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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A-1
(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, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................. to ...................
Commission file number 1-7067
UNITED COMPANIES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Louisiana 71-0430414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 Essen Lane 70809
Baton Rouge, Louisiana (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code (504) 924-6007
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.00
(Title of Class)
------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
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 10, 1995, was
$349,805,588.
The number of shares of $2.00 par value stock issued and outstanding
as of March 10, 1995 was 13,883,937 excluding 579,841 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Management's proxy statement in connection with the Annual Meeting of
Shareholders to be held June 14, 1995 is incorporated by reference in Part III.
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AMENDMENT TO APPLICATION OR REPORT
FILED PURSUANT TO SECTION 12, 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
UNITED COMPANIES FINANCIAL CORPORATION
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items,
financial statements, exhibits or other portions of its Annual Report on Form
10-K for the year ended December 31, 1994 as set forth in the pages attached
hereto:
<TABLE>
<S> <C>
PART I
Item 1. Business
PART II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
PART IV
Item 14. Schedule V, Supplementary Insurance Information, for the
three years ended December 31, 1994
Schedule VI, Reinsurance, for the three years ended December
31, 1994
Exhibit 11.1, Statement Re Computation of Earnings Per Share
Exhibit 23.1, Independent Auditors' Consent
</TABLE>
For convenience, the following items, which have not been amended, are also
included in the amended Annual Report on Form 10-K.
<TABLE>
<S> <C>
PART I
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure matters
PART III
PART IV
Item 14. Schedule II, Valuation and Qualifying Accounts for the three
years ended December 31, 1994.
Exhibits incorporated by reference
Exhibit 21.1 List of Subsidiaries
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed on its behalf
by the undersigned, thereunto duly authorized.
UNITED COMPANIES FINANCIAL CORPORATION
By: /s/ Sherry E. Anderson
----------------------------------------
Sherry E. Anderson
Senior Vice President and Secretary
Date: May 22, 1995
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PART I
ITEM 1. BUSINESS
GENERAL
United Companies Financial Corporation (the "Company" or "UCFC"),
founded in 1946, is a financial services holding company having mortgage and
insurance operations. The Company's mortgage operations are focused on the
origination, sale and servicing of first mortgage, non-conventional, home
equity loans. Home equity loan production in 1992, 1993, and 1994 was $301
million, $540 million, and $909 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
Company believes its loan securitizations improve its access to funding and
thereby provide a distribution outlet sufficient to meet the Company's expanded
home equity loan production. Increased loan production and its reduced cost of
funding are the primary reasons that the operating income before income taxes
of the Company's mortgage operations rose from $24.0 million in 1992 to $46.3
million in 1993 to $81.2 million in 1994. The Company's insurance operations
sell primarily deferred annuities marketed in 47 states, the District of
Columbia and Puerto Rico. 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 1,500 employees.
MORTGAGE
United Companies Lending Corporation ("UC Lending" or "UCLC"), the
Company's wholly-owned mortgage subsidiary, originates, sells and services
primarily first mortgage, non-conventional, home equity loans which are
typically not loans for the purchase of homes. UC Lending originated $893
million of first mortgage home equity loans in 1994, up 68% from $531 million
in 1993. Loan originations are accomplished primarily through a retail branch
network in 38 states consisting of 140 offices as of December 31, 1994. The
Company's strategy for increasing loan production includes continued geographic
expansion, increased wholesale originations and acquisitions. In order to
expand its distribution network, during the third quarter of 1992, the Company
initiated a wholesale loan network of correspondents and brokers through a
division of UC Lending operating under the registered service mark UNICOR
Mortgage(R), Inc. ("UNICOR"). The Company has expanded this division which,
as of December 31, 1994, was operating in 31 states. The Company plans to
further expand UNICOR on a selective basis into other states. UNICOR offers
fixed and adjustable rate home equity loans to borrowers of a credit quality
comparable to customers of UC Lending's branch network. During late 1993, UC
Lending began another wholesale loan network which offers the same products as
the UNICOR program to banks and other financial institutions through its
division that operates under the registered service mark GINGER MAE(R), Inc.
("GINGER MAE"), the acronym for the Good Neighbor Reinvestment Mortgage
Assistance Loan Program. This program is intended to permit participating
institutions to originate loans to borrowers who do not qualify for
conventional credit. Loans purchased by UC Lending under this program are
underwritten by UC Lending personnel prior to approval and funding under
substantially the same guidelines as those utilized by UNICOR. As of December
31, 1994, GINGER MAE had 117 financial institutions in 11 states participating
in the GINGER MAE program. In August, 1994 the Company incorporated two
separate subsidiaries, UNICOR Mortgage(R), Inc. and GINGER MAE(R), Inc., and
intends to commence operation of the wholesale division through these separate
subsidiaries during 1995.
