all home
equity loans are underwritten (or, in the case of bulk purchases are
re-underwritten) prior to approval and funding utilizing substantially similar
underwriting guidelines. The underwriting function is centralized at the home
office. Underwriting guidelines are modified from time to time. The following
is a description of the current underwriting guidelines, which are not
materially different from prior guidelines.
The underwriting process is intended to assess primarily the
prospective borrower's ability and willingness to repay the loan and
secondarily the adequacy of the real property security as collateral for the
loan granted. A credit package is submitted to the home office which includes a
current appraisal from an independent appraiser on the Company's approved list,
a property inspection, a credit report and a verification of employment. On a
case-by-case basis, after review and approval by 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.
The Company originates fixed-rate home equity loans which generally
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 fixed-rate loan amounts generally do not
exceed $500,000 unless a higher amount is specifically approved by the home
office. The Company also originates a fixed rate loan product with an original
term to maturity of 180 months and an amortization schedule of 360 months
("Balloon Loans"). Balloon loans must be secured by first liens on single
family, owner occupied residential properties. Fixed-rate home equity loans
secured by second mortgages generally do not exceed $150,000. 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 $500,000
unless a higher amount is specifically approved by home office.
The homes used for collateral to secure the home equity loans may be
owner occupied, non-owner occupied rental properties or a combination of owner
occupied rental properties, which in any case are one-to-four family residences
(which may be a detached or semi-detached row house, townhouse, a condominium
unit or a unit in a planned unit development). In addition, fixed rate home
equity 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 generally permitted only for fixed-rate home equity loans and generally are
limited to one-to-four family owner occupied property. Such a loan secured by a
second
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mortgage typically will not be made if the first mortgage is a balloon or
an individual or owner financed mortgage.
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. The originator
selects the appraiser and orders the appraisal. The Company requires that the
appraisal provide an adequately supported estimate of the value of the property
proposed as security for the requested home equity loan and a complete, accurate
description of the property. In some cases, the appraisal is subject to
completion of improvements which are to be made with the proceeds of the
proposed home equity loan. The property is analyzed, 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 fixed-rate and adjustable rate home equity loans originated
through the wholesale loan programs, the maximum loan-to-value is 90%, with the
maximum for rural properties generally being 80%. For home equity loans
originated through the branch network, an Underwriting Loan-to-Value Ratio, as
described below, is utilized. The total amount of a home equity loan, net of the
origination fees, credit life insurance premium, if any, prepaid tax and
insurance escrow, real estate tax service fee, loan application fee and prepaid
interest, is defined as the "Cash Out." The "Underwriting Loan-to-Value Ratio"
for underwriting purposes is the Cash Out divided by the appraised value or
purchase price of the property, whichever is less. The Cash Out with respect to
fixed-rate and adjustable-rate loans originated through the branch network is
limited to 90% of the lesser of the applicable appraised value or purchase price
of the property.
Generally, the maximum Underwriting Loan-to-Value Ratio is 80% for a
loan with a second mortgage on the property. With respect to rural properties,
the maximum Underwriting Loan-to-Value Ratio (utilizing only up to ten acres
and the improvements thereon) is 80%. The maximum Underwriting Loan-to-Value
Ratio generally applicable to non-owner occupied homes is 75% and is generally
80% 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. 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 ratio calculation is based upon the principal and
interest payment amount utilizing the maximum rate on the second change date.
Generally, the borrowers are required to have two years of employment with
their current employer or two years of like experience. Applicants who are
salaried employees must provide current employment information in addition
to recent employment history. This information is verified for salaried
borrowers based on written confirmation from employers, or a combination of
a telephone confirmation from the employer and the most recent pay stub and
the most recent W-2 tax form. A self-employed applicant is generally required
to provide copies of complete federal income tax returns filed for the most
recent two years. Reverification of the foregoing information is generally not
undertaken for home equity loans purchased through the bulk purchase program of
the Company.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's credit history is required. The
credit report should reflect all delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. Verification is required to be obtained of the first mortgage balance,
if any, its status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current. A borrower's
mortgage payment history should generally reflect no more than three payments
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over 30 days delinquent in the last twelve months; however, in some cases, a
borrower is permitted to have no more than five payments over 30 days
delinquent in the last twelve months and one payment over 60 days delinquent in
the last twelve months. Credit analysis is subjective and subject to
interpretation in the underwriting process.
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.
The Company generally requires title insurance coverage on each home
equity loan it originates. The Company and its assignees are generally named as
the insured on the title insurance policies and the addressee of the title
opinion.
The borrower is required to obtain property insurance in an amount
sufficient to cover, in the case of a first mortgage, the new loan and in the
case of a fixed-rate second mortgage, the new loan and any prior mortgage. If
the sum of an outstanding first mortgage, if any, and the fixed-rate home
equity loan exceeds the lesser of replacement or insurable value, insurance
equal to the lesser of replacement or insurable value may be accepted. The
Company requires that its name and address are properly added to the "mortgagee
clause" of the insurance policy. In the event the policy does not provide for
written notice of policy changes or cancellation, an endorsement adding such
provision is required. The borrower is required to obtain flood insurance to
the extent such insurance is available under the Flood Disaster Protection Act
of 1973, as amended.
After a loan is underwritten, approved and funded, the mortgage loan
packages are reviewed by home office loan review personnel. A random sample of
the mortgage loan packages are subsequently subjected to a quality control
audit.
Loan sales and securitizations. Substantially all of the loans
originated or purchased by the Company are sold. Since 1985, the Company has
sold loans originated by it in the secondary market, initially in transactions
with government-sponsored mortgage agencies or conduits, later in private
placement transactions with financial institutions and, since the second
quarter of 1993, through a shelf registration statement filed with the
Securities and Exchange Commission by a subsidiary of the Company.
Approximately $2.9 billion of mortgage-backed pass-through certificates backed
primarily by first mortgage home equity loans originated directly or through
correspondents or mortgage brokers, or purchased and re-underwritten have been
registered under the registration statement and publicly sold since 1993. The
Company intends to continue to effect securitization transactions on a
quarterly basis, but the amount and timing of sales of securities under the
shelf registration statement will depend upon market and other conditions
affecting the operations of the Company.
The following table reflects certain information regarding home equity
loan production, sales and securitizations during the indicated periods:
1995 1994 1993
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Home equity loan production........................ $ 1,541,537 $ 908,821 $ 539,868
Home equity loan sales............................. $ 1,471,868 $ 977,653 $ 462,873
Average coupon on loans sold....................... 11.67% 11.80% 12.00%
Interest spread retained on loans sold............. 4.98% 4.49% 6.06%
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The weighted average interest spread on loans sold (the difference
between the stated rate on the loan and the rate paid to purchasers, less
certain recurring fees) is determined without regard to expected credit losses.
Servicing rights are retained on substantially all loans sold.
The Company's securitization transactions are credit enhanced and the
certificates issued pursuant thereto have received ratings of "Aaa" from
Moody's Investors Service, Inc. and "AAA" (or "AAAr" in the case of variable
rate certificates) from Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. Credit enhancement is achieved in part through a guaranty
provided by a third party insurer and 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, the third party insurer is obligated to pay any
further losses experienced by the owners of the pass-through certificates. The
Company has, from time to time, used the Financial Guaranty Insurance Company
("FGIC") and MBIA Insurance Corporation ("MBIA") as third party insurers. In
connection with the issuance of approximately $2.9 billion in pass-through
certificates discussed above, the Subordinated Amounts aggregate approximately
$426 million.
Each pooling and servicing agreement that governs the distribution of
cash flows from the pooled loans requires the establishment of an account (the
"Reserve Account") that may require 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 related Subordinated Amount. To the extent that
losses are incurred on the loans underlying the pass-through certificates
issued in a securitization transaction, such losses are paid out of the related
Reserve Account to the extent that funds are available.
The Company derives a significant portion of its income by realizing
gains upon the sale of loans due to the excess servicing income of such loans.
Excess servicing income represents the excess of the interest rate payable by a
borrower on a loan over the interest rate passed through to the investor
acquiring an interest in such loan, less the Company's normal servicing fee and
other applicable recurring fees. When loans are sold, the Company recognizes as
current income the present value of the excess servicing income expected to be
realized over the anticipated average life of the loans sold less future
estimated credit losses relating to the loans sold. At December 31, 1995, the
Company's balance sheet reflected capitalized excess servicing income of
approximately $283 million and an allowance for loss on loans serviced of
approximately $45 million. The capitalized excess servicing income is computed
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar instruments at the time of
sale. The weighted average discount rate used to determine the present value of
the balance of capitalized excess servicing income on home equity loans
reflected on the Company's balance sheet at December 31, 1995, was
approximately 10%. The Company is not aware of an active market for this kind
of receivable. No assurance can be given that this receivable could in fact be
sold at its stated value on the balance sheet.
Capitalized excess servicing income is amortized over the lesser of
the estimated or actual remaining life of the underlying loans as an offset
against the excess servicing income component of servicing income actually
received in connection with such loans. Although management of the Company
believes that it has made reasonable estimates of the excess servicing income
likely to be realized, it should be recognized that the rate of prepayment and
the amount of defaults utilized by the Company are estimates and actual
experience may vary from these estimates. The Company periodically reviews its
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. Rapid increases in interest
rates or competitive pressures may result in a reduction of excess servicing
income, thereby reducing the gains recognized by the Company upon the sale of
loans in the future.
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The gain recognized by the Company upon the sale of loans will have
been overstated if the excess servicing income actually received by the Company
is less than originally assumed. An acceleration of future prepayments and/or
delinquencies could result in capitalized excess servicing income amortization
expense exceeding realized excess servicing income, thereby adversely affecting
the Company's servicing income.
The ability of the Company to sell loans and/or mortgage-backed
securities in the secondary market, or an alternative source of funding loan
production, is essential for continuation of the Company's loan origination
operations. A prolonged, substantial reduction in the size of the secondary
market for home equity loans may adversely affect the Company's ability to sell
its loan originations and/or mortgage-backed securities in the secondary market
with consequent adverse impact on the Company's profitability and future
originations. Moreover, market and other considerations could affect the timing
of the Company's securitization transactions and delays in such sales could
reduce the amount of gains recognized from the sale of loans in a given
quarter.
Loan Servicing. The Company retains the servicing on substantially all
loans it originates, including approximately 69,700 home equity loans with an
aggregate principal balance of $2.7 billion owned and/or serviced at December
31, 1995, up 60% from the prior year-end. The following services are performed
for investors to whom the Company has sold loans and for which it has retained
servicing: investor reporting; collecting and remitting periodic principal and
interest payments to investors and performing other administrative services,
including maintaining required escrow accounts for payment of real estate taxes
and standard hazard insurance; determining the adequacy of standard hazard
insurance; advising investors of delinquent loans; conducting foreclosure
proceedings, and inspecting and reporting on the physical condition of the
mortgaged properties securing the mortgage loans; and disposing of foreclosed
properties. The Company is generally obligated to advance interest on
delinquent loans to the secondary market investors at the applicable
pass-through rate until satisfaction of the note, liquidation of the 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 until such losses aggregate the limit
specified in the related loan sale agreement. In connection with its servicing
activities, the Company sends to borrowers payment coupon books that specify
the fixed payment amount and due date in the case of fixed-rate home equity
loans and the adjusted payment amount and due date in the case of
adjustable-rate home equity loans and the late payment amount, if any. Due
dates for payments generally occur on the first day of the calendar month. With
respect to adjustable-rate home equity loans, the Company provides written
notices to borrowers of upcoming rate adjustments along with new payment coupon
books reflecting the adjusted payment amounts.
The Company, as master servicer, is required under each loan sale
agreement to service the mortgage loans either directly or through
sub-servicers. Substantially all servicing activities are centralized at the
home office.
Under the terms of the pending sale of UCLIC, servicing of commercial
real estate loans owned by UCLIC and pass-through certificates owned by third
parties and UCLIC which are backed by commercial real estate loans originated
by UCLC will be transferred from UCLC to UCLIC at the closing of the sale.
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The contractual balance of loans owned and/or serviced by UCLC,
substantially all of which it originated, were as follows for the dates
indicated:
December 31,
---------------------------------------------
1995 1994 1993
----------- ----------- ------------
(in thousands)
Owned and serviced:
Home equity............................................. $ 2,701,481 $ 1,683,698 $ 1,125,139
Commercial.............................................. 251,241 274,413 345,365
Conventional............................................ 58,554 74,294 98,277
Manufactured housing.................................... 888 - -
------------ ------------ ------------
Total .................................................... $ 3,012,164 $ 2,032,405 $ 1,568,781
============ ============ ============
Total serviced for
third party investors.................................. $ 2,602,944 $ 1,679,875 $ 1,065,549
============ ============ ============
Owned by the Company:
Home equity............................................. $ 236,987 $ 203,651 $ 318,334
Commercial.............................................. 169,990 147,722 183,065
Conventional............................................ 1,355 1,157 1,833
Manufactured housing.................................... 888 - -
------------ ------------ ------------
Total .................................................... $ 409,220 $ 352,530 $ 503,232
============ ============ ============
At December 31, 1995, the Company's home equity portfolio of
properties acquired in foreclosure or for which deeds in lieu of foreclosure
have been accepted and held by the Company pending disposition represented
approximately $8.5 million (excluding the allowance for loan losses
attributable to these properties). This amount may include the first mortgage
balance, delinquent first mortgage payments and certain advances made on the
property.
When the Company believes that borrowers with existing loans with the
Company are likely to refinance such loans due to interest rate changes, equity
build-up or other reasons, the Company actively attempts to retain such
borrowers through solicitations of such borrowers to refinance with the
Company. Such refinancings generate fee income and servicing income for the
Company.
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Delinquency and Loss Experience. The following two tables set forth
information relating to delinquency, loan loss and foreclosure experience for
the home equity loan portfolio serviced by the Company (including loans owned
by the Company) as of the dates and for the periods indicated:
December 31,
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1995 1994 1993
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(dollars in thousands)
Number of home equity loans ..................... 69,723 52,289 41,854
Dollar amount of home equity loans..............$ 2,701,481 $ 1,683,698 $ 1,125,139
Delinquency period (1)
30-59 days ...................................... 2.93% 2.40% 2.32%
60-89 days ...................................... 0.91% 0.91% 1.02%
90 days and over ................................ 4.31% 4.36% 4.92%
Foreclosed properties (2)
Owned by the Company ............................ 0.31% 0.52% 1.51%
Serviced for third parties ...................... 0.80% 0.70% 0.74%
Net write-offs - for the year ended ............. 0.56% 0.84% 0.88%
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(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.
Year Ended December 31,
--------------------------------------------------
1995 1994 1993
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(in thousands)
Average dollar amount of home equity loans
outstanding during period..............$ 2,192,590 $ 1,404,419 $ 972,294
Net losses
Gross Losses (1).......................$ 13,818 $ 12,745 $ 9,114
Recoveries (2).........................$ (1,597) $ (1,051) $ (566)
------------- -------------- -------------
Net Losses (3).........................$ 12,221 $ 11,694 $ 8,548
============ ============= =============
- ----------------------------
(1) "Gross Losses" are amounts which have been determined to be
uncollectible relating to home equity loans for each respective period.
(2) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(3) "Net Losses" means "Gross Losses" minus "Recoveries".
Loans are placed on a nonaccrual status when they are past due 150
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 a substantial portion of the portfolio. In addition, the Company
can neither quantify the impact of
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property value declines, if any, on the home equity loans nor predict whether,
to what extent or how long, such declines may exist. In a period of such
declines, the rates of delinquencies, foreclosures and losses on the home
equity loans could be higher than those theretofore experienced in the mortgage
lending industry in general. Adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the home equity loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses. As a
result, the information in the above tables should not be considered as 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.
LIFE INSURANCE
Overview. United Companies Life Insurance Company ("UCLIC"), the
Company's wholly-owned 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 UCLIC are
deferred annuities marketed on a commission basis principally through financial
institutions and independent general agents and are generally sold to middle
income customers seeking tax deferred insurance products, primarily to provide
savings for retirement. During the fourth quarter of 1995, UCLIC added variable
annuities to its product line.
At December 31, 1995, the invested assets of UCLIC consisted of $1.1
billion in investment grade fixed maturity securities (at amortized cost), $169
million of residential first mortgage loans and $170 million of commercial
mortgage loans. At December 31, 1995, the weighted average rating of its
publicly traded bond portfolio was "AA", the assets allocated to investments in
mortgage-backed securities were $778 million and the amount of non-investment
grade bonds in the portfolio was $22 million or 1.9% of the portfolio. During
1995, the net interest spread on the Company's annuity business was 2.37%
compared to 2.73% during 1994.
Reserves for annuity policies constitute the Company's primary
liabilities. At December 31, 1995 total annuity reserves were $1.4 billion. The
duration of these liabilities is affected 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. Since insurance commissions incurred at the
origination of annuity policies are generally deferred and recognized over the
estimated life of the policies, any unexpected increase in surrenders of
annuity contracts would require more rapid recognition of these expenses,
thereby adversely impacting profitability.
Recent Developments. On February 2, 1996, the Company signed a stock
purchase agreement dated as of January 30, 1996, for the sale of all of the
outstanding capital stock of UCLIC to UC Life Holding Corp., a new Delaware
corporation formed by Knightsbridge Capital Fund I, L.P. for an aggregate
amount of $164 million plus earnings of UCLIC from January 1, 1996, to closing
of the transaction. Knightsbridge, which is a private investment partnership
with institutional partners, was formed in 1995 to make equity investments in
companies engaged primarily in the life insurance industry.
Under the terms of the agreement, the sales price is comprised of
cash, currently estimated to be $109 million and UCLIC real estate and other
assets to be distributed to the Company prior to the closing. The real estate
to be distributed includes portions of the United Plaza office park, including
the Company's home office. In addition, the Company will purchase a convertible
promissory note from an affiliate of the purchaser for $15 million in cash. The
note matures in 11 years and bears interest at 8% per annum payable at
maturity.
The purchaser also agreed that UCLIC would continue to be an investor
in first lien home equity loans originated by the Company's lending operations
and that UCLIC's home office operations would be maintained in its present
location in Baton Rouge, Louisiana following the closing for at least two
years. The agreement is subject to approval by UCFC's shareholders and
regulatory authorities and the satisfaction of other conditions, and provides
that the closing will occur on or before July 31, 1996.
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Principal Products. The principal products marketed by UCLIC since
1978 have been deferred annuity contracts. A single premium, currently
averaging approximately $21,000, 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 UCLIC 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 accumulated premium plus the amount of interest credited on the policy,
less a surrender charge if applicable. The initial surrender charge typically
ranges from 9-10% of the initial premium and decreases to zero during a penalty
period of from five to ten years. Approximately 78% of UCLIC annuity policies
at December 31, 1995 were subject to a surrender penalty.
UCLIC produced $136 million and $250 million in sales of annuity
products during the years ended December 31, 1995 and 1994, respectively. The
Company believes that the decrease in annuity sales in 1995 is due in part to
the interest rate environment, particularly the relative relationship between
short term and intermediate term interest rates, and to the focus of the
Company's resources on development of the variable annuity product. In
addition, a financial institution which produced approximately 10% of UCLIC's
annuity sales in 1994 discontinued the sale of annuities for UCLIC in 1995
subsequent to the merger of such financial institution.
The interest earned on the annuity contract accumulates on a
tax-deferred basis until withdrawal by the policyholder. The deferred annuity
contracts written by UCLIC generally provide a death benefit equal to the
amount of the accumulated premium plus accumulated interest earned less the
amount of any prior withdrawals.
The following table presents UCLIC's annuity sales by state by percent
of total premiums for the periods indicated.
Year Ended December 31,
-----------------------
State 1995 1994
----- -------- --------
Florida............................... 21.8% 28.9%
Missouri.............................. 20.9 10.3
Louisiana............................. 9.8 13.7
Illinois.............................. 9.8 8.6
Texas................................. 7.3 5.8
All others............................ 30.4 32.7
----- -----
Total.............................. 100.0% 100.0%
===== =====
No other state individually accounted for more than 7% of premium
income during 1995 or 1994.
Distribution. UCLIC's strategy of marketing through financial
institutions and independent general 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
general agents usually offer the products of several insurance companies, UCLIC
must continue to provide products with competitive terms, interest crediting
rates, commissions and service to both policyholders and the selling
institutions and independent general agents. During 1995, UCLIC continued to
focus on expanding the independent general agent share of its distribution
network. Of the annuity contracts sold during 1995, approximately 55% of the
total dollar amount were attributable to sales by independent general agents
compared to 46% in 1994.
Reinsurance. UCLIC 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. UCLIC, 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 ("First
Capital") (not affiliated with First Capital Holding Company of California),
Aetna Life Insurance Company ("Aetna") Continental Assurance Company
("Continental"), American United Life
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Insurance Company ("American United") and Transamerica Occidental Life Insurance
Company ("Transamerica"). American United and Transamerica are rated "A+"
(Superior) by Best at December 31, 1995. Aetna and Continental are rated "A"
(Excellent), and First Capital is rated "B" (Adequate). In the case of First
Capital, the dollar amount of reserve credit taken by UCLIC is held in trust for
the benefit of UCLIC.
Life Insurance and Annuity Reserves. In accordance with applicable
insurance regulations, UCLIC 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. UCLIC 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, 1995, annuity reserves were $1.4 billion, policy
benefit reserves were $111.2 million, and unearned premium reserves related to
credit insurance were $1.8 million. These reserves are based upon UCLIC'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.
Investments. The investment function of UCLIC is overseen by an
investment committee comprised of senior management, with the assistance of
outside investment advisors in the management of certain assets. UCLIC's
investment policy seeks to achieve attractive returns on a 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 UCLIC as
necessary for meeting its objectives.
The investment strategy continues to focus on maintaining the
percentage of UCLIC's invested assets committed to commercial and residential
mortgages and to investment grade corporate bonds and mortgage-backed
securities.
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The following table sets forth, at December 31, 1995, certain
information regarding UCLIC's invested assets:
Amortized Percent of
Cost Total
------------- -----------
(dollars in thousands)
Fixed Maturity Securities (1)
U.S. Government, government agencies & authorities.................... $ 11,504 .7%
Foreign governments and other......................................... 20,819 1.3
Corporate bonds....................................................... 345,238 21.6
Mortgage-backed....................................................... 778,410 48.8
------------- ------
Total.............................................................. 1,155,971 72.4
Mortgage loans on real estate .............................................. 345,181 21.6
Short-term investments...................................................... 22,804 1.4
Investment in limited partnerships.......................................... 25,594 1.6
Real estate - investment properties......................................... 22,845 1.4
Policy loans................................................................ 20,291 1.3
Capitalized excess servicing income......................................... 2,469 .2
Common and preferred stocks................................................. 1,012 .1
------------- ------
Total.............................................................. $ 1,596,167 100.0%
============= ======
- --------------------
(1) Generally stated at amortized cost adjusted for permanent impairment in
value. Total fair value of fixed maturities at December 31, 1995 was
approximately $1.2 billion, representing net unrealized gain of $43.5
million.
As reflected in the following table, the carrying value of UCLIC's
investments classified as investment grade at December 31, 1995 was $1.1
billion or 94% of the fixed maturity portfolio:
Percent of
Amortized Fair Carrying Total Carrying
Investment Quality (1) Cost Value Value Value
------------- ------------- ------------- ---------------
(dollars in thousands)
Aaa....................................... $ 734,721 $ 756,251 $ 756,251 62.9%
Aa........................................ 25,255 26,768 26,768 2.2
A......................................... 227,800 244,562 244,434 20.3
Baa....................................... 101,321 107,447 107,306 9.0
------------- ------------- ------------- ---------
Total Investment Grade.................... 1,089,097 1,135,028 1,134,759 94.4
Ba and below.............................. 21,980 22,093 22,093 1.9
Not rated................................. 44,894 42,369 44,894 3.7
------------- ------------- ------------- ---------
Total Fixed Maturities.................... $ 1,155,971 $ 1,199,490 $ 1,201,746 100.0%
============= ============= ============= =========
--------------------
(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 UCLIC's investment portfolio is
invested in fixed rate, fixed maturity investments, the fair value of these
investments is sensitive to changes in market rates of interest. In a rising
interest rate environment, the fair value of these investments would be
expected to decrease in value. An unanticipated increase in policy surrenders
or claims could impact UCLIC's liquidity and require the sale of certain
assets, such as bonds, prior to their maturity at a loss.
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Fixed maturity investments. As of December 31, 1995, the amortized
cost of UCLIC's fixed maturity investments totaled $1.2 billion or
approximately 72.4% of UCLIC's invested assets. The fair value of fixed
maturity investments at that date exceeded the amortized cost by approximately
$43.5 million. In accordance with the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards No. 115
("SFAS 115"), the Company classifies its securities in one of three categories:
"available-for-sale", "held-to-maturity" or "trading". Securities classified as
held-to-maturity are carried at amortized cost, whereas securities classified
as trading securities or available-for-sale are recorded at fair value. The
adjustment, net of applicable income taxes, for investments classified as
available-for-sale is recorded in "Net unrealized gain (loss) on securities"
and is included in stockholders' equity on the balance sheet and the adjustment
for investments classified as trading is recorded in "Investment income" in the
statement of income. UCLIC 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 fair value is less than carrying value,
thereby resulting in a loss in the statements of income for financial and
statutory reporting purposes.
At December 31, 1995, 48.8% of UCLIC'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. UCLIC 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 54% of UCLIC's
investments in mortgage-backed securities at December 31, 1995.
Mortgage loans on real estate. At December 31, 1995, the contractual
balance of UCLIC's portfolio of loans was comprised of $169 million in first
mortgage residential home equity loans and $170 million in first mortgage
commercial real estate loans substantially all of which were originated by the
Company's mortgage lending subsidiaries. Since 1991, UCLIC has limited its
investment in commercial real estate mortgage loans and has from time to time
refinanced commercial mortgage loans sold in commercial mortgage loan
securitization transactions in 1990. The principal balance of loans sold in
these transactions which are scheduled to mature in 1996 is $12.1 million.
During 1995, UCLIC invested approximately $21.3 million in new commercial real
estate loans originated by UCLC and refinanced $18.2 million of existing
commercial real estate mortgage loans. The mortgage loan portfolio of UCLIC is
serviced by UCLC. UCLIC has full credit recourse to UCLC with respect to
substantially all of the residential mortgage loans acquired from such
subsidiary. The servicing of the commercial loan portfolio will be transferred
from UCLC to UCLIC under the terms of the proposed sale of UCLIC by the
Company. See "Life Insurance - Recent Developments" above.
Historically, UCLIC has purchased on an interim basis substantially
all of the first mortgage home equity loans originated by the Company's
mortgage lending subsidiaries. These loans are typically held by UCLIC for
short time periods (typically no longer than 90 days) and then sold back to the
Company's mortgage lending subsidiaries prior to their sale in securitization
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 $1.9 million with an average loan
size of approximately $.6 million. At origination, substantially all of the
mortgages are on properties with existing leases rather than on properties in
construction or on start-up properties. The origination of commercial mortgages
is
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subject to underwriting procedures, including: (i) maximum loan to value ratio
of 75% of the property's appraised value; (ii) specified debt coverage
requirements; (iii) on-site inspections; (iv) third-party appraisals; and (v)
personal guarantees of borrowers. The weighted average interest rate on UCLIC's
commercial mortgage loan portfolio was 9.83% and 10.07% at December 31, 1995
and 1994, respectively.
UCLIC's commercial mortgage portfolio is diversified by property type,
location and borrower. The following table provides information at December 31,
1995 regarding UCLIC's commercial mortgage loans on real estate by property
type, state and contractual maturity.
Percent of
Amount Total
------------ --------------
(dollars in thousands)
Commercial Mortgage Loans by Property Type:
Retail............................................................... $ 74,321 43.9%
Office............................................................... 43,527 25.7
Office and Warehouse................................................. 38,888 22.9
Other................................................................ 12,775 7.5
------------ ------
Total............................................................. $ 169,511 100.0%
============ ======
Commercial Mortgage Loans by State:
Florida.............................................................. $ 37,475 22.1%
Georgia.............................................................. 32,530 19.2
Colorado............................................................. 21,428 12.6
Virginia............................................................. 13,873 8.2
Tennessee............................................................ 12,316 7.3
Texas................................................................ 9,750 5.8
All Others........................................................... 42,139 24.8
------------ ------
Total............................................................. $ 169,511 100.0%
============= ======
Commercial Mortgage Loans by Contractual Maturity:
1996................................................................. $ 26,316 15.5%
1997................................................................. 17,781 10.5
1998................................................................. 19,633 11.6
1999................................................................. 16,387 9.7
After 1999........................................................... 89,394 52.7
------------ ------
Total............................................................. $ 169,511 100.0%
============ ======
At December 31, 1995, UCLIC owned $13.6 million of commercial
properties obtained through foreclosure. For substantially all commercial
mortgages which UCLIC has foreclosed, an independent appraisal was obtained
and, if warranted, UCLIC established a specific reserve based on its judgment
as to the amount which may not be recoverable. As of December 31, 1995, the
specific reserve amounted to $3.3 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, 1995, the general reserve amounted to $5.1 million.
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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. UCLIC is
currently rated "A-" (Excellent) by Best. 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.
On October 24, 1995, Duff & Phelps Credit Rating Co. ("Duff & Phelps")
placed the 'A+' (Single-A-Plus) claims paying ability rating of UCLIC on Rating
Watch--Uncertain. This rating action is based upon the announcement by the
Company that it was evaluating strategic alternatives regarding UCLIC,
including the possible sale of UCLIC. Duff and Phelps reported that the claims
paying ability rating would remain on Rating Watch--Uncertain until more
information becomes known about UCLIC's ultimate position within the Company's
organization or another organization. During 1995, Standard & Poor's, a
division of The McGraw-Hill Companies, Inc., revised the rating scale used in
assigning its qualified solvency ratings of insurance companies and, as a
result, revised its rating assigned to UCLIC from "BBq" to "Aq". The Company
believes that UCLIC's present ratings will enable it to continue to compete
successfully. Ratings held by UCLIC are important to maintaining public
confidence in UCLIC and its ability to market its annuity products. A lower
rating could materially and adversely affect UCLIC's ability to market its
products. particularly the sale of annuities through financial institutions and
could increase the surrender of its annuity policies. Both of these
consequences could, depending upon the extent thereof, have a materially
adverse effect on the Company's liquidity and, under certain circumstances, net
income.
OTHER OPERATIONS
The Company has developed an office park that includes its home office
building, which has approximately 94,000 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 100% leased at December 31, 1995. During 1990,
construction of a 100,000 square foot office building in the office park was
completed by a partnership in which United Companies Realty and Development
Co., Inc. ("UC Realty"), a wholly-owned subsidiary of the Company, is a general
partner. The office building was 94% leased at December 31, 1995. During 1995,
UC Realty completed construction of a 60,000 square feet office building on
property also located in the office park. The Company uses approximately 30,000
square feet of this building and leases the remainder.
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.
DISCONTINUED OPERATIONS
For a discussion of Discontinued Operations see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
"Discontinued Operations" and Note 12 in the Notes to Consolidated Financial
Statements.
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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.
MORTGAGE
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.
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.
LIFE INSURANCE
General Regulation. UCLIC 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. UCLIC 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.
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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.
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 Commissioners ("NAIC").
UCLIC's last examination occurred during 1994 for the three year period ended
December 31, 1993. Final reports issued by the Louisiana Commissioner of
Insurance did not raise any significant issues or adjustments.
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 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 UCLIC. There can be no assurance that
future tax legislation will not contain provisions that may result in adverse
effects on UCLIC's products.
COMPETITION
As a marketer of credit and annuity products, the Company faces
intense competition. Traditional competitors in the financial services business
include other mortgage banking companies, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Competitors in
the annuity business include an increasing number of insurance companies which
have begun to offer annuity products. Many of these competitors in the
financial services and annuity business are substantially larger and have more
capital and other resources than the Company. Competition can take many forms
including convenience in obtaining a loan or annuity, customer service,
marketing and distribution channels and interest or crediting rates. In
addition, the current level of gains realized by the Company and its existing
competitors on the sale of its and their non-conventional loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales as the result of increased loan origination
competition.
ITEM 2. Properties
The Company's executive offices are located in its home office
building in Baton Rouge, Louisiana. The Company occupies all of its home office
building which has approximately 94,000 square feet. UCLIC and the executive
offices of the Company's mortgage lending subsidiaries are located at the
Company's home office building and adjacent investment property. At December
31, 1995, the retail division of the Company's mortgage lending operations were
conducted in 39 states from 5 locations owned by the Company in 5 cities and
from 145 additional leased offices in 142 cities. The offices owned or leased
range in size from approximately 600 square feet to 3,200 square feet; leases
expire from 1996 to 2001, excluding renewal options. During 1995, aggregate
annual rental expense for leased office space was approximately $3.9 million.
Management believes that the properties are adequately maintained and insured,
and satisfactorily meet the requirements of the business conducted therein.
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20
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 remaining affairs of the Company's subsidiary, Foster Mortgage
Corporation ("FMC"), a discontinued operation, are now being concluded under
the supervision of a bankruptcy court. On December 21, 1993, the institutional
lenders under FMC's primary credit facility (the "FMC Institutional Lenders")
filed a petition in the U.S. bankruptcy court to cause the remaining affairs of
FMC to be concluded under the supervision of the bankruptcy court. The FMC
Institutional Lenders filed and the bankruptcy court approved a plan of
liquidation for FMC providing for the appointment of a trustee selected by the
FMC Institutional Lenders. The FMC Institutional Lenders allege that FMC has
certain claims against the Company, including a claim with respect to the
Company's alleged failure to remit all sums due FMC regarding federal income
taxes under a tax agreement among the Company and its subsidiaries, including
FMC, estimated by the FMC Institutional Lenders to range from $2.1 million to
$29 million. FMC and the Company executed, subject to the approval of the
bankruptcy court, a settlement agreement relating to payments between FMC and
the Company in connection with the federal income tax benefits resulting from
FMC's losses and to certain prior intercompany payments between FMC and the
Company. The settlement agreement included a release by FMC in favor of the
Company of any and all claims relating to federal income taxes. The FMC
Institutional Lenders opposed the proposed settlement agreement. At the
conclusion of a hearing on the proposed settlement on August 18, 1994, the
bankruptcy court approved the portion of the settlement providing for a net
payment by the Company of $1.65 million to FMC in satisfaction of the federal
income tax benefits resulting from FMC's losses and the release of any claims
regarding federal income taxes. The Company had previously recorded
substantially all of the impact of this portion of the settlement in its prior
financial statements. The bankruptcy court declined to approve the other
portion of the proposed settlement relating to payments received by the Company
from FMC within twelve months of the bankruptcy filing. If the Company were
required to refund such payments, the Company has estimated the potential
additional loss to be $1.9 million, net of tax benefits. The decision of the
bankruptcy court on the settlement was appealed by the FMC Institutional
Lenders to the U.S. District Court which affirmed the bankruptcy court's
decision. The FMC Institutional Lenders then appealed this decision to the U.S.
Fifth Circuit Court of Appeals. In a decision rendered on November 9, 1995, the
U.S. Fifth Circuit Court of Appeals reversed the district court, vacated the
settlement between FMC and the Company and remanded the matter for further
proceedings. The trustee under the plan of liquidation has filed an adversary
proceeding in the bankruptcy proceedings against the Company seeking avoidance
of alleged preferential payments totaling $3.72 million and has also instituted
a suit in federal court against the Company alleging claims under the tax
agreement estimated to range from $2 million to $29 million. Management of the
Company does not believe that any additional amounts are owed by the Company to
FMC or the trustee and intends to vigorously contest the claims which have been
brought against it for such amounts by the trustee under the plan of
liquidation. The Company did not guarantee any debt of FMC.
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
Nasdaq Stock Market") under the symbol "UCFC". The following table sets forth
for the periods indicated the high and low sale prices of the Company's Common
Stock as reported on the National Stock Market and the per share cash dividends
declared. All amounts have been adjusted for stock dividends.
SALES PRICES CASH
HIGH LOW DIVIDENDS
---- --- ---------
1995
First Quarter ........................ $ 18.250 $ 11.375 $ .05
Second Quarter ....................... 23.375 11.375 .05
Third Quarter (1)..................... 36.750 22.125 .05
Fourth Quarter........................ 37.375 25.500 .05
--------
Total.............................. $ .20
========
1994
First Quarter ........................ $ 21.821 $ 17.161 $ .0455
Second Quarter ....................... 19.093 14.320 .0455
Third Quarter ........................ 20.116 14.433 .0455
Fourth Quarter (2) ................... 15.911 11.000 .0455
--------
Total ............................. $ .1820
========
- --------------------
(1) On August 23, 1995, the Company announced a 100% Common Stock dividend
payable on October 20, 1995, to stockholders of record on October 9,
1995.
(2) On October 26, 1994, the Company announced a 10% Common Stock dividend
payable on January 10, 1995, to stockholders of record on December 22,
1994.
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.)
Approximate Number of Equity Security Holders
Approximate Number of Shareholders
Title of Class As of March 12, 1996
-------------- ----------------------------------
Common Stock, $2.00 par value 3,084
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from the
Company's audited Consolidated Financial Statements.
Year Ended December 31, (1) (3)
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ----------- ----------- ----------- ------------
(dollars in thousands, except per share data)
INCOME STATEMENT DATA:......................
Interest, charges and fees on loans $ 128,665 $ 111,994 $ 92,737 $ 89,780 $ 88,078
Loan sale gains............................. 142,156 86,735 59,441 33,475 29,627
Investment income........................... 104,062 84,666 75,527 65,548 61,828
Loan servicing income....................... 14,559 19,926 13,624 13,616 11,594
Net insurance premiums...................... 8,508 11,373 18,684 22,860 36,269
---------- ----------- ----------- ----------- -----------
Total revenues.............................. 397,950 314,694 260,013 225,279 227,396
Total expenses.............................. 283,186 230,620 216,952 204,664 219,580
---------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes...................... 114,764 84,074 43,061 20,615 7,816
Provision for income taxes.................. 41,805 29,492 14,744 7,601 3,164
---------- ----------- ----------- ----------- ------------
Income from continuing operations 72,959 54,582 28,317 13,014 4,652
Income (loss) from discontinued
operations............................... (3,491) (5,048) (16,742) (2,768) 6,824
---------- ----------- ----------- ----------- ------------
Net income ............................... $ 69,468 $ 49,534 $ 11,575 $ 10,246 $ 11,476
========== =========== =========== =========== ============
PER SHARE DATA (4):
Primary:
Income from continuing operations $ 2.39 $ 1.92 $ 1.26 $ .66 $ .24
Income (loss) from discontinued
operations............................... (.11) (.18) (.75) (.14) .34
---------- ----------- ----------- ----------- ------------
Net income ............................... $ 2.28 $ 1.74 $ .51 $ .52 $ .58
========== =========== =========== =========== ============
Fully Diluted:
Income from continuing operations $ 2.36 $ 1.92 $ 1.20 $ .66 $ .24
Income (loss) from discontinued
operations........................ (.11) (.18) (.71) (.14) .34
---------- ----------- ----------- ----------- -----------
Net income .............................. $ 2.25 $ 1.74 $ .49 $ .52 $ .58
========== =========== =========== =========== ============
Weighted average shares outstanding
Primary................................ 30,501 28,490 22,208 19,834 19,766
Fully diluted.......................... 30,903 28,490 23,706 19,834 19,766
Cash dividends.............................. $ .20 $ .1818 $ .1546 $ .1364 $ .1278
Stockholders' equity - year end (2) $ 10.52 $ 5.67 $ 5.73 $ 4.85 $ 4.47
22
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Year Ended December 31
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ----------- ----------- ----------- ------------
(dollars in thousands)
BALANCE SHEET DATA - YEAR END:
Investment securities - net (2)................ $ 1,218,353 $ 1,044,842 $ 902,091 $ 759,354 $ 376,966
Loans -net..................................... 413,574 369,382 517,720 502,229 604,942
Capitalized excess servicing income............ 283,454 179,065 113,192 72,062 53,942
Deferred policy acquisition costs.............. 90,703 91,915 83,495 80,007 78,599
Total assets................................... 2,366,886 1,978,255 1,817,153 1,627,900 1,492,816
Annuity reserves............................... 1,417,803 1,425,973 1,294,983 1,147,555 1,014,649
Notes payable.................................. 255,756 213,668 155,500 206,850 200,447
Total liabilities.............................. 1,984,935 1,823,005 1,663,785 1,531,642 1,404,382
Stockholders' equity (2)....................... 381,951 155,250 153,368 96,258 88,434
OTHER DATA:
Mortgage
Total loan production........................ $ 1,562,788 $ 913,319 $ 545,229 $ 321,198 $ 328,184
Home equity loan production.................. 1,541,537 908,821 539,868 301,234 253,613
Average home equity loan size................ 49 41 39 28 24
Home equity loans serviced -
year end................................... 2,701,481 1,683,698 1,125,139 819,448 703,922
Total loans serviced - year end.............. 3,012,164 2,032,405 1,568,781 1,367,822 1,344,388
Average coupon on home equity
loans produced............................. 11.6% 11.7% 11.8% 13.4% N/A
Loan origination fees as % of home
equity loans............................... 4.4% 5.9% 7.0% 7.9% 8.2%
Weighted average interest spread
retained on home equity loans sold......... 4.98% 4.49% 6.06% 4.56% 4.42%
Life Insurance
Annuity sales................................ $ 135,534 $ 249,737 $ 207,682 $ 187,050 $ 175,796
Net interest spread on
annuities ................................. 2.37% 2.73% 2.20% 1.84% 1.88%
Investment grade bonds as %
of invested assets......................... 68.2% 69.6% 59.6% 54.3% 25.1%
(1) On April 10, 1995, the Company decided to dispose of its investment in its
wholly-owned subsidiary, United General Title Insurance Company ("UGTIC"),
and on May 1, 1995 approved a formal plan of disposal. Previously, on May
7, 1993, the Company announced its decision to dispose of the net assets
and operations of Foster Mortgage Corporation ("FMC"), a wholly-owned
subsidiary of the Company. The operations of UGTIC and FMC have been
reclassified as discontinued operations and the prior years' financial
statements of the Company included herewith have been restated
accordingly.