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The secondary mortgage market's growing acceptance of mortgage-backed
securities based on non-conventional home equity loans has allowed the Company
to pool large numbers of loans for sale as mortgage-backed securities. In late
1991 and in 1992, this was accomplished primarily through private placement
transactions. During 1993 and 1994, UC Lending sold publicly $451 million and
$973 million, respectively, of home equity loans through a Company-sponsored
shelf registration statement which was initially approved in 1993 for up to $1
billion principal amount of mortgage-backed securities and was amended in 1994
to cover an additional $3 billion principal amount of mortgage-backed
securities. 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 certain recurring fees) ranged from 4.56% in 1992 to 6.06%
in 1993 to 4.49% in 1994. The weighted average interest spread on loans sold
is determined without regard to expected credit losses. Therefore, the spread
is not impacted by projected or actual credit losses. The Company's
securitization transactions are credit enhanced and have received ratings of
"Aaa" from Moody's Investors Service, Inc. and "AAA" from Standard & Poor's
Ratings Group, a division of McGraw-Hill, Inc. The Company presently intends
to effect securitization transactions on a quarterly basis, but the amount and
timing of sales of securities under the shelf registration statement will
depend upon market and other conditions affecting the operations of the
Company. Servicing rights are retained on substantially all loans sold, and as
of December 31, 1994, UC Lending serviced 52,289 home equity loans having an
aggregate principal balance of approximately $1.7 billion.
The ability of the Company to sell loans and/or mortgage-backed
securities in the secondary market 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.
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 loans sold less future
estimated credit losses relating to the loans sold. At December 31, 1994, the
Company's balance sheet reflected capitalized excess servicing income of
approximately $179 million and an allowance for loss on loans serviced of
approximately $26.8 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, 1994, 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 could
result in capitalized excess servicing income amortization expense exceeding
realized excess servicing income, thereby adversely affecting the Company's
servicing income and resulting in a charge to earnings in the period of
adjustment. 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.
Principal Product. UC Lending's principal product is a home equity
loan with a fixed amount, interest rate and term to maturity, which is
typically secured by a first lien mortgage on the borrower's residence.
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 UC Lending, which are generally secured by a second
mortgage and typically carry a floating interest rate. As of December 31,
1994, approximately 96.3% in aggregate principal amount of the home equity
loans owned and/or serviced by UC Lending were secured by a first mortgage with
the remaining 3.7% in aggregate principal amount secured by second or
multi-property mortgages. During 1994, UC Lending originated $893 million in
first mortgage home equity loans, including $70.9 million of adjustable rate
loans, and $16 million in second and multi-property mortgage loans. The
average home equity loan amount at origination during 1994 was approximately
$41,000 up from $39,000 in 1993 and $28,000 in 1992, due primarily to an
expansion into geographic areas where home values are higher, a de-emphasis on
second mortgage loans, an expansion of loan product lines and the introduction
of a wholesale loan production program. On most home equity loans for home
improvements, the loan proceeds are disbursed to an escrow agent which,
according to guidelines established by UC Lending, releases such proceeds upon
completion of the improvements or in draws as the work on the improvements
progresses. The weighted average interest rate on home equity loans originated
during 1994 was 11.7%, compared to 11.8% during 1993. Costs incurred by the
borrower for loan origination, including origination points (which had a
weighted average of 6.0% for 1994 compared to 7.0% for 1993) and appraisal,
legal and title fees, are often included in the amount financed. Over the past
five years, contractual maturities have generally ranged from seven to twenty
years, and the average effective maturity has been approximately seven years.
Prior to July, 1991, UC Lending actively originated commercial real estate
loans for sale to UC Life. However, commercial real estate originations were
generally terminated due to a change in UC Life's investment demand and lack of
a secondary market for this product.
UC Lending's 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 generally produce higher fee and
interest income 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. Further, borrowers of
non-conventional loans may present a greater credit risk and generally pay
higher interest rates and loan origination fees. Management of the Company
believes that any greater credit risk arising out of making loans to these
borrowers is compensated by higher fees and interest rates. There are
generally numerous competitors for these borrowers in each of UC Lending's
geographic markets. Principal competitors include recognized national and
regional lenders. The Company believes that prompt underwriting and response
to loan applications provides a competitive advantage in loan originations.