(2) During the first quarter of 1994, the Company implemented the provisions
of FASB Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
which revised the method of accounting for certain of the Company's
investments. Prior to adoption of SFAS 115, the Company reported its
investments in fixed income investments at amortized cost, adjusted for
declines in value considered to be other than temporary. SFAS 115 requires
the classification of securities in one of three categories:
"available-for-sale", "held-to-maturity" or "trading securities".
Securities classified as held-to-maturity are carried at amortized cost,
whereas securities
23
24
classified as trading securities or available-for-sale are recorded at
fair value. Effective with the adoption of SFAS 115, the Company
determined the appropriate classification of its investments and, if
necessary, adjusted the carrying value of such securities accordingly as
if the unrealized gains or losses had been realized. The adjustment, net
of applicable income taxes, for investments classified as
available-for-sale is recorded in "Net unrealized loss on securities" and
is included in Stockholders' equity on the balance sheet and the
adjustment for investments classified as trading is recorded in
"Investment income" in the statement of income. In accordance with the
provisions of SFAS 115, prior year investments were not restated.
(3) During the third quarter of 1995, the Company implemented, on a
prospective basis, the provisions of FASB Statement of Financial
Accounting Standards No. 122 ("SFAS 122") which revised the method of
accounting for mortgage servicing rights on loans originated by the
Company. SFAS requires that a mortgage banking enterprise recognize as
separate assets rights to service mortgage loans for others that have been
acquired through either the purchase or origination of such loans. Prior
to the adoption of SFAS 122, the Company recognized late charges and other
ancillary income when collected and charged costs to service mortgage
loans when incurred. Net income for 1995 was increased by $3.9 million or
$.13 per share on a fully diluted basis as the result of the Company's
implementation of SFAS 122. The amount capitalized is included in "Other
assets".
(4) All share and per share data have been adjusted to reflect stock dividends.
24
25
SELECTED INCOME STATEMENT DATA BY SEGMENT
Year Ended December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ----------- ----------- ----------- -----------
(in thousands)
MORTGAGE
Interest, charges and fees on loans....... $ 84,496 $ 63,905 $ 41,249 $ 31,998 $ 34,073
Investment income......................... 7,227 2,762 1,054 696 1,137
Loan sale gains........................... 142,156 86,289 59,220 29,679 15,571
Loan servicing income..................... 19,219 24,645 19,116 18,289 14,209
---------- ----------- ----------- ----------- -----------
Total revenues............................ 253,098 177,601 120,639 80,662 64,990
Total expenses............................ 145,425 96,446 74,344 56,661 60,592
---------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes.................... 107,673 81,155 46,295 24,001 4,398
---------- ----------- ----------- ----------- -----------
LIFE INSURANCE
Interest, charges and fees on loans....... 38,077 43,647 45,561 51,396 51,585
Investment income......................... 99,327 83,614 75,594 67,287 63,285
Net insurance premiums.................... 8,508 11,373 18,684 22,860 36,269
Loan sale gains........................... - - - 3,310 -
Loan servicing income..................... (1,427) (505) 340 673 1,645
---------- ----------- ---------- ----------- -----------
Total revenues............................ 144,485 138,129 140,179 145,526 152,784
Total expenses............................ 132,386 129,049 137,544 140,061 150,707
---------- ----------- ----------- ----------- -----------
Income from continuing
operations before income taxes......... 12,099 9,080 2,635 5,465 2,077
---------- ----------- ----------- ----------- -----------
CORPORATE, OTHER OPERATIONS AND
ELIMINATIONS
Income (loss) from continuing operations
before income taxes.................... (5,008) (6,161) (5,869) (8,851) 1,341
---------- ----------- ----------- ----------- -----------
CONSOLIDATED
Income from continuing operations
before income taxes.................... 114,764 84,074 43,061 20,615 7,816
Provision for income taxes................ 41,805 29,492 14,744 7,601 3,164
---------- ----------- ----------- ----------- -----------
Income from continuing operations......... 72,959 54,582 28,317 13,014 4,652
Income (loss) from discontinued
operations............................. (3,491) (5,048) (16,742) (2,768) 6,824
---------- ----------- ----------- ----------- -----------
Net income ............................... $ 69,468 $ 49,534 $ 11,575 $ 10,246 $ 11,476
========== =========== =========== =========== ============
25
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the
Company's Consolidated Financial Statements and accompanying Notes presented
elsewhere herein.
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,
---------------------------------------------
1995 1994 1993
------ ------ ------
(dollars in thousands)
Mortgage ......................................... $ 107,673 $ 81,155 $ 46,295
Life insurance.................................... 12,099 9,080 2,635
Corporate, other operations and eliminations...... (5,008) (6,161) (5,869)
------------ ------------ -----------
Total........................................... $ 114,764 $ 84,074 $ 43,061
============ ============ ===========
Home equity loan production....................... $ 1,541,537 $ 908,821 $ 539,868
Home equity loans sold............................ 1,471,868 977,653 462,873
Weighted average interest spread retained
on home equity loans sold...................... 4.98% 4.49% 6.06%
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.
The Company's mortgage operations primarily consist of the production (by
origination or purchase), sale and servicing of first mortgage,
non-conventional, home equity loans. In the fourth quarter of 1995, the Company
expanded its lending operations to include additional manufactured housing loan
products. Fundamental to the profitability and funding of the Company's
mortgage operations is the sale of loans with servicing rights retained.
The majority of the revenue of the mortgage segment is derived from gain
recognized on the sale of loans and the recognition of net loan fees at the
time of sale of the loans. Net loan fees on loans owned by the Company are
recognized over the lives of the loans.
Prior to 1991, 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, the Company has pooled and sold large numbers of
loans in mortgage-backed securitization transactions. 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 and sold publicly $1.5 billion,
$973 million and $451 million of home equity loans during 1995, 1994 and 1993,
respectively.
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 loans produced, and will influence
the funding costs of such production and the amount of gain recognized on loans
sold in the secondary market. During periods of declining interest rates the
mortgage 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.
During 1993, the positive effect on income of the mortgage operations
resulted primarily from a wider interest margin retained on loans sold than
experienced in 1994 and 1995. The weighted average interest spread on loans
sold to third parties (the difference between the stated rate on the loan and
the rate paid to purchasers, less recurring
26
27
fees) was 6.06% in 1993, declined to 4.49% in 1994 and increased to 4.98% in
1995 due to changes in the interest rate environment. The weighted average
interest spread on loans sold is determined without regard to credit losses,
which are provided for separately by the Company. The lower interest spread on
loans sold during 1994 and 1995 was somewhat offset by an increased volume of
loans produced and sold.
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. Likewise,
if delinquencies or liquidations were to occur sooner in the portfolio of loans
sold by the Company and/or with greater frequency than was initially assumed,
capitalized excess servicing income amortization would occur more quickly than
originally anticipated, which would have an adverse effect on servicing income
in the period of such adjustment. In contrast, an increase in the level of
interest rates for an extended period of time could adversely affect the
ability of the Company to originate loans, as well as the profitability of the
loan origination program, by increasing the cost of funding and reducing the
interest spread on loans retained and loans sold. If actual prepayments with
respect to loans sold occur more slowly than estimated 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.
(For further discussion of loan sale gains and capitalized excess servicing
income see Note 1.2 to Notes to the Consolidated Financial Statements.)
LIFE INSURANCE.
United Companies Life Insurance Company ("UCLIC"), the Company's
wholly-owned life insurance subsidiary, has focused its efforts on expanding
its annuity product line and its distribution network of financial institutions
and independent general agents. On February 2, 1996, the Company entered into
an agreement to sell all of the outstanding capital stock of UCLIC. The
proposed sale is subject to approval of the Company's shareholders and
regulatory authorities and the satisfaction of certain other conditions. See
Note 13 to Notes to Consolidated Financial Statements. In 1995, annuity sales
were $136 million compared to $250 million in 1994. The Company believes that
the decrease in annuity sales in 1995 is due in part to the interest rate
environment, particularly the relative relationships between short term and
intermediate term interest rates, and to the focus of UCLIC's resources on
development of its variable annuity product. In addition, a financial
institution which produced approximately 10% of UCLIC's annuity sales in 1994
discontinued the sale of annuities for UCLIC in 1995 subsequent to the merger
of such financial institution. UCLIC focused in 1994 and 1995 on expanding the
independent general agents share of its distribution network, which agents sold
approximately 55% of the total dollar amount of annuities written in 1995
compared to 46% in 1994 and 30% in 1993. As with the Company's mortgage
operation, fluctuations in and the level of interest rates also impacts the
operations of UCLIC. The average spread on the annuity business was 2.20%,
2.73% and $2.37% during 1993, 1994 and 1995, respectively. Surrenders of
annuity policies increased in 1994 and 1995 compared to 1993 due in part to the
continued reduction in interest crediting rates on new and existing annuity
contracts and to a rising interest rate environment and an increase in the
number of annuity contracts which were beyond the surrender penalty period.
At December 31, 1995, the weighted average rating of the publicly traded
bond portfolio was "AA", the amortized cost of assets allocated to investments
in investment grade fixed maturity securities was $355.6 million or 30.8% of
the portfolio and in investment grade mortgage-backed securities was $733.5
million or 63.5% of the portfolio. At December 31, 1995 the amortized cost of
UCLIC's holdings of non-investment grade bonds was $22.0 million or 1.9% of the
portfolio. UCLIC's invested assets also include residential and commercial real
estate mortgages originated and serviced by United Companies Lending
Corporation ("UCLC"); however, the percentage
27
28
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 UCLIC are monetary in nature and therefore
sensitive to changes in the interest rate environment. Profitability of UCLIC
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 UCLIC 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 fair value
of UCLIC's investments, primarily fixed maturity investments, increases;
however, yields earned on investments made during such periods decline. In
contrast, during periods of rising interest rates the fair 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.
Reserves for annuity policies constitute the Company's primary
liabilities. The duration of these liabilities is affected by a number of
factors, including interest rates, surrender penalties, ratings, public
confidence in the insurance industry generally and in UCLIC specifically,
governmental regulations and tax laws. Since insurance commissions incurred at
the origination of annuity policies are generally deferred and recognized over
the estimated life of the policies, any unexpected increase in surrenders of
annuity contracts would require more rapid recognition of these expenses,
thereby adversely impacting profitability.
DISCONTINUED OPERATIONS.
UGTIC
United General Title Insurance Company. On April 10, 1995, the Company
made a decision to dispose of its investment in United General Title Insurance
Company ("UGTIC"), a wholly owned subsidiary of the Company, and, on May 1,
1995, approved a formal plan of disposal. The decision to dispose of UGTIC was
independent of the consummation of the sale thereof pursuant to the definitive
stock sale agreement signed on August 11, 1995. As a result, the operations of
UGTIC have been classified as discontinued operations, and, accordingly, the
consolidated financial statements and the related notes of the Company
segregate continuing and discontinued operations. The sale was concluded on
February 29, 1996.
The definitive stock sale agreement provided for the sale of 100% of the
stock of UGTIC and contains a provision making the Company liable to UGTIC for
claims from defalcations and fraud losses incurred by UGTIC which are unknown
and occur prior to closing and are discovered within 24 months thereafter. The
Company is also liable, up to $4.2 million, for policy claims paid over a ten
year period after closing that exceed certain specified levels. The Company
recorded a loss from discontinued operations (net of income tax benefit) of
$3.5 million in 1995 in connection with the sale of UGTIC.
UGTIC was formed in 1983 in part to compliment the Company's mortgage
operations; however, underwriting of affiliated transactions represented only
approximately 3% of UGTIC's business in 1994 and 1995. At December 31, 1995
UGTIC was licensed in 29 states, was represented by approximately 948
independent general agents and had no direct operations. Key markets for UGTIC
are Colorado, Louisiana, Florida and California. During 1995, 1994 and 1993,
title insurance premiums were $37.0 million, $44.7 million and $24.4 million,
respectively. During 1995 and 1994, UGTIC experienced a net loss of $2.0
million and $5.0 million, respectively, compared to net income of $.8 million
in 1993. Operations in 1994 suffered severely as the result of claims related
to agency defalcations. In addition to the incurred losses, the profitability
of UGTIC in 1994 was negatively impacted by a $3.8 million increase in its
reserve for policy losses.
28
29
FOSTER MORTGAGE CORPORATION
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As of November 30, 1993, the servicing rights
owned by FMC, which constituted substantially all of its assets, were sold. On
December 21, 1993, the institutional lenders under FMC's primary credit
facility (the "FMC Institutional Lenders") filed a petition in the U.S.
bankruptcy court to cause the remaining affairs of FMC to be concluded under
the supervision of the bankruptcy court. The FMC Institutional Lenders filed
and the bankruptcy court approved a plan of liquidation for FMC providing for
the appointment of a trustee selected by the FMC Institutional Lenders. The FMC
Institutional Lenders allege that FMC has certain claims against the Company,
including a claim with respect to the Company's alleged failure to remit all
sums due FMC regarding federal income taxes under a tax agreement among the
Company and its subsidiaries, including FMC, estimated by the FMC Institutional
Lenders to range from $2.1 million to $29 million. FMC and the Company
executed, subject to the approval of the bankruptcy court, a settlement
agreement relating to payments between FMC and the Company in connection with
the federal income tax benefits resulting from FMC's losses and to certain
prior intercompany payments between FMC and the Company. The settlement
agreement included a release by FMC in favor of the Company of any and all
claims relating to federal income taxes. The FMC Institutional Lenders opposed
the proposed settlement agreement. At the conclusion of a hearing on the
proposed settlement on August 18, 1994, the bankruptcy court approved the
portion of the settlement providing for a net payment by the Company of $1.65
million to FMC in satisfaction of the federal income tax benefits resulting
from FMC's losses and the release of any claims regarding federal income taxes.
The Company had previously recorded substantially all of the impact of this
portion of the settlement in its prior financial statements. The bankruptcy
court declined to approve the other portion of the proposed settlement relating
to payments received by the Company from FMC within twelve months of the
bankruptcy filing. If the Company were required to refund such payments, the
Company has estimated the potential additional loss to be $1.9 million, net of
tax benefits. The decision of the bankruptcy court on the settlement was
appealed by the FMC Institutional Lenders to the U.S. District Court which
affirmed the bankruptcy court's decision. The FMC Institutional Lenders then
appealed this decision to the U.S. Fifth Circuit Court of Appeals. In a
decision rendered on November 9, 1995, the U.S. Fifth Circuit Court of Appeals
reversed the district court, vacated the settlement between FMC and the Company
and remanded the matter for further proceedings. The trustee under the plan of
liquidation has filed an adversary proceeding in the bankruptcy proceedings
against the Company seeking avoidance of alleged preferential payments totaling
$3.72 million and has also instituted a suit in federal court against the
Company alleging claims under the tax agreement estimated to range from $2
million to $29 million. Management of the Company does not believe that any
additional amounts are owed by the Company to FMC or the trustee and intends to
vigorously contest the claims which have been brought against it for such
amounts by the trustee under the plan of liquidation. The Company did not
guarantee any debt of FMC.
1995, 1994 AND 1993 RESULTS OF OPERATION
Net income for 1995 was $69.5 million ($2.25 per share based on 30.9
million weighted average shares outstanding) compared to $49.5 million for 1994
($1.74 per share based on 28.5 million weighted average shares outstanding) and
$11.6 million for 1993 ($.49 per share based on 23.7 million weighted average
shares outstanding). The increase in net income in 1995 resulted primarily from
an increase in the amount of loans sold and the gain and fees recognized in
connection therewith. As previously discussed in "Discontinued operations", net
income for 1995, 1994 and 1993 was reduced by losses of $3.5 million, $5.0
million and $16.7 million recognized in connection with the Company's decisions
to divest United General Title Insurance Company and Foster Mortgage
Corporation.
29
30
The following table sets forth certain financial data for the periods
indicated.
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------- ---------- ----------
(in thousands)
Total revenues........................................$ 397,950 $ 314,694 $ 260,013
Total expenses........................................ 283,186 230,620 216,952
Income from continuing operations before
income taxes........................................ 114,764 84,074 43,061
Income from continuing operations .................... 72,959 54,582 28,317
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the years ended December 31, 1995,
1994 and 1993.
Year Ended December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands)
Interest, charges and fees on loans .................$ 128,665 $ 111,994 $ 92,737
Loan sale gains...................................... 142,156 86,735 59,441
Investment income.................................... 104,062 84,666 75,527
Loan servicing income................................ 14,559 19,926 13,624
Net insurance premiums............................... 8,508 11,373 18,684
---------- ---------- ----------
Total............................................$ 397,950 $ 314,694 $ 260,013
========== ========== ==========
Interest, charges and fees on loans increased $16.7 million and $19.3
million for 1995 and 1994, respectively. 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 each loan held by the Company are
recognized over the life of the loan or earlier at the time of sale of the loan
to a third party. During 1995, 1994 and 1993, the Company sold approximately
$1.5 billion, $978 million and $463 million, respectively, in home equity loans
and recognized approximately $36.0 million, $32.5 million and $18.9 million,
respectively, in net loan origination fees (which relate primarily to fixed
rate retail production) in connection with these sales.
The following table presents the composition of interest, charges and
fees on loans for the periods indicated.
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------- ---------- ----------
(in thousands)
Loan origination fees ...............................$ 68,442 $ 56,576 $ 35,987
Mortgage loan interest............................... 47,185 47,996 51,763
Other loan income ................................... 13,038 7,422 4,987
----------- ---------- ----------
Total ...........................................$ 128,665 $ 111,994 $ 92,737
=========== ========== ==========
The Company estimates that nonaccrual loans reduced mortgage loan
interest for 1995, 1994 and 1993 by approximately $13.3 million, $10.3 million
and $9.5 million, respectively. During 1995 the average amount of
30
31
nonaccrual loans owned by the Company was $21.6 million compared to $25.5
million for 1994 and $31.7 million for 1993. In addition, the average balance
of loans serviced for third parties which were on a nonaccrual basis or in
foreclosure was $83.1 million during 1995, compared to $55.6 million and $43.4
million during 1994 and 1993, respectively, representing 3.9%, 4.1% and 4.5%,
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, 1995 the Company owned
approximately $7.2 million of commercial loans which were on an accrual status,
but which the Company considers as potential problem loans, compared to $7.8
million and $8.1 million at December 31, 1994 and 1993, respectively. 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.
Loan sale gains were $142.2 million, $86.7 million and $59.4 million
in 1995, 1994 and 1993, respectively. Loan sale gains approximate the present
value for the estimated lives of the loans of the excess of the contractual
rates on the loans sold over the sum of the pass-through rate paid to the
buyer, a normal servicing fee, a trustee fee, a surety bond fee, if any, in
mortgage-backed securitization transactions, and an estimate of future credit
losses. The increase in the amount of loan sale gains was due primarily to a
$494 million and a $515 million increase in the amount of loans sold during
1995 and 1994, respectively. 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) decreased in 1994
compared to 1993 but increased in 1995 compared to 1994. Interest spread
retained by the Company on loans sold includes the normal servicing fee. During
1994, guidelines were established which defined an industry accepted "normal
servicing fee" as 50 basis points for servicing "B" and "C" quality home equity
loans, such as those originated by the Company. As the result of this industry
data, the Company, effective July 1, 1994, implemented a servicing fee rate in
its loan securitization transactions of 50 basis points. This resulted in an
increase in the amount of loan sale gain recognized on the home equity loans
sold compared to previous securitization transactions which included a
servicing fee rate of 75 basis points. In addition, as further discussed in
Note 1.11, during the third quarter of 1995, the Company implemented a new
accounting pronouncement related to mortgage servicing rights on loans
originated by the Company. The implementation of the pronouncement increased
loan sale gains by approximately $6.0 million during 1995. Loan sale gains
during 1995 were reduced by the use of higher prepayment assumptions, primarily
related to adjustable rate mortgage loans, in calculating the gain on sale of
loans compared to prior years. The impact of the change in assumptions reduced
loan sale gains by approximately $12.4 million. In addition, loan sale gains
during 1995 were reduced by approximately $5.5 million as the result of the
utilization of interest hedge mechanisms to protect the Company against an
increase in market interest rates on the pass-through certificates sold in the
second quarter of 1995 securitization transaction. The reduction in income
resulted from a decline in interest rates prior to the pricing of this
securitization transaction.
The following table presents information regarding home equity loan
sale transactions for the periods indicated.
Year Ended December 31,
-------------------------------------
1995 1994 1993
---------- --------- ---------
(dollars in thousands)
Home equity loans sold...............................$ 1,471,868 $ 977,653 $ 462,873
Average coupon on home equity loans sold............. 11.67% 11.80% 12.00%
Weighted interest spread retained on home
equity loans sold............................... 4.98% 4.49% 6.06%
Home equity loan sale gains..........................$ 142,156 $ 86,735 $ 59,220
31
32
Fluctuations in and the level of market interest rates will impact the
interest spread retained by the Company on loans sold, and, potentially, the
amount of its loan sale gains. An increase in the level of market interest
rates will generally adversely affect the interest spread on loans sold,
whereas such interest spread generally widens during a declining interest rate
environment. The effect of actions which may be taken by the Company during a
rising interest rate environment to mitigate the impact on earnings of
fluctuations in market rates, such as increasing the coupon rate charged on its
loan products, will generally lag the impact of market rate fluctuations. In
connection with loan securitization transactions, the Company has used a
prefunding feature which "locks in" the pass-through rate that the Company will
pay to the investor on a predetermined amount of loans for future delivery. The
Company is obligated for the difference between the earnings on the prefunded
amount and the pass-through interest paid to the investor during the period
from the date of the closing of the securitization transaction until the date
of delivery of the loans. In connection with the home equity loan
securitization transaction which closed in the fourth quarter of 1995,
approximately $3.7 million was held in a prefunding account for purchase of the
Company's home equity loans during the first quarter of 1996. Pursuant thereto,
home equity loans with a remaining principal balance of approximately $3.7
million were delivered on January 10, 1996.
Investment income totaled $104.1 million for 1995 compared to
investment income of $84.7 million and $75.5 million during 1994 and 1993,
respectively. Investment income during 1995 was positively affected by a $4.8
million increase in income, compared to 1994, related to the Company's
investment in a limited partnership. In addition, interest earned on temporary
investments reserve accounts totaled $7.2 million in 1995 compared to $2.7
million and $1.1 million during 1994 and 1993, respectively. Investment income
for 1995, 1994 and 1993 also includes investment gains of $.5 million, $.2
million and $.6 million, respectively. At December 31, 1995 the amortized cost
of the fixed income portfolio totaled $1.1 billion and was comprised
principally of $734 million in investment grade mortgage-backed securities and
$345 million in investment grade bonds. At December 31, 1995, the weighted
average rating of the publicly traded bond portfolio according to nationally
recognized statistical rating agencies was "AA". At December 31, 1995 the
carrying value of investments in the Company's trading account, which is
comprised of investments in common stocks, was $752,000 reflecting a $207,000
unrealized gain which is included in investment income for 1995.
Loan servicing income was $14.6 million, $19.9 million and $13.6
million for 1995, 1994 and 1993, respectively. Loan servicing income in 1995
was negatively affected by a $6.3 million increase in the amortization of
capitalized excess servicing income as the result of an adjustment in the
estimated prepayment assumptions of certain mortgage loans serviced by the
Company, primarily adjustable rate mortgage loans. This adjustment offset the
impact of an increase of approximately $800 million in the average amount of
home equity loans serviced by the Company for third parties during 1995
compared to the same period of 1994. As discussed above, the industry accepted
"normal servicing fee" was defined during the second quarter of 1994 as 50
basis points. Effective July 1, 1994, the Company reduced its estimate of
normal servicing fee and began using 50 basis points in computing loan sale
gains. The reduction in the normal servicing fee for home equity loans from 75
to 50 basis points has the impact of increasing current revenues (loan sale
gains) while reducing future revenues (loan servicing income). The following
table reflects the components of loan servicing income for the periods
indicated.
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------- ----------- -----------
(in thousands)
Servicing fees earned.........................................$ 87,278 $ 60,181 $ 35,168
Amortization of capitalized excess servicing income........... (72,719) (40,255) (21,544)
----------- ----------- -----------
Total................................................$ 14,559 $ 19,926 $ 13,624
=========== =========== ===========
Net insurance premiums were $8.5 million, $11.4 million and $18.7
million for 1995, 1994 and 1993, respectively. Net insurance premiums reflect
revenues associated primarily with credit insurance underwritten by
32
33
UCLIC. The decrease in premium income is primarily the result of the impact of
UCLIC's decision to discontinue sales of credit insurance products.
Expenses. The following table presents the components of the
Company's expenses for the periods indicated.
Year Ended December 31,
--------------------------------------------
1995 1994 1993
------------ ---------- ----------
(in thousands)
Interest on annuity policies......................... $ 79,086 $ 73,065 $ 76,086
Personnel............................................ 76,022 57,380 40,784
Interest............................................. 28,308 14,563 10,158
Loan loss provision.................................. 16,025 13,457 17,343
Insurance commissions................................ 13,630 14,264 13,920
Insurance benefits .................................. 9,930 12,654 18,200
Other operating...................................... 60,185 45,237 40,461
----------- ----------- ----------
Total............................................ $ 283,186 $ 230,620 $ 216,952
=========== =========== ==========
Interest on annuity policies increased $6.0 million during 1995
compared to 1994, primarily as the result of a $70 million increase in average
annuity reserves. The decline in interest on annuity policies of $3.0 million
in 1994 compared to 1993 resulted primarily from a reduction in the average
interest crediting rate on the Company's annuity policies. Average annuity
reserves were $1.4 billion during 1995 and 1994 and $1.2 billion during 1993.
Personnel expenses were $76.0 million, $57.4 million and $40.8 million
in 1995, 1994 and 1993, respectively. The increase in personnel costs are
primarily associated with the expansion of the Company's mortgage operations,
including start-up costs for the manufactured housing lending program, loan
production related incentives and an increase in the cost of the Company's
employee benefit and incentive plans.
Insurance commissions for 1995, 1994 and 1993 were $13.6 million,
$14.3 million and $13.9 million, respectively. Commissions paid on issuance of
the Company's deferred annuity products are generally capitalized as deferred
policy acquisition costs ("DPAC") and amortized over the estimated life of the
policy. During 1995 and 1994, the Company capitalized approximately $11.9
million and $20.7 million, respectively, in commissions paid on sales of
annuities compared to $13.7 million during 1993. Amortization of commission
expense on annuities capitalized in prior periods was $11.0 million and $9.5
million during 1995 and 1994, respectively, compared to $5.6 million during
1993.
Insurance benefits were $9.9 million, $12.7 million and $18.2 million
for 1995, 1994 and 1993, respectively. The declining trend of insurance
benefits resulted from a reduction in benefits associated with ordinary life
and credit insurance products.
The Company's loan loss provision was $16.0 million, $13.5 million and
$17.3 million for 1995, 1994 and 1993, respectively. The fluctuation in the
level of the Company's provision for loan losses is attributed in part to
increases and decreases in the amount of loans owned by the Company during the
respective periods. During 1994, the amount of loans owned by the Company
declined by approximately $151 million compared to 1993. The amount of loans
owned during 1995 increased $57 million compared to 1994.
Interest expense for 1995 increased approximately $13.7 million
compared to 1994 primarily as the result of an increase in the weighted average
interest rate charged on debt and an increase in the average amount of debt
outstanding. The $4.4 million increase in interest expense from 1993 to 1994
was likewise attributed to an increase in the weighted average interest rate
charged on debt.
33
34
Other operating expenses increased approximately $14.9 million and
$4.8 million during 1995 and 1994, respectively, primarily as the result of
costs associated with the expansion of the Company's mortgage operations.
During 1995, 1994 and 1993, advertising expense totaled $9.0 million, $3.1
million and $.8 million and occupancy and equipment expenses were $10.9
million, $8.0 million and $6.8 million, respectively. Other operating expenses
in 1993 included a $2.3 million accrual for the estimated cost of a legal
settlement and $1.4 million in estimated losses in connection with termination
of a third party administrative contract for credit insurance.
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, 1995, 1994 and 1993.
Year Ended December 31, 1995
-----------------------------------------------------------------
Corporate,
Life Other Operations
Mortgage Insurance & Eliminations Total
-------- --------- ---------------- -----
(in thousands)
Revenues
Interest, charges and fees on loans........... $ 84,496 $ 38,077 $ 6,092 $ 128,665
Loan sale gains............................... 142,156 - - 142,156
Investment income............................. 7,227 99,327 (2,492) 104,062
Net insurance premiums........................ - 8,508 - 8,508
Loan servicing income......................... 19,219 (1,427) (3,233) 14,559
------------- -------------- ----------- ---------------
Total...................................... 253,098 144,485 367 397,950
------------- -------------- ----------- ---------------
Expenses:
Interest on annuity policies.................. - 79,086 - 79,086
Personnel..................................... 62,677 5,260 8,085 76,022
Insurance commissions......................... - 13,427 203 13,630
Insurance benefits............................ - 9,930 - 9,930
Loan loss provision........................... 11,974 4,051 - 16,025
Interest...................................... 20,566 3,417 4,325 28,308
Other operating............................... 50,208 17,215 (7,238) 60,185
------------- -------------- ----------- ---------------
Total...................................... 145,425 132,386 5,375 283,186
------------- -------------- ----------- ---------------
Income (loss) from continuing operations
before income taxes........................... $ 107,673 $ 12,099 $ (5,008) $ 114,764
============= ============= ============ ==============
34
35
Year Ended December 31, 1994
----------------------------------------------------------
Corporate,
Life Other Operations
Mortgage Insurance & Eliminations Total
-------- ---------- ----------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans...... $ 63,905 $ 43,647 $ 4,442 $ 111,994
Loan sale gains.......................... 86,289 - 446 86,735
Investment income........................ 2,762 83,614 (1,710) 84,666
Net insurance premiums................... - 11,373 - 11,373
Loan servicing income.................... 24,645 (505) (4,214) 19,926
---------- ---------- --------- ---------
Total................................. 177,601 138,129 (1,036) 314,694
---------- ---------- --------- ---------
Expenses:
Interest on annuity policies............. - 73,065 - 73,065
Personnel................................ 46,356 4,959 6,065 57,380
Insurance commissions.................... - 13,710 554 14,264
Insurance benefits....................... - 12,654 - 12,654
Loan loss provision...................... 8,398 5,059 - 13,457
Interest................................. 6,496 1,979 6,088 14,563
Other operating.......................... 35,196 17,623 (7,582) 45,237
---------- ---------- --------- ---------
Total................................. 96,446 129,049 5,125 230,620
---------- ---------- --------- ---------
Income (loss) from continuing operations
before income taxes................... $ 81,155 $ 9,080 $ (6,161) $ 84,074
========== ========== ========= =========
Year Ended December 31, 1993
-------------------------------------------------------
Corporate,
Life Other Operations
Mortgage Insurance & Eliminations Total
-------- ---------- ----------------- -----
(in thousands)
Revenues:
Interest, charges and fees on loans.... $ 41,250 $ 45,561 $ 5,926 $ 92,737
Investment income .................. 1,054 75,594 (1,121) 75,527
Loan sale gains .................. 59,220 - 221 59,441
Net insurance premiums................. - 18,684 - 18,684
Loan servicing income.................. 19,115 340 (5,831) 13,624
---------- ---------- --------- ---------
Total .................. 120,639 140,179 (805) 260,013
---------- ---------- --------- ---------
Expenses:
Interest on annuity policies........... - 76,086 - 76,086
Personnel.............................. 31,987 3,878 4,919 40,784
Insurance commissions.................. - 13,185 735 13,920
Insurance benefits..................... - 18,200 - 18,200
Loan loss provision.................... 12,349 4,994 - 17,343
Interest............................... 4,315 628 5,215 10,158
Other operating........................ 25,693 20,573 (5,805) 40,461
---------- ---------- --------- ---------
Total............................... 74,344 137,544 5,064 216,952
---------- ---------- --------- ---------
Income (loss) from continuing operations
before income taxes................... $ 46,295 $ 2,635 $ (5,869) $ 43,061
========== ========== ========= =========
35
36
ASSET QUALITY AND RESERVES
The quality of the Company's loan and bond portfolios and of the loan
portfolio serviced for third parties significantly affects the profitability of
the Company. The values of and markets for these assets are dependent on a
number of factors, including general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors, which become more
pronounced in periods of economic decline, may affect the quality of these
assets and the Company's resulting ability to sell these assets for acceptable
prices. General economic deterioration can result in increased delinquencies on
existing loans, reductions in collateral values and declines in the value of
investments resulting from a reduced capacity of issuers to repay the bonds.
Loans. Substantially all of the loans owned by the Company were
produced through the Company's branch (i.e., retail) network or wholesale loan
programs. In connection with its origination of home equity loans, the Company
relies on specified underwriting and credit review procedures, a mortgage on
the borrower's residence and, in some cases, other security, and, in its retail
origination program, contact with borrowers through its branch office system to
manage credit risk on its loans. In addition to servicing the loans owned by
the Company, the mortgage division serviced approximately $2.6 billion in loans
for third parties at December 31, 1995, $2.5 billion of which are home equity
loans. Substantially all of the home equity loans serviced for third parties
were publicly sold as mortgage backed securities ("pass-through certificates").
The purchasers of the pass-through certificates receive a credit enhanced
security which is achieved in part through a guaranty provided by a third party
insurer and by subordinating the excess interest spread retained by the Company
to the payment of scheduled principal and interest on the certificates. The
Company has, from time to time, used the Financial Guaranty Insurance Company
("FGIC") and MBIA Insurance Corporation ('MBIA") as third party insurers. The
subordination of the excess interest spread retained by the Company relates to
credit losses which may occur after the sale of the loans and continues until
the earlier of the payment in full of the loans or termination of the agreement
pursuant to which the loans were sold. If cumulative payment defaults exceed
the amount subordinated, the third party insurer is obligated to pay any
further losses experienced by the owners of the pass-through certificates.
The Company is also obligated to cure, repurchase or replace loans
which may be determined after the sale to violate representations and
warranties relating to them and which are made by the Company at the time of
the sale. The Company regularly evaluates the quality of the loan portfolio and
estimates its risk of loss based upon historical loss experience, prevailing
economic conditions, estimated collateral value and such other factors which,
in management's judgment, are relevant in estimating the credit risk in owned
and/or serviced loans. Estimated losses on the owned portfolio are provided for
by an increase in the allowance for loan losses through a charge to current
operating income. At December 31, 1995, the Company's allowance for loan losses
was $14.9 million. For loans sold, the Company reduces the amount of gain
recognized on the sale by the estimated amount of credit losses, and records
such amount on its balance sheet in the allowance for loss on loans serviced.
At December 31, 1995, the allowance for loss on loans serviced was $45.0
million. The maximum recourse associated with sales of home equity loans
according to terms of the loan sale agreements totaled approximately $475
million, of which amount approximately $466 million relates to the subordinated
cash and excess interest spread. Should credit losses on loans sold materially
exceed the Company's estimates for such losses, such consequence will have a
material adverse impact on the Company's financial statements.
At December 31, 1995, the contractual balance of loans serviced was
approximately $3.0 billion comprised of approximately $409 million serviced for
the Company and approximately $2.6 billion serviced for investors. The
portfolio is geographically diversified. Although the Company services loans in
48 states, at December 31, 1995 a substantial portion of the loans serviced
were originated in Florida (10.5%), Ohio (10.0%) and Louisiana (8.8%),
respectively, and no other state accounted for more than 7.5% 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
(25.9%), Georgia (19.4%) and Colorado (10.9%) and no other state accounted for
more than 8.0% 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
36
37
the borrower. The following table provides a summary of loans owned and/or
serviced which are past due 30 days or more, foreclosed properties and loans
charged off as of the dates indicated.
Foreclosed Properties
------------------------
Contractual Delinquencies % of Owned Serviced for % of
Balance Contractual Contractual by the Third Party Net Loans Average
Year Ended of Loans Balance Balance Company Investors Charged Off Loans
- ---------- --------------------------------------------------------------------------------------------------
(dollars in thousands)
December 31, 1995
Home equity................. $ 2,701,481 $ 220,145 8.15% $ 8,469 $ 21,604 $ 12,221 0.56%
Commercial.................. 251,241 4,518 1.80% 16,547 5,325 4,416 1.68%
Conventional................ 58,554 2,734 4.67% - - 132 .20%
Manufactured housing........ 888 - - - - - -
------------ ----------- --------- ---------- -----------
Total.................. $ 3,012,164 $ 227,397 7.55% $ 25,016 $ 26,929 $ 16,769
============ =========== ========= ========== ===========
December 31, 1994
Home equity................. $ 1,683,698 $ 129,203 7.67% $ 8,791 $ 11,837 $ 11,694 0.84%
Commercial.................. 274,413 5,377 1.96% 22,131 8,784 5,658 1.83%
Conventional................ 74,294 2,672 3.60% 35 - 100 0.16%
------------ ----------- --------- ---------- -----------
Total.................. $ 2,032,405 $ 137,252 6.75% $ 30,957 $ 20,621 $ 17,452
============ =========== ========= ========== ===========
December 31, 1993
Home equity................. $ 1,125,139 $ 92,974 8.26% $ 17,014 $ 8,355 $ 8,548 0.88%
Commercial.................. 345,365 19,292 5.59% 20,871 9,275 3,579 0.95%
Conventional................ 98,277 3,747 3.81% 148 - 77 0.09%
------------ ----------- --------- ---------- -----------
Total.................. $ 1,568,781 $ 116,013 7.40% $ 38,033 $ 17,630 $ 12,204
============ =========== ========= ========== ===========
Management continues to focus on reducing the level of non-earning
assets owned and/or serviced by expediting the foreclosure process. The balance
of foreclosed home equity loans owned and/or serviced as a percentage of the
home equity loans owned and/or serviced was 1.1%, 1.2% and 2.3% at December 31,
1995, 1994 and 1993, respectively.
The above delinquency and loan loss experience represents the
Company's recent experience. However, the delinquency, foreclosure and net loss
percentages may be affected by the increase in the size and relative lack of
seasoning of a substantial portion of the portfolio. In addition, the Company
can neither quantify the impact of property value declines, if any, on the home
equity loans nor predict whether to what extent or how long such declines may
exist. In a period of such declines, the rates of delinquencies, foreclosures
and losses on the home equity loans could be higher than those theretofore
experienced in the mortgage lending industry in general. Adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the home equity loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses. As a result, the information in the above tables
should not be considered as 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.
A summary analysis of the changes in the Company's allowance for loan
losses and the allowance for loss on loans serviced is shown in Note 3.3 of the
Notes to the Consolidated Financial Statements.