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The following table sets forth selected home equity loan data for the indicated
periods:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1993 1992
----------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Loan originations . . . . . . . . . . . . . . . . . $ 908,821 $ 539,868 $ 301,234
=========== =========== ==========
Servicing portfolio (year-end):
Serviced for the Company . . . . . . . . . . . . . $ 203,651 $ 318,334 $ 274,021
Serviced for third party investors . . . . . . . . 1,480,047 806,805 545,427
----------- ----------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 1,683,698 $ 1,125,139 $ 819,448
=========== =========== ==========
Loan sales by UC Lending to third party investors . . $ 977,653 $ 462,873 $ 271,920
=========== =========== ==========
Average coupon on loans sold to
third party investors . . . . . . . . . . . . . . . 11.80% 12.00% 13.69%
=========== =========== ==========
Interest spread retained on loans sold . . . . . . . 4.49% 6.06% 4.56%
=========== =========== ==========
</TABLE>
Origination and Distribution. At December 31, 1994, UC Lending was
originating home equity loans through branch offices and its UNICOR and GINGER
MAE wholesale loan programs in 38 states. The wholesale loan origination
programs were developed to supplement the retail program and to expand the
distribution network. The Company believes that the marketing of its loan
products by UNICOR and GINGER MAE through independent mortgage brokers and
financial institutions provides an efficient and cost effective method to
access a larger customer base. Regardless of the manner of origination, all
home equity loans are underwritten utilizing the appropriate underwriting
guidelines of UC Lending prior to approval and funding. The underwriting
function is centralized at the home office. Subsequent to funding, all home
equity loans are reviewed by home office personnel and a portion are subject to
quality control review by home office personnel. The branch offices generally
are responsible for sales of foreclosed real estate. Each branch office
operates as a profit center and compensation of branch personnel includes an
incentive bonus plan based on production. Field personnel in the wholesale
loan programs receive a base salary and additional compensation based upon loan
production.
Underwriting. Substantially similar underwriting guidelines have
been used with respect to home equity loans originated in the branch network
and in the wholesale lending programs. The underwriting guidelines are
modified from time to time. The following is a description of the current
underwriting guidelines of UC Lending, which are not materially different from
prior guidelines.
The underwriting function is centralized at the home office.
Regardless of the manner of origination, all home equity loans are underwritten
utilizing the appropriate underwriting guidelines prior to approval and
funding. The underwriting process is intended to assess primarily the
prospective borrower's ability 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 UC Lending'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 UC Lending's 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.
UC Lending originates fixed-rate loans which, in general, fully
amortize over a period not to exceed: 360 months for single family, owner
occupied first mortgages; 360 months for single family, non-owner occupied
first
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mortgages; 240 months for single family, combination owner occupied/rental
property first mortgages; and 180 months for single family, owner occupied
second mortgages. The maximum fixed-rate loan amount is generally $500,000
unless a higher amount is specifically approved by the home office. UC
Lending, through its wholesale loan programs also originates a fixed rate loan
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 and, in the case of loans originated through the
branch network, non-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 executive
management of UC Lending.
The homes used for collateral to secure the fixed-rate loans may be
owner occupied, non-owner occupied rental properties or a combination of owner
occupied/rental properties, which in any case are one-to-four family residences
(which may be a detached or semi-detached row house, townhouse, a condominium
unit or a unit in a planned unit development). In addition, loans may be
secured by single-family owner occupied manufactured or mobile homes with land
if the manufactured or mobile homes are permanently affixed and defined as real
estate under applicable state law. Second mortgages are permitted only for
fixed-rate home equity loans and generally are limited to single family owner
occupied property. A loan secured by a second mortgage typically will not be
made if the first mortgage is a graduated payment mortgage, a balloon, or an
individual or owner financed mortgage. The homes used for collateral to secure
adjustable-rate home equity loans may be owner occupied or non-owner occupied
rental properties, which in any case are one-to-four family residences (which
may be a detached or semi-detached, row house, townhouse, a condominium unit or
a unit in a planned unit development). In addition, such loans may be secured
by manufactured or mobile homes and the underlying land if the manufactured or
mobile homes are permanently affixed and defined as real estate under
applicable state law.
In general, the value of each property proposed as security for a home
equity loan is required to be determined by a current appraisal from an
independent appraiser who has been approved by the home office. UC Lending
selects the appraiser and orders the appraisal.
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 home equity loans originated through UC Lending's
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 UC Lending's branch network, an Underwriting Loan-to-Value Ratio, as
described below, is utilized. The total amount of a fixed-rate home equity
loan, net of the origination fees, credit life insurance premium, if any,
prepaid tax and insurance escrow, real estate tax service fee, loan application
fee and prepaid interest, is defined as the "Cash Out." The "Underwriting
Loan-to-Value Ratio" for underwriting purposes is the Cash Out divided by the
appraised value or purchase price of the property, whichever is less. The Cash
Out with respect to fixed-rate loans originated through the branch network is
limited to 90% of the lesser of the appraised value or purchase price of the
property.