37
38
Investment securities. The Company's investment portfolio consists
primarily of mortgage backed securities and corporate bonds, comprising 65.7%
and 29.3% of the portfolio at December 31, 1995, respectively. At December 31,
1995, approximately 93.6% of the Company's portfolio of investment securities
were classified in an available-for-sale category and the carrying value
adjusted to fair value by means of an adjustment to stockholders' equity. The
remainder of the portfolio consists primarily of private placements made either
directly or through an investment partnership and are classified as
held-to-maturity and valued at cost. At December 31, 1995, the Company owned
$.8 million in equity securities classified as trading securities. The net
unrealized gain in the debt securities portfolio (fair value over amortized
cost) at December 31, 1995 was $43.8 million compared to a net unrealized loss
of $73.9 million at December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding loan
production 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 and asset-backed securities. The liquidity
requirements for the Company's insurance operations are generally met by funds
provided from the sale of annuities and cash flow from its investments in fixed
income securities and mortgage loans.
Prior to 1994, the Company's primary debt facility was a revolving
credit facility (the "Bank Facility") dated as of October 11, 1988. On November
2, 1994 the Company publicly sold $125 million of its senior unsecured notes
and used the net proceeds from the sale of the senior notes to repay a portion
of the principal amount of the indebtedness outstanding under the Bank
Facility. During 1995, the Company publicly sold $100 million of its senior
unsecured notes and used a portion of the net proceeds from the sale of the
senior notes to repay the remaining balance outstanding under the Bank
Facility, which was scheduled to mature on December 31, 1996. The remainder of
the proceeds were used for general corporate purposes. The Company terminated
the Bank Facility effective July 25, 1995. In addition, the Company maintains
short-term credit facilities with various financial institutions. As of
December 31, 1995, $65 million in such credit facilities were available to the
Company and no amounts were outstanding thereunder.
During 1995, the Company sold 1,955,000 shares of its Preferred
Redeemable Increased Dividend Equity Securities(sm), 6 3/4% PRIDES, Convertible
Preferred Stock ("PRIDES(sm)") at a price per share of $44.00. Net proceeds to
the Company were approximately $83.3 million. The net proceeds from the sale of
the shares of PRIDES were used for general corporate purposes.
At December 31, 1995, the Company had secured warehouse facilities
available from (i) a syndicate of commercial banks (the "Commercial Bank
Warehouse") and (ii) the investment bank that acted as lead underwriter for the
Company's fourth quarter securitization (the "Investment Bank Warehouse"). The
Commercial Bank Warehouse permits certain of the Company's mortgage lending
subsidiaries to borrow up to $150 million on a revolving basis secured by home
equity loans eligible thereunder. Loans under this facility are subject to the
satisfaction of certain borrowing conditions, including a minimum borrowing
base and will bear interest at a floating rate. Borrowings under this facility
are required to be repaid from the proceeds of the sale or other disposition of
the home equity loan collateral. The lenders' commitment under this facility is
scheduled to terminate on May 23, 1997. At December 31, 1995, $19.3 million was
outstanding under the Commercial Bank Warehouse.
The Investment Bank Warehouse was directly related to the 1995 fourth
quarter securitization and initially provided funding for up to $250 million of
eligible home equity loans for such securitization and terminated with the
closing of the last delivery of loans under the prefunding accounts relative to
this securitization. As of December 31, 1995, $75 million was available and no
amounts were outstanding under the Investment Bank Warehouse. The Company
expects to have facilities similar to the Investment Bank Warehouse available
in conjunction with its future securitizations.
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The following discussion reflects the primary sources of liquidity and
capital for each of the Company's primary operating divisions.
Mortgage. The principal cash requirements of the Company's mortgage
operations arise from loan production, deposits to reserve accounts,
repayments of intercompany debt borrowed under the Company's senior notes,
payments of operating and interest expenses, and income taxes related to loan
sale transactions. Loan production is funded principally through proceeds from
the issuance of the Company's senior notes, short-term bank facilities and
warehouse facilities pending loan sales.
Substantially all of the loans originated or acquired by the Company
are sold. Net cash used by operating activities of the Company in 1995 and
1994, respectively, reflects approximately $1.6 billion and $949 million,
respectively, in cash used for loan originations and acquisitions. The primary
source of funding for loan originations is derived from the reinvestment of
proceeds from the ultimate sale of loans in the secondary market which totaled
approximately $1.5 billion and $978 million in 1995 and 1994, respectively. In
connection with the loan sale transactions in the secondary market, third-party
surety bonds and cash deposits by the Company as credit enhancements were
provided. The loan sale transactions required the subordination of certain cash
flows payable to UCLC and its subsidiaries to the payment of principal and
interest due to certificate holders. In connection with these transactions,
UCLC has been required, in some instances, to fund an initial deposit, and
thereafter, in each transaction, a portion of the amounts receivable by UCLC
and its subsidiaries from the excess interest spread has been required to be
placed and maintained in a reserve account to the extent of the subordination
requirements. The subordination requirements generally provide that the excess
interest spread is payable to a reserve account until a specified level of
cash, which is less than the maximum subordination amount, is accumulated
therein. The capitalized excess servicing income of the Company is subject to
being utilized first to replenish cash paid from the reserve account to fund
shortfalls in collections from borrowers who default on the payment of
principal or interest on the loans underlying the pass-through certificates
issued until the total of the Company's deposits into the reserve account equal
the maximum subordination amount. In connection with the issuance and sale of
approximately $3.2 billion of pass-through certificates through December 31,
1995, the subordination amounts aggregate approximately $466 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 (including the guarantee fee payable therefrom) for these purposes is
terminated. The excess interest spread required to be deposited and maintained
in the respective reserve accounts will not be available to support the cash
flow requirements of the Company until such amount exceeds the maximum
subordinated amount (other than amounts, if any, in excess of the specified
levels required to be maintained in the reserve accounts, which may be
distributed periodically to the Company). At December 31, 1995, the amounts on
deposit in such reserve accounts totaled $155 million.
Life insurance. The principal cash requirement of UCLIC consists of
contractual obligations to policyholders, principally through policy claims and
surrenders. The primary sources of funding these obligations, in addition to
cash flow from investments, are the sale of annuities. Net cash flow from
annuity operations is used to build an investment portfolio, which in turn
produces future cash flows from investment income and provides a secondary
source of liquidity for this division. Net cash provided by operating
activities of the insurance division (which excludes annuity sales and
surrenders) in 1995 and 1994 was approximately $87 million and $64 million,
respectively, resulting primarily from cash earnings on investments. The
Company monitors available cash and cash equivalents to maintain adequate
balances for current payments while maximizing cash available for longer term
investment activities. The Company's financing activities during 1995 and 1994
reflect approximately $136 million and $250 million, respectively, in cash
received primarily from sales by UCLIC of its annuity products. The Company
believes that the decrease in annuity sales is due in part to the interest rate
environment, particularly the relative relationship between short term and
intermediate term interest rates, and to the focus by UCLIC on development of
its variable annuity product. In addition, a financial institution which
produced approximately 10% of UCLIC's annuity sales in 1994 discontinued the
sale of annuities for UCLIC in 1995 subsequent to the merger of such financial
institution. As reflected in the net cash used by investing activities during
the same periods, investment purchases were approximately $137 million and $300
million, respectively, reflecting the investment of
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these funds and the reinvestment of proceeds from maturities of investments.
Cash used by financing activities during these twelve month periods also
reflects payments of $223 million and $192 million primarily on annuity
products resulting from policyholder surrenders and claims. The increase in
annuity surrenders during 1995 was expected, due in part to an increase in the
amount of annuity policies which were beyond the surrender penalty period.
Should annuity surrenders continue to exceed annuity sales, such consequence
will decrease the liquidity of UCLIC and potentially result in the sale of
certain assets, such as bonds and loans, prior to their maturity, which may be
at a loss. UCLIC's investments at December 31, 1995, included approximately
$345 million in residential and commercial mortgage loans, and the amortized
cost of its bond portfolio included $378 million in corporate and government
bonds and private debt placements and $778 million in mortgage-backed
securities.
As a Louisiana domiciled insurance company, UCLIC is subject to
certain regulatory restrictions on the payment of dividends. UCLIC had the
capacity at December 31, 1995 to pay dividends of $9.2 million. UCLIC did not
pay any dividends to the Company during 1993, 1994 or 1995 in order to retain
capital in UCLIC.
PENDING SALE OF UCLIC .
On February 2, 1996, the Company signed a Stock Purchase Agreement
(the "Agreement") dated as of January 30, 1996, for the sale of all of the
outstanding capital stock of UCLIC to UC Life Holding Corp., a new Delaware
corporation formed by Knightsbridge Capital Fund I, L.P. for an aggregate
amount of $164 million plus earnings of UCLIC from January 1, 1996, to closing
of the transaction. Knightsbridge, which is a private investment partnership
with institutional partners, was formed in 1995 to make equity investments in
companies engaged primarily in the life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash
currently estimated to be $109 million and UCLIC real estate and other assets
to be distributed to the Company prior to the closing. The real estate to be
distributed includes portions of the United Plaza office park, including the
Company's home office. In addition, the Company will purchase a convertible
promissory note from an affiliate of the purchaser for $15 million in cash. The
note matures in 11 years and bears interest at a rate of 8% per annum payable
at maturity. The Company does not expect the sale of UCLIC to have a material
effect on net income.
The purchaser also agreed that UCLIC would continue to be an investor
in first lien home equity loans originated by the Company's lending operations
and that UCLIC's home office operations would be maintained in its present
location in Baton Rouge, Louisiana following the closing for at least two
years. The agreement is subject to approval by UCFC's shareholders and
regulatory authorities and the satisfaction of other conditions, and provides
that the closing will occur on or before July 31, 1996.
RATINGS
The Company. During 1994, the Company sold publicly $125 million of
its unsecured and unsubordinated 9.35% senior notes due November 1, 1999. Duff
and Phelps Credit Rating Co. ("D&P") rated the issue BBB, Standard and Poor's,
a division of The McGraw-Hill Companies, Inc. ("S&P"), rated the notes BBB- and
Moody's Investor Services, Inc. ("Moody's") rated the notes Ba2, respectively.
D&P previously assigned a rating of BBB to the Bank Facility.
On July 25, 1995 the Company issued $100 million of its unsecured and
unsubordinated 7% senior notes due July 15, 1998. The notes received ratings of
"BBB" from D&P, "BBB-" from S&P and "Ba2" from Moody's.
Life insurance subsidiary. In June, 1994, A.M. Best Company ("Best")
reaffirmed its "A-" (Excellent) rating of UCLIC. Best's ratings depend in part
on its analysis of an insurance company's financial strength, operating
performance and claims paying ability. In addition, in 1995, S&P revised the
rating scale used in assigning
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its qualified solvency ratings of insurance companies and, as a result, revised
its rating assigned to UCLIC from "BBq" to "Aq".
On October 24, 1995, D&P placed the 'A+' (Single-A-Plus) claims paying
ability rating of UCLIC on Rating Watch--Uncertain. This rating action is based
upon the announcement by the Company that it was evaluating strategic
alternatives regarding UCLIC, including the possible sale of UCLIC. D&P
reported that the claims paying ability rating would remain on Rating
Watch--Uncertain until more information becomes known about UCLIC's ultimate
position within the Company's organization or another organization.
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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, 1995
and 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. 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, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 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.
As discussed in Note 1.11 of the Notes to the Consolidated Financial
Statements, in 1995 the Company changed its method of accounting for mortgage
servicing rights to conform with Statement of Financial Accounting Standards
No. 122.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
February 29, 1996
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1995 1994
----------- -----------
Assets (in thousands)
Cash and cash equivalents................................................... $ 28,087 $ 56,359
Temporary investments - reserve accounts ................................... 155,254 81,980
Investment securities
Trading ................................................................ 752 679
Available-for-sale ..................................................... 1,140,421 960,100
Held-to-maturity ....................................................... 51,586 57,391
Other .................................................................. 25,594 26,672
Loans - net ................................................................ 413,574 369,382
Capitalized excess servicing income ........................................ 283,454 179,065
Deferred policy acquisition costs .......................................... 90,703 91,915
Accrued interest receivable ................................................ 53,265 37,200
Property - net ............................................................. 38,659 30,565
Deferred income tax benefit ................................................ -- 7,420
Net assets of discontinued operations ...................................... 6,245 9,736
Other assets ............................................................... 79,292 69,791
----------- -----------
Total assets..................................................... $ 2,366,886 $ 1,978,255
=========== ===========
Liabilities and Stockholders' Equity
Annuity reserves............................................................ $ 1,417,803 $ 1,425,973
Notes payable .............................................................. 255,756 213,668
Insurance reserves ......................................................... 113,002 120,992
Deferred income taxes payable .............................................. 64,461 --
Allowance for loss on loans serviced ....................................... 44,970 26,822
Repurchase agreements ...................................................... 40,857 --
Other liabilities .......................................................... 48,086 35,550
----------- -----------
Total liabilities ............................................... 1,984,935 1,823,005
----------- -----------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized - 20,000,000 shares;
Issued - 1,955,000 shares of 6 3/4% PRIDES(sm) ($44 per share
liquidation preference) ......................................... 3,910 --
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 29,302,246 and 28,541,154 shares .......................... 58,604 57,082
Additional paid-in capital ............................................. 179,848 94,129
Net unrealized gain (loss) on securities ............................... 29,514 (46,858)
Retained earnings ...................................................... 122,816 62,025
Treasury stock and ESOP debt ........................................... (12,741) (11,128)
----------- -----------
Total stockholders' equity ......................................... 381,951 155,250
----------- -----------
Total liabilities and stockholders' equity....................... $ 2,366,886 $ 1,978,255
=========== ===========
See notes to consolidated financial statements.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands, except per share data)
Revenues:
Interest, charges and fees on loans .............. $ 128,665 $ 111,994 $ 92,737
Loan sale gains .................................. 142,156 86,735 59,441
Investment income ................................ 104,062 84,666 75,527
Loan servicing income ............................ 14,559 19,926 13,624
Net insurance premiums ........................... 8,508 11,373 18,684
--------- --------- ---------
Total ............................................ 397,950 314,694 260,013
--------- --------- ---------
Expenses:
Interest on annuity policies ..................... 79,086 73,065 76,086
Personnel ........................................ 76,022 57,380 40,784
Interest ......................................... 28,308 14,563 10,158
Loan loss provision .............................. 16,025 13,457 17,343
Insurance commissions ............................ 13,630 14,264 13,920
Insurance benefits ............................... 9,930 12,654 18,200
Other operating .................................. 60,185 45,237 40,461
--------- --------- ---------
Total .................................... 283,186 230,620 216,952
--------- --------- ---------
Income from continuing operations before income taxes 114,764 84,074 43,061
Provision for income taxes .......................... 41,805 29,492 14,744
--------- --------- ---------
Income from continuing operations ................... 72,959 54,582 28,317
Loss from discontinued operations:
Loss from discontinued operations, net of
income tax expense benefit of $1,084
$2,702 and $314, respectively ................ (2,014) (5,048) (676)
Loss on disposal, net of income tax benefit
of $794 and $8,326, respectively ............. (1,477) -- (16,066)
--------- --------- ---------
Total .................................... (3,491) (5,048) (16,742)
--------- --------- ---------
Net income .......................................... $ 69,468 $ 49,534 $ 11,575
========= ========= =========
Per share data:
Income from continuing operations ................ $ 2.36 $ 1.92 $ 1.20
Loss from discontinued operations ................ (.11) (.18) (.71)
--------- --------- ---------
Net income ....................................... $ 2.25 $ 1.74 $ .49
========= ========= =========
See notes to consolidated financial statements.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------
1995 1994 1993
-------------------------------------------
(in thousands)
Cash flows from continuing operating activities:
Income from continuing operations ....................................... $ 72,959 $ 54,582 $ 28,317
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating activities:
Decrease (increase) in deferred policy acquisition costs ............. 1,212 (8,420) (3,488)
Increase in accrued interest receivable .............................. (16,065) (7,033) (3,401)
Decrease (increase) in other assets .................................. 2,044 (8,155) 595
Decrease in insurance reserves ....................................... (7,990) (12,596) (8,727)
Increase (decrease) in other liabilities ............................. (5,911) (2,829) 18,241
Loan sale gains ...................................................... (164,112) (94,673) (62,896)
Amortization of capitalized excess servicing income .................. 72,719 40,255 21,544
Investment gains ..................................................... (325) (219) (595)
Interest on annuity policies ......................................... 79,086 73,065 76,086
Loan loss provision .................................................. 16,025 13,457 17,343
Amortization and depreciation ........................................ 4,462 3,387 3,624
Deferred income taxes ................................................ 30,758 12,301 (3,532)
Proceeds from sales and principal collections of loans
held for sale ...................................................... 1,507,514 1,000,970 478,213
Originations and purchases of loans held for sale .................... (1,600,213) (949,448) (595,893)
Net cash flows from trading investment securities .................... (73) (687) --
----------- ----------- -----------
Net cash provided (used) by continuing operating activities . (7,910) 113,957 (34,569)
----------- ----------- -----------
Cash flows from discontinued operating activities ............................ -- (2,889) (5,612)
----------- ----------- -----------
Cash flows from investing activities:
Principal collected on loans held for investment .................. 77,182 94,588 95,755
Proceeds from sales of loans held for investment .................. -- -- 593
Originations and acquisition of loans held for investment ......... (39,547) (8,798) (4,560)
Increase in reserve accounts ...................................... (73,274) (54,308) (20,046)
Proceeds from sales of investment securities ...................... 27,047 9,459 25,475
Proceeds from maturities or calls of investment securities ........ 53,914 76,978 117,117
Purchase of held-to-maturity securities ........................... -- -- (283,853)
Purchases of available-for-sale securities ........................ (136,579) (300,384) --
Capital expenditures .............................................. (10,885) (4,693) (893)
----------- ----------- -----------
Net cash used by investing activities ....................... (102,142) (187,158) (70,412)
----------- ----------- -----------
Cash flows from financing activities:
Payments on mortgage loan ......................................... -- -- (15,750)
Proceeds from senior debt and mortgage loan ....................... 103,219 125,192 --
Decrease in revolving credit debt ................................. (72,163) (82,838) (35,000)
Increase (decrease) in repurchase agreement ....................... 40,857 (30,000) 30,000
Increase (decrease) in debt with maturities of three months or less (14,750) 14,250 (600)
Increase in warehouse loan facility ............................... 19,321 -- --
Proceeds from ESOP debt ........................................... 6,283 -- --
Payments on ESOP debt ............................................. (321) -- --
Deposits received from annuities .................................. 135,534 249,737 207,682
Payments on annuities ............................................. (222,791) (191,811) (136,340)
Cash dividends paid ............................................... (8,677) (5,050) (3,624)
Increase in managed cash overdraft ................................ 11,241 10,374 2,409
Proceeds from issuance of stock ................................... 83,254 4,545 48,714
Increase in unearned ESOP compensation ............................ (2,313) (2,434) --
Proceeds from exercise of stock options and warrants .............. 3,086 542 298
----------- ----------- -----------
Net cash provided by financing activities ................... 81,780 92,507 97,789
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ............................. (28,272) 16,417 (12,804)
Cash and cash equivalents at beginning of period ............................. 56,359 39,942 52,746
----------- ----------- -----------
Cash and cash equivalents at end of period ................................... $ 28,087 $ 56,359 $ 39,942
=========== =========== ===========
See notes to consolidated financial statements.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Treasury
Additional Unrealized Stock and Total
Common Preferred Paid-in Gain (Loss) on Retained ESOP Stockholders'
Stock Stock Capital Securities Earnings Debt Equity
--------- ---------- ----------- ---------- ---------- ----------- ------------
(in thousands)
Balance, December 31, 1992,
as previously reported...........$ 18,730 $ 31,461 $ 52,037 $ (5,970) $ 96,258
Effect of 1995 stock split............ 18,730 (18,730)
--------- ---------- ----------- -------- ---------- ----------- ----------
Balance, December 31, 1992,
as restated...................... 37,460 12,731 52,037 (5,970) 96,258
Net income............................ 11,575 11,575
Dividends paid........................ (3,624) (3,624)
Decrease in ESOP debt................. 147 147
Common stock options
exercised........................ 1,476 1,301 2,777
Treasury shares acquired.............. (2,479) (2,479)
Preferred stock issued................ $ 20,000 (1,239) 18,761
Preferred stock converted into
common stock........................ 7,804 (20,000) 12,196
Common stock issued................... 4,000 25,953 29,953
--------- ---------- ----------- -------- ---------- ----------- ----------
Balance, December 31, 1993............ 50,740 - 50,942 59,988 (8,302) 153,368
Net income............................ 49,534 49,534
Dividends paid........................ 5,184 37,263 (47,497) (5,050)
Increase in ESOP debt................. (2,222) (2,222)
Common stock options..................
exercised........................ 398 1,749 2,147
Treasury shares acquired.............. (604) (604)
Common stock issued................... 600 3,945 4,545
Common stock warrants
exercised........................... 160 230 390
Mark-to-market adjustment
on investments...................... (46,858) (46,858)
--------- ---------- ----------- -------- ---------- ----------- ----------
Balance, December 31, 1994 57,082 - 94,129 (46,858) 62,025 (11,128) 155,250
Net income............................ 69,468 69,468
Dividends paid........................ (8,677) (8,677)
Increase in ESOP debt................. ( 1,613) (1,613)
Common stock warrants
exercised........................ 704 696 1,400
Common stock options
exercised........................ 818 5,386 6,204
Preferred stock issued................ 3,910 79,344 83,254
Release of ESOP shares................ 293 293
Mark-to-market adjustment
on investments................... 76,372 76,372
--------- ---------- ----------- -------- ---------- ----------- ----------
Balance, December 31, 1995 $ 58,604 $ 3,910 $ 179,848 $ 29,514 $ 122,816 $ (12,741) $ 381,951
========= ========== =========== ======== ========== =========== ==========
See notes to consolidated financial statements.
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UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
1.2 Loan Accounting. The Company originates loans for its own portfolio
and for sale and/or securitization in the secondary market.
1.2(a) 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. For fixed rate loans the Company uses prepayment assumptions based
on the prepayment experience of its owned and serviced loan portfolio.
Prepayment rates for adjustable rate loans are derived from available market
data and prepayment experience of the Company's owned and serviced portfolio.
The weighted average discount rate used by the Company to determine the present
value of expected cash flows from excess servicing arising from loan sale
transactions occurring in 1995, 1994 and 1993 was 10%. 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.
1.2(b) Nonrefundable Loan Fees. Loan origination fees and incremental
direct costs associated with loan originations are deferred and recognized over
the lives of the loans as an adjustment to yield, using the interest method.
Unamortized costs and fees are recognized upon sale of the loan or related
mortgage-backed securities to third parties.
1.2(c) Loan Servicing. The Company generally retains the right to service
loans it originates and subsequently sells or securitizes in the secondary
market. 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
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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. Prior to the adoption of Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing
Rights", the Company recognized late charges and other ancillary income when
collected and charged costs to service mortgage loans when incurred. As further
discussed in Note 1.11, the Company implemented the provisions of SFAS 122 in
the third quarter of 1995 and, in connection therewith, changed its method of
accounting for mortgage servicing rights to recognize as separate assets rights
to service mortgage loans for others that have been acquired through either the
purchase or origination of such loans.
1.2(d) 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 management uses the best information available in conducting its
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions, collateral value or other elements
used in conducting the review.
1.2(e) Allowance for Loss on Loans Serviced. The Company's loan sale
agreements generally provide for the subordination of cash and excess interest
spread relating to the loans sold. Such subordination relates to credit losses
which may occur after the sale of the loans and continues until the earlier of
the payment in full of the loans or the termination of the agreement pursuant
to which the loans were sold. In connection with the securitization and sale of
home equity pass-through certificates, the interest retained by the Company is
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. On certain loan sale transactions prior to 1991, the loan
sale agreements provided limited recourse against the Company for credit
losses. The Company has funded a portion of such recourse through the pledge of
certificates of deposit. Regardless of the structure of the loan sale
transaction, the Company estimates the amount of future losses under the loan
sale agreements and provides a reserve for such loss in determining the amount
of gain recorded on the sale.
1.2(f) Other. Loans are placed on a nonaccrual status when they are
past due 150 days.
1.2(g) 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 Company personnel or independent
appraisers. The related adjustments are included in the Company's provision for
loan losses.
1.3 Insurance Accounting.
1.3(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.
48
49
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 8.2%, 7.2%, and 6.3% of the life insurance
in force as of December 31, 1995, 1994 and 1993, respectively. The amount of
dividends paid on participating policies is based on published dividend scales
and totaled $1.2 million, $1.0 million and $1.5 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
1.3(b) Reinsurance.
Life insurance. UCLIC 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. UCLIC is contingently liable for insurance
ceded to reinsurers. Premiums ceded under reinsurance agreements were $1.7
million, $2.1 million, and $3.6 million in 1995, 1994 and 1993, respectively.
Reserve credit taken under reinsurance agreements totaled $32.9 million, $34.0
million and $35.2 million at December 31, 1995, 1994 and 1993, respectively.
UCLIC has assumed the following reinsurance from other insurers:
Insurance
in Force Premiums
----------- -----------
(in thousands)
1995............................. $ 992,979 $ 2,589
1994............................. 1,106,148 2,966
1993............................. 1,106,721 3,039
UCLIC has a receivable at December 31, 1995 of approximately
$33.9 million from one reinsurer; however, the funds supporting the receivable
are escrowed in a separate trust account for the benefit of UCLIC 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,
------------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands)
Direct premiums........................ $ 7,659 $ 10,537 $ 19,294
Reinsurance assumed.................... 2,589 2,966 3,039
Reinsurance ceded...................... (1,740) (2,130) (3,649)
-------- -------- ---------
Net insurance premiums.............. $ 8,508 $ 11,373 $ 18,684
======== ======== ========
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1.4 Temporary Investments - Reserve Accounts. In connection with its loan
sale transactions, the Company 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. The
amounts on deposit are invested in certain instruments as permitted by the
trustee and earnings thereon accrue to the Company. 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.
1.5 Investment securities. In accordance with the provisions of Statement
of Financial Accounting Standards No. 115 ("SFAS 115"), the Company classifies
securities in one of three categories: "available-for-sale", "held-to-maturity"
or "trading". Securities classified as held-to-maturity are carried at
amortized cost, whereas securities classified as trading securities or
available-for-sale are recorded at fair value. The adjustment, net of
applicable income taxes, for investments classified as available-for-sale is
recorded in "Net unrealized gain (loss) on securities" and is included in
Stockholders' equity on the balance sheet and the adjustment for investments
classified as trading is recorded in "Investment income" in the statement of
income.
1.6 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.
1.7 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.
1.8 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, 1995,
cash equivalents totaled $28.1 million bearing interest rates ranging from
5.25% to 5.61% per annum.
1.9 Repurchase agreements. At December 31, 1995, UCLIC had a liability of
approximately $40.9 million incurred pursuant to securities sold under
agreements to repurchase ("repurchase agreements"). The securities sold under
these agreements are classified as "Available-for-sale" investment securities
and are carried at their aggregate market value of $42.2 million at December
31, 1995. The repurchase agreements bear interest at 5.70% and 5.74% and
matured in January, 1996.
1.10 Financial instruments. The Company from time to time enters into
interest rate hedge mechanisms to manage its exposure to interest rate changes
in connection with the securitization and sale of its home equity loans. The
Company closes out the hedge position to coincide with the related loan sale
and recognizes the results of the hedge transaction in determining the amount
of the related loan sale gain.
1.11 Accounting Standards. In May 1993 and in October 1994, the FASB
issued Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS
114" and "SFAS 118") which address the accounting by creditors for impairment
of loans and specify how allowances for credit losses related to certain loans
should be determined. The statements also address the accounting by creditors
for all loans that are restructured in a troubled debt restructuring involving
modification of terms of a receivable. The implementation of the provisions of
SFAS 114 and SFAS 118 in the first quarter of 1995 did not have a material
effect on the financial statements of the Company.
On May 12, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS No. 122"). SFAS No. 122 requires that a mortgage
banking enterprise recognize as separate assets rights to service mortgage
loans for others that have been
50
51
acquired through either the purchase or origination of such loans. With respect
to loans originated, this is accomplished by allocating total costs incurred
between the loan and the servicing rights based on their relative fair values.
The estimated fair value of the servicing rights is determined by discounting
expected future cash flows using a discount rate commensurate with the risk
involved. Prior to the adoption of SFAS No. 122, the Company recognized late
charges and other ancillary income when collected and charged costs to service
mortgage loans when incurred. The Company elected to implement the provisions
of this statement on a prospective basis during the third quarter of 1995. The
assumptions used by the Company included estimates of the cost of servicing the
loans, the discount rate, float value, inflation rate, ancillary income per
loan, prepayment speeds and default rates. The amount capitalized at December
31, 1995 was $5.8 million and is included in "other assets". Net income for
1995 was increased by $3.9 million, or $.13 per share, respectively, on a fully
diluted basis as a result of the Company's implementation of SFAS No. 122.
On October 23, 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 encourages, but does not require, the recognition of
compensation expense for grants of stock, stock options and other equity
instruments to employees based on a fair value method of accounting. Companies
are permitted to continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"); however, companies that choose to retain this method of
accounting will be required to provide expanded disclosures of pro forma net
income and earnings per share in the notes to financial statements as if the
new fair value method of accounting had been adopted. The provisions of SFAS
123 are effective for fiscal years beginning after December 15, 1995. The
Company has elected to continue to apply the accounting rules contained in APB
25 and to comply with the additional disclosure requirements as set forth in
SFAS 123.
1.12 Reclassifications. Certain prior year amounts have been
reclassified to conform with the current year presentation. Such
reclassifications had no effect on net income.
2. INVESTMENT SECURITIES - NET
The Company's portfolio of investment securities as of December 31, 1995
consisted of the following:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
(in thousands)
Trading
Common stock.............................. $ 545 $ 215 $ 8 $ 752
============ =========== ======== ===========
Available-for-sale
Debt securities
Corporate............................. $ 328,546 $ 22,452 $ 679 $ 350,319
U.S. Treasury......................... 11,504 409 - 11,913
Mortgage-backed..................... 733,516 22,258 602 755,172
Foreign governments................. 20,394 1,916 - 22,310
Other............................... 425 21 - 446
------------ ----------- -------- -----------
Total.............................................. 1,094,385 47,056 1,281 1,140,160
------------ ----------- -------- -----------
Equity securities........................ 629 78 446 261
------------ ----------- -------- -----------
Total.......................... $ 1,095,014 $ 47,134 1,727 $ 1,140,421
============ =========== ======== ===========
Held-to-maturity
Debt securities
Corporate............................ $ 6,692 $ 550 $ - $ 7,242
Mortgage-backed...................... 44,894 1,414 3,939 42,369
------------ ----------- -------- -----------
Total.......................... $ 51,586 $ 1,964 3,939 $ 49,611
============ =========== ======== ===========
Other
Investment in limited partnerships....... $ 25,594 $ 25,594
============ ===========
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52
The Company's portfolio of investment securities as of December 31, 1994
consisted of the following:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
(in thousands)
Trading
Common stock............................. $ 656 $ 51 $ 28 $ 679
============== ============ ============ =============
Available-for-sale
Debt securities
Corporate............................ $ 258,549 $ 321 $ 13,148 $ 245,722
U.S. Treasury........................ 10,720 31 238 10,513
Mortgage-backed...................... 743,359 22 58,218 685,163
Foreign governments.................. 18,433 190 603 18,020
Other................................ 425 13 - 438
-------------- ------------ ------------ -------------
Total.......................... 1,031,486 577 72,207 959,856
-------------- ------------ ------------ -------------
Equity securities....................... 703 36 495 244
-------------- ------------ ------------ -------------
Total.......................... $ 1,032,189 $ 613 $ 72,702 $ 960,100
============== ============ ============ =============
Held-to-maturity
Debt securities
Corporate........................... $ 10,829 $ 300 $ 212 $ 10,917
Mortgage-backed..................... 46,562 110 2,505 44,167
-------------- ------------ ------------ -------------
Total.......................... $ 57,391 $ 410 $ 2,717 $ 55,084
============== ============ ============ =============
Other
Investment in limited partnerships....... $ 26,672 $ 26,672
============== =============
The cost and estimated fair value of debt securities at December 31, 1995,
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.
Available-for-Sale Held-to-Maturity
------------------------------ ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------- ------------- ----------- ------------
(in thousands)
1 year or less..................................... $ 6,601 $ 6,513 $ - $ -
Over 1 year through 5 years........................ 80,080 84,349 2,286 2,361
Over 5 years through 10 years...................... 266,238 285,826 4,406 4,881
After 10 years..................................... 7,950 8,300 - -
Mortgage-backed securities......................... 733,516 755,172 44,894 42,369
------------- ------------- ----------- ------------
Total..................................... $ 1,094,385 $ 1,140,160 $ 51,586 $ 49,611
============= ============= =========== ============
Net unrealized gains (losses) on available-for-sale securities included in
Stockholders' equity at December 31, 1995 and 1994 are presented net of
deferred income taxes (benefit) of $15.9 million and ($25.2) million,
respectively.
Proceeds from the sales of investments during 1995 totaled $27.0 million
and resulted in realized investment gains of $.3 million. Net investment gains
for the years ended December 31, 1995, 1994 and 1993 were $.5
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53
million, $.2 million and $.6 million, respectively, and are included in
investment income. At December 31, 1995, securities with a cost of $9.4 million
were on deposit with insurance regulatory authorities.
3. LOANS - net
3.1 Loans Owned. The following schedule sets forth the components
of Loans owned by the Company at December 31, 1995 and 1994.
December 31,
--------------------------------------
1995 1994
------------ -------------
(in thousands)
Home equity............................................... $ 236,987 $ 202,551
Commercial................................................ 169,990 155,271
Conventional.............................................. 1,340 1,106
Foreclosed properties..................................... 25,017 31,073
Nonrefundable loan fees................................... (4,950) (4,538)
Consumer and other........................................ 732 1,536
------------ -------------
Total................................................. $ 429,116 $ 386,999
============ =============
Included in owned loans at December 31, 1995 and 1994 were nonaccrual
loans totaling $20.8 million and $21.7 million, respectively.
The following schedule summarizes the composition of Loans - net at
December 31, 1995 and 1994:
December 31,
---------------------------------------
1995 1994
------------ -------------
(in thousands)
Loans..................................................... $ 429,116 $ 386,999
Allowance for loan losses................................. (14,891) (16,508)
Unearned discount......................................... (651) (1,109)
------------ -------------
Loans - net............................................... $ 413,574 $ 369,382
============ ============
3.2 Loans Serviced. The following table sets forth the loans serviced by
the Company for third parties at December 31, 1995 and 1994, by type of loan.
The right to service these loans was retained upon their sale in the secondary
market. Substantially all of these loans were originated by the Company.
December 31,
-------------------------------------
1995 1994
------------ ------------
(in thousands)
Home equity............................................... $ 2,464,495 $ 1,480,047
Commercial................................................ 81,251 126,691
Conventional.............................................. 57,198 73,136
------------ ------------
Total........................................... $ 2,602,944 $ 1,679,874
============ ============
3.3 Loan Loss Allowances. The Company provides an estimate for
future credit losses in an Allowance for Loan Losses for loans owned by the
Company and in an Allowance for Loss on Loans Serviced for loans serviced for
others.
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54
A summary analysis of the changes in the Company's Allowance for Loan
Losses is as follows:
Year Ended December 31,
--------------------------------
1995 1994 1993
-------- --------- --------
(in thousands)
Balance at beginning of period $ 16,508 $ 21,017 $ 15,842
Loans charged to allowance
Home equity .............. (13,818) (12,745) (9,114)
Commercial ............... (4,416) (5,767) (3,579)
Conventional ............. (178) (149) (142)
-------- -------- --------
Total ............... (18,412) (18,661) (12,835)
Recoveries on loans previously
charged to allowance ....... 1,643 1,209 631
-------- -------- --------
Net loans charged off ........ (16,769) (17,452) (12,204)
Loan loss provision .......... 16,025 13,457 17,343
Reserve reclassification ..... (873) (514) 36
-------- -------- --------
Balance at end of year ....... $ 14,891 $ 16,508 $ 21,017
======== ======== ========
Specific reserves ............ $ 5,445 $ 6,571 $ 8,500
Unallocated reserves ......... 9,446 9,937 12,517
-------- -------- --------
Total reserves ............... $ 14,891 $ 16,508 $ 21,017
======== ======== ========
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, 1995, the Company owned $25.0 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 estimated market value.
A summary of the allowances for future credit losses on loans and
foreclosed properties owned by the Company and loans sold with recourse is as
follows:
December 31,
----------------------------
1995 1994 1993
------- -------- --------
(in thousands)
Allowance for loan losses
(applicable to loans and
foreclosed properties owned
by the Company) ................... $14,891 $16,508 $21,017
Allowance for loss on loans serviced
(applicable to loans sold with recourse) 44,970 26,822 12,938
------- ------- -------
Total ............................. $59,861 $43,330 $33,955
======= ======= =======
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As of December 31, 1995, approximately $2.5 billion of home equity
loans sold were serviced under agreements substantially all of which provide
for the subordination of cash and excess interest spread owned by the Company
for credit losses ("loans sold with recourse"). The maximum recourse associated
with sales of home equity loans according to terms of the loan sales agreements
was approximately $475 million at December 31, 1995, of which $466 million
relates to the subordinated cash and excess interest spread. The Company's
estimate of its losses, based on historical loan loss experience, was
approximately $45.0 million at December 31, 1995 and is recorded in the
Company's allowance for loss on loans serviced. Should credit losses on loans
sold with limited recourse, or subordination of cash and excess interest spread
owned by the Company, materially exceed the Company's estimate for such losses,
such consequence will have a material adverse impact on the Company's
operations.
3.4 Concentration of Credit Risk. The Company's serviced portfolio is
geographically diversified. Although the Company services mortgage loans in 48
states, at December 31, 1995, a substantial portion of loans serviced were
originated in Florida (10.5%), Ohio (10.0%) and Louisiana (8.8%) ,
respectively, and no other state accounted for more than 7.5% 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
(25.9%), Georgia (19.4%) and Colorado (10.9%) and no other state accounted for
more than 8.0% 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.
3.5 Commitments. The Company uses a prefunding feature in connection with
loan securitization transactions. At December 31, 1995 approximately $3.7
million was held in a prefunding account for the purchase of the Company's home
equity loans during the first quarter of 1996. Pursuant to this commitment,
home equity loans with a remaining principal balance of approximately $3.7
million were delivered January 10, 1996.
4. PROPERTY - NET
Property is summarized as follows:
December 31,
---------------------------
1995 1994
--------- ---------
(in thousands)
Land and buildings................................................ $ 41,796 $ 34,716
Furniture, fixtures and equipment................................. 21,751 18,943
--------- ---------
Total......................................................... 63,547 53,659
Less accumulated depreciation..................................... (24,888) (23,094)
--------- ---------
Total......................................................... $ 38,659 $ 30,565
========== =========
Rental expense on operating leases, including real estate, computer
equipment and automobiles, totaled $6.4 million, $5.3 million and $3.3 million
during 1995, 1994 and 1993, respectively. Minimum annual commitments at
December 31, 1995 under noncancellable operating leases are as follows (in
thousands):
1996............................................. $ 5,652
1997............................................. 3,686
1998............................................. 1,544
1999............................................. 386
2000 ............................................ 108
Thereafter....................................... 4
---------
Total.................................... $ 11,380
=========
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5. OTHER ASSETS AND OTHER LIABILITIES
At December 31, 1995, Other assets included amounts due from reinsurers of
$33.6 million and Policy loans of $20.3 million compared to $35.0 million and
$20.2 million, respectively, at December 31, 1994. In addition, included in
Other assets at December 31, 1994 was a federal income tax receivable of $6.2
million.
Other liabilities at December 31, 1995 and 1994 included a $24.0 million
and $12.8 million managed cash overdraft, respectively.
6. NOTES PAYABLE
Notes payable consisted of the following:
December 31,
--------------------
1995 1994
-------- --------
(in thousands)
9.35% Senior unsecured notes due 11/1/99 $125,000 $125,000
7% Senior unsecured notes due 7/15/98 .. 100,000 --
Revolving credit agreement ............. -- 72,163
Mortgage loan .......................... 5,473 1,755
Warehouse facility ..................... 19,321 --
ESOP debt .............................. 5,962 --
Short-term borrowings .................. -- 14,750
-------- --------
Total ....................... $255,756 $213,668
======== ========
On July 25, 1995 and on November 2, 1994, the Company publicly sold $100
million and $125 million, respectively, of its senior unsecured notes. The
notes provide for interest payable semi-annually and are not redeemable prior
to maturity. The notes rank on a parity with other unsecured and unsubordinated
indebtedness of the Company. The net proceeds from the sale of the notes were
used primarily to repay the principal amount of indebtedness outstanding under
the Company's existing revolving credit facility with a group of banks.
At December 31, 1995, the Company had available a secured warehouse
facility provided by the investment bank that acted as lead underwriter of the
Company's fourth quarter public loan securitization transaction. The warehouse
facility was directly related to the public securitization and initially
provided funding for up to $250 million of eligible home equity loans for such
securitization and matured on January 10, 1996 with the closing of the last
delivery of loans for the securitization. In addition, the mortgage lending
subsidiaries of the Company entered into a credit agreement dated as of May 23,
1995 with First Union National Bank of North Carolina and certain other lenders
signatory thereto. Under this facility, the mortgage lending subsidiaries may
borrow up to $150 million on a revolving basis secured by home equity loans
eligible thereunder. Loans under this facility are subject to the satisfaction
of certain borrowing conditions, including a minimum borrowing base and bear
interest at a floating rate. Borrowings under this warehouse facility are
required to be repaid from the proceeds of the sale or other disposition of the
home equity loan collateral. The lenders' commitment under this facility is
scheduled to terminate on May 23, 1997. As of December 31, 1995, approximately
$19.3 million was outstanding under this warehouse facility.
The Company also has arrangements with banks providing for short-term
unsecured borrowings of up to $65 million, none of which was outstanding at
December 31, 1995. Borrowings under these lines of credit bear interest at
market or prime rates. Notes payable at December 31, 1995 include a $5.5
million mortgage loan for the construction of an office building adjacent to
the Company's home office building and is secured by a mortgage on the
property.
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The Company made payments for interest of $25.7 million, $13.0 million and
$9.5 million during the years ended December 31, 1995, 1994 and 1993,
respectively.
7. INCOME TAXES
The provision for income taxes attributable to continuing operations is as
follows:
Year Ended December 31,
------------------------------------------
1995 1994 1993
----------- ----------- -----------
Current.................................................... $ 11,047 $ 17,191 $ 18,276
Deferred................................................... 30,758 12,301 (3,532)
----------- ----------- ----------
Total...................................................... $ 41,805 $ 29,492 $ 14,744
=========== =========== ==========
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,
------------------------------------------
1995 1994 1993
----------- ---------- ----------
Federal income tax at statutory rate........................ $ 40,168 $ 29,426 $ 15,072
Differences resulting from:
Reversal of timing differences at prior tax rates......... - - 15
State income taxes........................................ 511 (72) 75
Other..................................................... 1,126 138 (418)
----------- ---------- ----------
Reported income tax provisions.............................. $ 41,805 $ 29,492 $ 14,744
=========== ========== ==========
The significant components of the Company's net deferred income tax
(benefit) liability at December 31, 1995 and 1994 are as follows:
December 31,
---------------------------------
1995 1994
------------ ------------
(in thousands)
Deferred income tax assets:
Allowance for loan losses................................... $ 904 $ 1,011
Nonrefundable loan fees..................................... 1,732 1,588
Policy reserves............................................. 21,530 21,464
Mark-to-market adjustment................................... - 25,231
Investment securities....................................... 3,377 1,924
Other....................................................... 840 913
------------ -----------
28,383 52,131
------------ -----------
Deferred income tax liabilities:
Loan income................................................. 41,022 10,910
Mark-to-market adjustment................................... 15,892 -
Mortgage servicing rights................................... 2,034 -
Real estate................................................. 4,421 4,175
Deferred policy acquisition costs........................... 29,475 29,626
------------ -----------
92,844 44,711
------------ -----------
Net deferred income tax (benefit) liability.................... $ 64,461 $ (7,420)
============ ===========
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Payments made for income taxes during the years ended December 31, 1995,
1994 and 1993 were $7.8 million, $28.3 million and $5.4 million, respectively.
Consolidated retained earnings at December 31, 1995 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, 1995 and 1994, the Company had a current income tax
receivable of $11.2 million and $6.2 million, respectively, which is included
in "Other assets".
8. CAPITAL STOCK
The Company has authorization to issue up to 100,000,000 shares of its
$2.00 par value common stock. There were 28,142,564 and 27,381,472 shares
outstanding at December 31, 1995 and 1994, respectively, excluding 1,159,682
treasury shares. The Company also has authorization to issue 20,000,000 shares
of preferred stock of which 1,955,000 shares are currently issued (see
discussion of "PRIDES(sm)" below). Included in the authorized preferred stock
are 1,000,000 shares of Series A Junior Participating preferred stock and
800,000 shares of Cumulative Convertible preferred stock, none of which is
outstanding.
On June 16, 1995, the Company concluded the sale of 1,955,000 shares of
its Preferred Redeemable Increased Dividend Equity Securities(sm), 6 3/4%
PRIDES(sm), Convertible Preferred Stock, par value $2.00 per share
("PRIDES(sm)"), at a price per share of $44.00. Dividends on the PRIDES(sm) are
cumulative and are payable quarterly in arrears on each January 1, April 1,
July 1 and October 1. Net proceeds to the Company were approximately $83.3
million. The net proceeds from the sale of shares of PRIDES(sm) were used for
general corporate purposes.
The PRIDES(sm) rank prior to the Company's common stock as to payment of
dividends and distribution of assets upon liquidation. The shares of PRIDES(sm)
mandatorily convert into shares of common stock on July 1, 2000 (the "Mandatory
Conversion Date") on a two share to one share basis (as adjusted for the 100%
common stock dividend paid October 20, 1995), and the shares of PRIDES(sm) are
convertible into shares of common stock at the option of the holder at any time
prior to the Mandatory Conversion Date on the basis of 1.652 of a share of
common stock for each share of PRIDES(sm), in each case subject to adjustment
in certain events. In addition, the Company has the option to convert the
shares of PRIDES(sm), in whole or in part, on or after July 1, 1998 until the
Mandatory Conversion Date, into shares of its common stock according to a
formula.
On October 26, 1994, the Company's Board of Directors declared a 10%
common stock dividend payable to shareholders of record on December 22, 1994.
The additional shares were distributed on January 10, 1995. On August 23, 1995,
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 20, 1995, to stockholders of record on October 9, 1995. 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 these transactions. During 1995 and 1994, the
Company paid cash dividends on its common stock in the amount of $5.5 million
and $5.1 million, or $.20 and $.182 per share, respectively. In addition,
during 1995, the Company paid cash dividends on its PRIDES(sm) in the amount of
$3.1 million or $1.61 per share. See Note 10 for a discussion of dividend
restrictions on retained earnings.
On July 27, 1994, the Board of Directors authorized the redemption of the
rights under the rights plan of the Company adopted in 1989 (the "1989 Rights
Plan") and approved a new rights plan (the "1994 Rights Plan"). In connection
with the redemption, the rights under the 1989 Rights Plan (the "1989 Rights")
were redeemed at a price of $.0039526 per 1989 Right with the aggregate
redemption price payable to each holder of the 1989 Rights to be rounded up to
the nearest $.01. In approving the 1994 Rights Plan, the Board of Directors
declared a dividend
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distribution of one preferred share purchase right for each outstanding share
of the Company's Common Stock. The rights under the 1994 Rights Plan will
become exercisable only upon the occurrence of certain events as specified
therein (primarily certain changes in ownership of the Company).
At December 31, 1995 and 1994, 1,159,682 shares of the Company's common
stock, or 4% of the issued common stock, were held as treasury stock at a cost
of $6.8 million.
9. EMPLOYEE BENEFIT PLANS
9.1 Employee Stock Ownership Plan. All employees who meet minimum age
and service requirements participate in the Company's Employee Stock Ownership
Plan ("ESOP"). The Company makes annual tax deductible contributions to the
ESOP which are used to purchase additional shares of the Company's common stock
or to pay debt service on shares acquired with the proceeds of loans
("leveraged shares"). The ESOP's leveraged shares are initially pledged as
collateral for the debt incurred in connection with the acquisition of such
shares. As the debt is repaid, the shares are released from collateral and
allocated to plan participants. Contributions are allocated among participants
based on years of service and compensations. Upon retirement, death or
disability, the employee or a beneficiary receives the designated common stock.
The Company's cash contributions to the ESOP were $2.3 million, $2.2
million and $.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Shares held by the ESOP at December 31, 1995, 1994 and 1993 were
approximately 4.0 million, 4.7 million and 4.3 million, respectively. At
December 31, 1994, the ESOP had borrowed $4.3 million from the Company bearing
interest at rates ranging from 7.85% to 9.50%. During 1995, the ESOP was
granted a $10 million line of credit from a financial institution. During 1995,
the ESOP borrowed $1.6 million under this line of credit and refinanced the
amounts previously borrowed from the Company. At December 31, 1995 the ESOP had
notes payable with a balance of $6.0 million under this line of credit. Because
the source of the loan payments is primarily contributions received by the ESOP
from the Company, such debt is included in the Company's notes payable with a
corresponding reduction of stockholder's equity. In accordance with Statement
of Position 93-6 ("SOP 93-6"), leveraged shares purchased subsequent to
December 31, 1992 are, upon release, reflected as compensation expense based on
the then current market price of the shares. Shares which have not been
committed to be released are not considered outstanding for purposes of the
computation of earnings per share. During 1995, 165,000 shares of the Company's
common stock which were considered outstanding for earnings per share purposes
in prior periods were not considered outstanding. At December 31, 1995,
approximately 8,000 shares of common stock were committed to be released
resulting in additional compensation expense of approximately $.2 million
during 1995. At December 31, 1995, the ESOP had approximately 800,000 leveraged
shares, of which approximately 288,000 were accounted for under the provisions
of SOP 93-6. The fair value of the 288,000 leveraged shares accounted for under
the provisions of SOP 93-6 was $7.6 million at December 31, 1995.
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9.2 Stock Option Plans. The following is a summary of options granted,
exercised or canceled during 1993, 1994 and 1995.
Option Price
Shares Per Share
------------ ----------------------
January 1, 1993............................ 1,871,050 $ 2.77 to $ 4.55
Granted............................. 847,880 $ 4.12 to $ 6.42
Exercised........................... (811,652) $ 2.77 to $ 4.13
Canceled............................ (97,432)
------------
December 31, 1993.......................... 1,809,846 $ 2.77 to $ 6.42
Granted............................. 138,596 $ 15.46 to $ 19.21
Exercised........................... (219,174) $ 2.77 to $ 4.13
Canceled............................ (29,822)
------------
December 31, 1994.......................... 1,699,446 $ 2.77 to $ 19.21
Granted............................. 670,600 $ 16.00 to $ 22.38
Exercised........................... (409,092) $ 2.77 to $ 6.42
Canceled............................ (40,734)
------------
December 31, 1995.......................... 1,920,220
============
At December 31, 1995 options for 522,084 of the Company's common
stock were exercisable and 914,396 shares were available for the granting of
options. During 1995 and 1994, the Company recognized a $4.4 million and a $1.4
million federal income tax benefit, respectively, as a result of the exercise
of non-qualified stock options. This benefit resulted in a decrease in current
income taxes payable and an increase in additional paid-in capital.
9.3 Employees' Savings Plan and Trust. The United Companies Financial
Corporation Employees' Savings Plan and Trust is designed to be a qualified
plan under Sections 401(a) and 401(k) of the Internal Revenue Code. Under the
plan, employees are allowed to defer income on a pre-tax basis through
contributions to the plan and the Company matches a portion of such
contributions. The Company's matching contributions totaled $1.3 million, $1.0
million and $.4 million during 1995, 1994 and 1993, respectively. Employees
have five investment options, one of which is to invest in the Company's common
stock. The plan held 567,971 and 558,386 shares of the Company's common stock
at December 31, 1995 and 1994, respectively.
9.4 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 during 1995 and 1994 was $.2 million
and $.3 million, respectively. The Company calculated its postretirement
benefit obligation as of December 31, 1995 using a weighted average discount
rate of 6.5%. A reconciliation of the funded status of the deferred
compensation plan as of December 31, 1995 and 1994 is as follows:
December 31, 1995 Net Change December 31, 1994
----------------- ---------- -----------------
(in thousands)
Accumulated postretirement
benefit obligation................. $ (1,912) $ (90) $ (1,822)
Plan assets............................ - - -
----------- --------- ------------
Funded status.......................... (1,912) (90) (1,822)
Unrecognized transition
obligation......................... 1,138 (66) 1,204
----------- --------- ------------
Accrued postretirement
benefit cost....................... $ (774) $ (156) $ (618)
=========== ========= ============
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10. REGULATORY ACCOUNTING
Accounting records of UCLIC are also maintained in accordance with
practices prescribed or authorized by insurance regulatory authorities.
Prescribed statutory accounting principles include a variety of publications of
the National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. UCLIC's capital
and surplus pursuant to the regulatory accounting basis as of December 31, 1995
and 1994 was $99.9 million and $90.0 million, respectively. UCLIC's regulatory
accounting basis net gain from operations for the years ended December 31,
1995, 1994 and 1993 was $12.8 million, $9.7 million and $13.0 million,
respectively. Net income (loss) of UCLIC on a regulatory accounting basis,
which includes realized capital gains and losses, was $10.0 million, $5.8
million and $(1.7) million for the years ended December 31, 1995, 1994 and
1993, respectively. As a Louisiana domiciled insurance company, UCLIC is
subject to certain regulatory restrictions on the payment of dividends. UCLIC
has the capacity at December 31, 1995 to pay dividends of $9.2 million without
prior regulatory approval. UCLIC did not pay any dividends to the Company
during 1993, 1994 or 1995 in order to retain capital in UCLIC. At December 31,
1995, UCLIC has $186.5 million of net assets for financial reporting purposes.
UCLIC received written approval from the Louisiana Department of Insurance
to invest in first lien residential mortgage loans originated by the Company on
a short-term basis without recording the assignment of the mortgage loans to
UCLIC, which differs from prescribed statutory accounting practices. Statutory
accounting practices prescribed by the State of Louisiana require that
investments in mortgage loans be secured by unrestricted first liens on the
underlying property. As of December 31, 1995, statutory surplus was increased
by approximately $53.7 million as a result of this permitted practice.
11. 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.
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The carrying value and fair value of the Company's financial assets and
liabilities at December 31, 1995 and 1994 were as follows:
1995 1994
-------------------------- ---------------------------
Carrying Carrying
Value Fair Value Value Fair Value
----------- ------------ ------------- -----------
(in thousands) (in thousands)
Financial assets:
Cash and cash equivalents.................... $ 28,087 $ 28,087 $ 56,359 $ 56,359
Temporary investments - reserve accounts..... 155,254 155,254 81,980 81,980
Loans - net.................................. 394,002 396,923 344,880 343,121
Capitalized excess servicing income.......... 283,454 283,454 179,065 179,065
Investment securities:
Trading................................. 752 752 679 679
Available-for-sale...................... 1,140,421 1,140,421 960,100 960,100
Held-to-maturity........................ 51,586 49,611 57,391 55,084
Other assets................................. 70,916 71,628 61,430 61,430
Financial liabilities:
Annuity reserves............................. 1,417,803 1,350,626 1,425,973 1,354,944
Notes payable................................ 255,756 270,558 213,668 212,314
Allowance for loss on loans serviced......... 44,970 44,970 26,822 26,822
Repurchase agreements........................ 40,857 40,857 - -
Other liabilities............................ 29,528 29,528 15,679 15,679
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.
Loans. The fair value of the Company's loan portfolio was determined by
segregating the portfolio by type of loan and further by its performing and
nonperforming components. Performing loans were further segregated based on the
due date of their payments, an analysis of credit risk by category was
performed and a matrix of pricing by category was developed. Loans which had
been identified for sale were valued at their estimated sales price, which
includes the estimated value of the portion of the interest and fees which are
not sold with the securities backed by the loans. Loans which were current but
not identified for sale approximate the remaining principal balance which is
believed to represent an estimate of market discount from similar loans
identified for sale. The fair value of delinquent loans was estimated by using
the Company's historical recoverable amount on defaulted loans. Foreclosed
property is excluded from this disclosure because it is not considered a
financial instrument.
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
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estimated losses on loans sold with recourse. The carrying value is considered
to be a reasonable estimate of fair value.
Investment securities. The estimated fair value for the Company's
investment security 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.
Allowance for loss on loans serviced. In estimating the fair value of the
allowance for loss on loans serviced with recourse, the Company estimated the
timing of cash flows and discounted these cash flows using a risk-free interest
rate.
Repurchase agreement. The repurchase agreements mature in less than 60
days; therefore, the carrying amount of the repurchase agreements are
considered to be a reasonable estimate of fair value.
Other assets and other liabilities. Other assets include primarily due
from reinsurers, policy loans and mortgage servicing rights. Other liabilities
are comprised primarily of managed cash overdraft, amounts due investors, escrow
accounts and accrued interest 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, 1995.
Notes payable. Notes payable consists primarily of amounts payable for the
Company's senior unsecured notes. The fair value of the senior unsecured notes
is based upon the estimated current rate offered to the Company for debt of the
same remaining maturity.
The fair values presented herein are based on pertinent information
available to management as of December 31, 1995. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
12. DISCONTINUED OPERATIONS
United General Title Insurance Company. On April 10, 1995, the Company
made a decision to dispose of its investment in United General Title Insurance
Company ("UGTIC"), a wholly owned subsidiary of the Company, and, on May 1,
1995, approved a formal plan of disposal. The decision to dispose of UGTIC was
independent of the consummation of the sale thereof pursuant to the definitive
stock sale agreement signed on August 11, 1995. As a result, the operations of
UGTIC have been classified as discontinued operations, and, accordingly, the
consolidated financial statements and the related notes of the Company
segregate continuing and discontinued operations. The sale was concluded on
February 29, 1996 at a sales price of approximately $5.5 million.
The definitive stock sale agreement provided for the sale of 100% of the
stock of UGTIC and contains a provision making the Company liable to UGTIC for
claims from defalcations and fraud losses incurred by UGTIC which are unknown
and occur prior to closing and are discovered within 24 months thereafter. The
Company is also liable, up to $4.2 million, for policy claims paid over a ten
year period after closing that exceed certain specified levels. The Company
recorded a loss from discontinued operations (net of income tax benefit) of
$3.5 million in 1995 in connection with the sale of UGTIC.
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Revenues for UGTIC for the years ended December 31, 1995, 1994 and 1993
were $37.8 million, $45.5 million and $25.1 million, respectively. At December
31, 1995, total assets and total liabilities of UGTIC were $16.8 million and
$8.3 million, respectively.
Foster Mortgage Corporation. On May 7, 1993, the Company decided to divest
its subsidiary Foster Mortgage Corporation ("FMC"). As of November 30, 1993,
the servicing rights owned by FMC, which constituted substantially all of its
assets, were sold. On December 21, 1993, the institutional lenders under FMC's
primary credit facility (the "FMC Institutional Lenders") filed a petition in
the U.S. bankruptcy court to cause the remaining affairs of FMC to be concluded
under the supervision of the bankruptcy court. The FMC Institutional Lenders
filed and the bankruptcy court approved a plan of liquidation for FMC providing
for the appointment of a trustee selected by the FMC Institutional Lenders. The
FMC Institutional Lenders allege that FMC has certain claims against the
Company, including a claim with respect to the Company's alleged failure to
remit all sums due FMC regarding federal income taxes under a tax agreement
among the Company and its subsidiaries, including FMC, estimated by the FMC
Institutional Lenders to range from $2.1 million to $29 million. FMC and the
Company executed, subject to the approval of the bankruptcy court, a settlement
agreement relating to payments between FMC and the Company in connection with
the federal income tax benefits resulting from FMC's losses and to certain
prior intercompany payments between FMC and the Company. The settlement
agreement included a release by FMC in favor of the Company of any and all
claims relating to federal income taxes. The FMC Institutional Lenders opposed
the proposed settlement agreement. At the conclusion of a hearing on the
proposed settlement on August 18, 1994, the bankruptcy court approved the
portion of the settlement providing for a net payment by the Company of $1.65
million to FMC in satisfaction of the federal income tax benefits resulting
from FMC's losses and the release of any claims regarding federal income taxes.
The Company had previously recorded substantially all of the impact of this
portion of the settlement in its prior financial statements. The bankruptcy
court declined to approve the other portion of the proposed settlement relating
to payments received by the Company from FMC within twelve months of the
bankruptcy filing. If the Company were required to refund such payments, the
Company has estimated the potential additional loss to be $1.9 million, net of
tax benefits. The decision of the bankruptcy court on the settlement was
appealed by the FMC Institutional Lenders to the U.S. District Court which
affirmed the bankruptcy court's decision. The FMC Institutional Lenders then
appealed this decision to the U.S. Fifth Circuit Court of Appeals. In a
decision rendered on November 9, 1995, the U.S. Fifth Circuit Court of Appeals
reversed the district court, vacated the settlement between FMC and the Company
and remanded the matter for further proceedings. The trustee under the plan of
liquidation has filed an adversary proceeding in the bankruptcy proceedings
against the Company seeking avoidance of alleged preferential payments totaling
$3.72 million and has also instituted a suit in federal court against the
Company alleging claims under the tax agreement estimated to range from $2
million to $29 million. Management of the Company does not believe that any
additional amounts are owed by the Company to FMC or the trustee and intends to
vigorously contest the claims which have been brought against it for such
amounts by the trustee under the plan of liquidation. The Company did not
guarantee any debt of FMC.
13. SUBSEQUENT EVENT.
On February 2, 1996, the Company signed a stock purchase agreement dated
as of January 30, 1996, for the sale of all of the stock of UCLIC to UC Life
Holding Corp., a new Delaware corporation formed by Knightsbridge Capital Fund
I, L.P. for an aggregate amount of $164 million plus earnings of UCLIC from
January 1, 1996, to closing of the transaction. Knightsbridge, which is a
private investment partnership with institutional partners, was formed in 1995
to make equity investments in companies engaged primarily in the life insurance
industry.
Under the terms of the agreement, the sales price is comprised of cash,
currently estimated to be $109 million and UCLIC real estate and other assets
to be distributed to the Company prior to the closing. The real estate to be
distributed includes portions of the United Plaza office park, including the
Company's home office. In addition, the Company will purchase a convertible
promissory note from an affiliate of the purchaser for $15 million in cash. The
note matures in 11 years and bears interest at 8% per annum payable at
maturity. The Company does not expect the sale to have a material effect on
net income.
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The purchaser also agreed that UCLIC would continue to be an investor in
first lien home equity loans originated by the Company's lending operations and
that UCLIC's home office operations would be maintained in its present location
in Baton Rouge, Louisiana following the closing for at least two years. The
agreement is subject to approval by UCFC's shareholders and regulatory
authorities and the satisfaction of other conditions, and provides that the
closing will occur on or before July 31, 1996.
14. 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, 1995, 1994 and 1993:
Year Ended December 31,
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
(in thousands)
Revenues
Mortgage......................................... $ 253,098 $ 177,601 $ 120,639
Life insurance................................... 144,485 138,129 140,179
Corporate, other operations, and
eliminations................................. 367 (1,036) (805)
------------- ------------- -------------
Total................................... $ 397,950 $ 314,694 $ 260,013
============= ============= =============
Income from continuing operations
before income taxes
Mortgage......................................... $ 107,673 $ 81,155 $ 46,295
Life insurance................................... 12,099 9,080 2,635
Corporate, other operations, and
eliminations................................. (5,008) (6,161) (5,869)
------------- ------------- -------------
Total................................... $ 114,764 $ 84,074 $ 43,061
============= ============= =============
Assets - Year-end
Mortgage......................................... $ 533,952 $ 301,330 $ 182,672
Life Insurance................................... 1,789,608 1,641,026 1,622,879
Corporate, other operations, and
eliminations................................. 43,326 35,899 11,602
------------- ------------- -------------
Total................................... $ 2,366,886 $ 1,978,255 $ 1,817,153
============= ============= =============
15. CONTINGENCIES
As discussed in Note 12 above, the Company, in February, 1996, concluded
the sale of its investment in UGTIC. In connection therewith, the stock sale
agreement includes a provision making the Company liable to UGTIC for claims
from defalcations and fraud losses incurred by UGTIC which are unknown and
occur prior to closing and are discovered within 24 months thereafter. The
Company is also liable, up to $4.2 million, for policy claims paid over a ten
year period after closing that exceed certain specified levels.
As also discussed in Note 12 above, the U.S. Fifth Circuit Court of
Appeals reversed the lower court decision approving the settlement agreement
between FMC and the Company, vacated the settlement between FMC and the Company
and remanded the matter for further proceedings. The trustee under the plan of
liquidation has filed an adversary proceeding in the bankruptcy proceedings
against the Company seeking avoidance of alleged preferential payments totaling
$3.72 million and has also instituted a suit in federal court against the
Company alleging claims under the tax agreement estimated to range from $2
million to $29 million. Management of the Company does not believe that any
additional amounts are owed by the Company to FMC or the trustee and intends to
vigorously contest the claims which have been brought against it for such
amounts by the trustee under the plan of liquidation. The Company did not
guarantee any debt of FMC.
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16. 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)
1995
Total revenues................................................. $ 86,835 $ 101,876 $ 106,109 $ 103,130
Income from continuing operations before income taxes.......... 19,549 30,379 34,070 30,766
Net income..................................................... 12,696 16,426 21,248 19,099
Per share data - net income:
Primary:
Income from continuing operations......................... $ .46 $ .66 $ .68 $ .61
Income (loss) from discontinued operations................ (.01) (.09) (.01) (.01)
---------- ---------- ----------- -----------
Total.................................................. $ .45 $ .57 $ .67 $ .60
========== ========== =========== ===========
Fully Diluted:
Income from continuing operations......................... $ .46 $ .66 $ .66 $ .60
Income (loss) from discontinued operations................ (.01) (.10) (.01) (.01)
---------- ---------- ----------- -----------
Total................................................. $ .45 $ .56 $ .65 $ .59
========== ========== =========== ===========
Three Months Ended
-----------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
----------- ---------- ----------- -----------
(in thousands, except per share data)
1994
Total revenues................................................... $ 74,816 $ 78,175 $ 82,054 $ 79,649
Income from continuing operations before income taxes............ 20,832 22,751 23,290 17,201
Net income....................................................... 13,710 14,699 15,253 5,872
Per share data - net income:
Primary:
Income from continuing operations........................ $ .47 $ .52 $ .53 $ .39
Income (loss) from discontinued operations............... .01 (.01) - (.18)
------------ ----------- --------- ----------
Total.................................................... $ .48 $ .51 $ .53 $ .21
============ =========== ========= ==========
Fully Diluted:
Income from continuing operations........................ $ .47 $ .52 $ .53 $ .39
Income (loss) from discontinued operations............... .01 (.01) - (.18)
------------ ---------- --------- ----------
Total.................................................... $ .48 $ .51 $ .53 $ .21
============ ========== ========= ===========
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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.
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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 42
December 31, 1995 and 1994
Consolidated Balance Sheets Page 43
For the three years ended December 31, 1995
Consolidated Statements of Income Page 44
Consolidated Statements of Cash Flows Page 45
Consolidated Statements of Stockholders' Equity Page 46
Notes to Consolidated Financial Statements Pages 47-66
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, 1995, the registrant was primarily an operating company
and all subsidiaries are wholly owned.
Schedule II Valuation and Qualifying Accounts, for the three years
ended December 31, 1995. Page 74
Schedule V* Supplementary Insurance Information, for the three
years ended December 31, 1995. Page 75
Schedule VI* Reinsurance, for the three years ended December 31,
1995. Page 76
* Filed in compliance with Article 7 of Regulation S-X.
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Exhibits
Exhibit No. Description of Document
2(1) Stock Purchase Agreement dated as of January 30, 1996 by and between the
Company and UC Life Holding Corporation
3.1(2) Articles of Incorporation, as amended
3.1A(3) Amendment to Articles of Incorporation effective April 28, 1994
3.1B(4) Amendment to Articles of Incorporation effective June 19, 1995
3.2(5) By-Laws, as amended
4.1(6) Senior Indenture
4.2(6) Subordinated Indenture
4.3(6) First Supplemental Indenture with respect to 9.35% Senior Notes due November 1,
1999
4.4(6) Form of certificate for shares of Preferred Redeemable
Increased Dividend Equity Securities 6 3/4% PRIDES(sm),
Convertible Preferred Stock, par value $2.00 per share
4.5(7) Second Supplemental Indenture for 7% Senior Notes due July 15, 1998
4.6(8) Series A Junior Participating Preferred Stock Purchase Rights
10.1(2) 1986 Employee Incentive Stock Option Plan
10.2(2) Employee Stock Ownership Plan and Trust
10.3(2) Management and compensatory contracts with executive officers and directors
10.4(2) Deferred compensation agreements
10.5(9) Management Incentive Plan, as amended
10.6(2) Employees' Savings Plan and Trust
10.7(2) Agreement for termination of employee agreement
10.8(2) Agreement for termination of employment agreement
10.9(2) Unfunded Salary Deferral Agreement dated April 1, 1989 with executive officer
10.10(2) Split-Dollar Insurance Agreement dated April 1, 1989 with executive officer
10.11(2) 1989 Stock Incentive Plan
10.12(2) 1989 Non-Employee Director Stock Option Plan
10.13(2) 1992 Form 11K, Employees' Savings Plan and Trust
10.14(10) Stock Purchase Warrant dated as of July 1, 1993
10.15(2) 1993 Form 11K, Employees' Savings Plan and Trust
10.16(9) 1993 Stock Incentive Plan
69
70
Exhibit No. Description of Document
10.17(9) 1993 Non-Employee Director Plan
10.19(2) 1994 Form 11-K, Employees' Savings Plan and Trust
10.20(11) 1995 Form 11-K, Employee Savings Plan
10.21(5) Indemnification agreements
10.22(12) Change of Control Agreement
10.23(12) Supplemental Retirement Agreement
10.24(12) Split Dollar Agreement
11.1(12) Statement regarding computation of per share earnings
21.1(12) List of Subsidiaries of the Company
23.1(12) Consent of Deloitte & Touche LLP
27(12) Financial Data Schedule
(1) Incorporated herein by reference to the designated Exhibit on the
Company's Current Report on Form 8-K filed on February 9, 1996.
(2) Incorporated herein by reference to the designated Exhibit of the
Company's Annual Report on Form 10-K dated December 31, 1994.
(3) Incorporated herein by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q dated June 30, 1994.
(4) Incorporated herein by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q dated June 30, 1995.
(5) Incorporated herein by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q dated March 31, 1995.
(6) Incorporated by reference to the designated Exhibits of the Company's
Current Report on Form 8-K filed on June 16, 1995.
(7) Incorporated herein by reference to the designated Exhibit to the
Company's Current Report on Form 8-K filed July 26, 1995.
(8) Incorporated by reference to the designated Exhibit of the Company's
Form 8-A dated August 5, 1994.
(9) Incorporated by reference from the designated Exhibit of the Company's
Registration Statement on Form S-8 filed September 29, 1995.
(10) Incorporated herein by reference to the designated Exhibit of the
Company's Registration Statement on Form S-3 (SEC File No. 33-52739).
(11) To be filed as Amendment to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995
(12) Filed herewith.
Exhibit No. 10.22 - Page 79
Exhibit No. 10.23 - Page 107
Exhibit No. 10.24 - Page 115
Exhibit No. 11.1 - Page 120
Exhibit No. 21.1 - Page 121
Exhibit No. 23.1 - Page 122
Exhibit No. 27 - Page 123
70
71
Reports on Form 8-K
On October 31, 1995, the Company filed a Current Report on Form 8-K
announcing that it was reviewing strategic alternatives with respect to its
life insurance subsidiary, United Companies Life Insurance Company ("UCLIC"),
including the possible sale of such subsidiary. On February 9, 1996, the
Company filed a Current Report on Form 8-K to report that it had signed a
definitive agreement with respect to the sale of all of the outstanding capital
stock of UCLIC.
71
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 15, 1996
UNITED COMPANIES FINANCIAL CORPORATION
By: /s/ SHERRY E. ANDERSON
--------------------------------
Sherry E. Anderson
Senior Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 15, 1996.
/s/ J. TERRELL BROWN Chairman of the Board, Chief Executive Officer
- ----------------------------------- (Principal Executive Officer)
J. Terrell Brown
/s/ JOHN D. DIENES President, Chief Operating Officer and
- ----------------------------------- Director (Principal Operating Officer)
John D. Dienes
/s/ DALE E. REDMAN Executive Vice President, Chief Financial Officer,
- ----------------------------------- and Director (Principal Financial Officer)
Dale E. Redman
/s/ JESSE O. GRIFFIN Senior Vice President and Controller
- ----------------------------------- (Principal Accounting Officer)
Jesse O. Griffin
/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
72
73
SIGNATURES
/s/ HARRIS J. CHUSTZ, JR. Director
- -----------------------------------
Harris J. Chustz, Jr.
/s/ ROY G. KADAIR, MD. Director
- -----------------------------------
Roy G. Kadair, M.D.
/s/ ROBERT D. KILPATRICK Director
- -----------------------------------
Robert D. Kilpatrick
/s/ O. MILES POLLARD, JR. Director
- -----------------------------------
O. Miles Pollard, Jr.
/s/ WILLIAM H. WRIGHT, JR. Director
- -----------------------------------
William H. Wright, Jr.
73
74
SCHEDULE II
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
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, 1995
Allowance for loan losses................. $ 16,508 $ 16,025 $ (873) $ 16,769 $ 14,891
Allowance for bond losses................. - - - - -
Unearned loan charges..................... 1,109 - - 458 651
---------- ---------- ---------- ----------- -----------
Total............................. $ 17,617 $ 16,025 $ (873) $ 17,227 $ 15,542
========== ========== ========== =========== ===========
December 31, 1994...........................
Allowance for loan losses................. $ 21,017 $ 13,457 $ (514) $ 17,452 $ 16,508
Allowance for bond losses................. 500 - - 500 -
Unearned loan charges..................... 1,982 - - 873 1,109
---------- ---------- ---------- ----------- -----------
Total............................. $ 23,499 $ 13,457 $ (514) $ 18,825 $ 17,617
========== ========== ========== =========== ===========
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
========== ========== ========== =========== ===========
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.
74
75
================================================================================
SCHEDULE V
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Three Years Ended December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J
Deferred Policy
Deferred Acquisition Cost
Amortization and
Policy Net Benefits, Other
Acquisition Future Policy Unearned Premium Investment Claims, Operating
Costs Benefits(1) Premiums Revenue(3) Income Losses, Etc. Expenses(4)
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Year ended December 31, 1995 ............ $ 90,703 $1,529,012 $ 1,793 $ 8,508 $ 136,037 $ 9,930 $ 31,971
Year ended December 31, 1994 ............ $ 91,915 $1,542,474 $ 4,491 $ 11,373 $ 126,108 $ 12,654 $ 32,960
Year ended December 31, 1993 ............ $ 83,495 $1,418,310 $ 10,260 $ 18,684 $ 109,728 $ 18,200 $ 24,967
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.
75
76
SCHEDULE VI
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
============================================================================================================================
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
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
December 31, 1995
Life insurance in force ................................... $ 554,131 $ 149,080 $ 992,979 $1,398,030 71.0%
========== ========== ========== ==========
Premiums
Life insurance .......................................... $ 6,016 $ 1,625 $ 2,588 $ 6,979 37.1%
Accident and health
insurance ............................................ 1,643 115 1 1,529 --
---------- ---------- ---------- ----------
Total premiums .................................. $ 7,659 $ 1,740 $ 2,589 $ 8,508 30.4%
========== ========== ========== ==========
December 31, 1994
Life insurance in force ................................... $ 709,883 $ 177,585 $1,106,148 $1,638,446 67.5%
========== ========== ========== ==========
Premiums
Life insurance .......................................... $ 7,467 $ 1,931 $ 2,959 $ 8,495 34.8%
Accident and health
insurance ............................................ 3,070 199 7 2,878 --
---------- ---------- ---------- ----------
Total premiums .................................. $ 10,537 $ 2,130 $ 2,966 $ 11,373 26.1%
========== ========== ========== ==========
December 31, 1993
Life insurance in force ................................... $ 956,788 $ 215,918 $1,106,721 $1,847,591 59.9%
========== ========== ========== ==========
Premiums
Life insurance .......................................... $ 12,657 $ 3,196 $ 3,020 $ 12,481 24.2%
Accident and health
insurance ............................................ 6,637 453 19 6,203 --
---------- ---------- ---------- ----------
Total premiums .................................. $ 19,294 $ 3,649 $ 3,039 $ 18,684 16.3%
========== ========== ========== ==========
76
77
INDEX TO EXHIBITS
Exhibit No. Description of Document
- ----------- -----------------------
2(1) Stock Purchase Agreement dated as of January 30, 1996
by and between the Company and UC Life Holding
Corporation
3.1(2) Articles of Incorporation, as amended
3.1A(3) Amendment to Articles of Incorporation effective
April 28, 1994
3.1B(4) Amendment to Articles of Incorporation effective
June 19, 1995
3.2(5) By-Laws, as amended
4.1(6) Senior Indenture
4.2(6) Subordinated Indenture
4.3(6) First Supplemental Indenture with respect to 9.35%
Senior Notes due November 1, 1999
4.4(6) Form of certificate for shares of Preferred Redeemable
Increased Dividend Equity Securities 6 3/4% PRIDES(sm),
Convertible Preferred Stock, par value $2.00 per share
4.5(7) Second Supplemental Indenture for 7% Senior Notes due
July 15, 1998
4.6(8) Series A Junior Participating Preferred Stock Purchase
Rights
10.1(2) 1986 Employee Incentive Stock Option Plan
10.2(2) Employee Stock Ownership Plan and Trust
10.3(2) Management and compensatory contracts with executive
officers and directors
10.4(2) Deferred compensation agreements
10.5(9) Management Incentive Plan, as amended
10.6(2) Employees' Savings Plan and Trust
10.7(2) Agreement for termination of employee agreement
10.8(2) Agreement for termination of employment agreement
10.9(2) Unfunded Salary Deferral Agreement dated April 1, 1989
with executive officer
10.10(2) Split-Dollar Insurance Agreement dated April 1, 1989
with executive officer
10.11(2) 1989 Stock Incentive Plan
10.12(2) 1989 Non-Employee Director Stock Option Plan
10.13(2) 1992 Form 11K, Employees' Savings Plan and Trust
10.14(10) Stock Purchase Warrant dated as of July 1, 1993
10.15(2) 1993 Form 11K, Employees' Savings Plan and Trust
10.16(9) 1993 Stock Incentive Plan
10.17(9) 1993 Non-Employee Director Plan
77
78
Exhibit No. Description of Document
- ----------- -----------------------
10.19(2) 1994 Form 11-K, Employees' Savings Plan and Trust
10.20(11) 1995 Form 11-K, Employee Savings Plan
10.21(5) Indemnification agreements
10.22(12) Change of Control Agreement
10.23(12) Supplemental Retirement Agreement
10.24(12) Split Dollar Agreement
11.1(12) Statement regarding computation of per share earnings
21.1(12) List of Subsidiaries of the Company
23.1(12) Consent of Deloitte & Touche LLP
27(12) Financial Data Schedule
(1) Incorporated herein by reference to the designated Exhibit on the
Company's Current Report on Form 8-K filed on February 9, 1996.
(2) Incorporated herein by reference to the designated Exhibit of the
Company's Annual Report on Form 10-K dated December 31, 1994.
(3) Incorporated herein by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q dated June 30, 1994.
(4) Incorporated herein by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q dated June 30, 1995.
(5) Incorporated herein by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q dated March 31, 1995.
(6) Incorporated by reference to the designated Exhibits of the Company's
Current Report on Form 8-K filed on June 16, 1995.
(7) Incorporated herein by reference to the designated Exhibit to the
Company's Current Report on Form 8-K filed July 26, 1995.
(8) Incorporated by reference to the designated Exhibit of the Company's
Form 8-A dated August 5, 1994.
(9) Incorporated by reference from the designated Exhibit of the Company's
Registration Statement on Form S-8 filed September 29, 1995.
(10) Incorporated herein by reference to the designated Exhibit of the
Company's Registration Statement on Form S-3 (SEC File No. 33-52739).
(11) To be filed as Amendment to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995
(12) Filed herewith.
Exhibit No. 10.22 - Page 79
Exhibit No. 10.23 - Page 107
Exhibit No. 10.24 - Page 115
Exhibit No. 11.1 - Page 120
Exhibit No. 21.1 - Page 121
Exhibit No. 23.1 - Page 122
Exhibit No. 27 - Page 123
78