For adjustable-rate home equity loans, the maximum loan-to-value ratio
is generally 90% and an Underwriting Loan-to-Value Ratio is not utilized.
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
85% 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.
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Creditworthiness. Verification of personal financial information for
each applicant is required by UC Lending. The applicant's total monthly
obligations (including principal and interest on each mortgage, tax
assessments, other loans, charge accounts and all scheduled indebtedness)
generally should not exceed 50% of a borrower's gross monthly income. In the
case of adjustable-rate home equity loans, the debt coverage ratio calculation
is based upon the principal and interest payment amount utilizing the 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. In the case of fixed-rate home equity loans, applicants who are
salaried employees must provide current employment information in addition to
recent employment history. UC Lending verifies this information for salaried
borrowers based on written confirmation from employers, or a combination of a
telephone confirmation from the employer and the most recent pay stub or the
most recent W-2 tax form. A self-employed applicant for a fixed-rate home
equity loan is generally required to provide copies of complete federal income
tax returns (including schedules) filed for the most recent two years.
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.
In the case of fixed-rate home equity loans, a borrower's mortgage payment
history should generally reflect no more than three payments over 30 days
delinquent in the last twelve months; however, in some cases, a borrower is
permitted to have no more than five payments over 30 days delinquent in the
last twelve months and one payment over 60 days delinquent in the last twelve
months. Credit analysis is subjective and subject to interpretation in the
underwriting process.
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.
UC Lending generally requires title insurance coverage on each home
equity loan it originates. UC Lending and its assignees are generally named as
the insured on the title insurance policies. In addition, a location map is
required for every home equity loan made by UC Lending and a survey of the
property is required where the property is being purchased by the borrower.
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. UC Lending requires
that its name and address are properly added to the "mortgagee clause" of the
insurance policy. In the event UC Lending's name is added to a "loss payee
clause" and the policy does not provide for written notice of policy changes or
cancellation, an endorsement adding such provision is required. The borrower
is not required to obtain flood insurance.
After a loan is underwritten, approved and funded, the mortgage loan
packages are reviewed and monitored by home office loan review personnel. A
random sample of the mortgage loan packages are subsequently subjected to a
quality control audit.
Loan Servicing. UC Lending retains the servicing on substantially all
loans it originates, including $1.7 billion of home equity loans owned and/or
serviced at December 31, 1994, up 49.6% from a year earlier. UC Lending
performs the following services for investors to whom it has sold loans and for
which it has retained servicing: investor reporting; collecting and remitting
periodic principal and interest payments to investors and performing other
administrative services, including maintaining required escrow accounts for
payment of real estate taxes and 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. UC Lending is generally
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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, UC Lending incurs a loss up to the limit
specified in the related loan sale agreement. In connection with its servicing
activities, UC Lending sends to borrowers payment coupon books that specify the
fixed monthly 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, UC Lending provides written
notices to borrowers of upcoming rate adjustments along with new payment coupon
books reflecting the adjusted payment amounts.
The Company is required under each loan sale agreement to service the
mortgage loans either directly or through sub-servicers. Servicing includes,
but is not limited to, post-origination loan processing, customer service,
remittance handling, collections and liquidations.
Collection Activities. If payment is not received within the grace
period as dictated by the applicable state law in which the loan originated, a
notice will be sent to the customer. Most of the home equity loans allow a 10
day grace period. In addition, follow-up correspondence is automatically
generated on the 21st, 32nd and 45th day of delinquency. Collection calls
begin on or before the expiration of the grace period. Calls at this stage are
directed toward loans with a history of slow payment. In addition, newer loans
are selected for calls to help establish a satisfactory payment record.
Collection calls continue until corrective arrangements are made, or
foreclosure is initiated.
If an account becomes 30 days past due, a collection supervisor
analyzes the account to determine the appropriate course of action. Generally,
when an account becomes 60 days past due a property inspection and borrower
interview is requested through a third party contractor. In addition, the
initial loan file is reviewed and generally an up-to-date credit report is
obtained. At 90 days past due, if appropriate corrective arrangements have not
been made with the borrower, a recommendation for foreclosure, along with an
accompanying package, is submitted to the collection supervisor. This package
generally includes the original appraisal, current inspection, loan approval
memorandum and recommendation cover sheet. If approved by the collection
supervisor, the package is forwarded to an internal review committee. The
approval of such committee is required before foreclosure proceedings commence.
Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments, a repayment plan to return the account to an
up-to-date status, or (to the extent authorized by the related loan sale
agreement) an extension/modification may be permitted.
The course of action followed for a delinquent account is dependent
upon a number of factors, including the borrower's payment history, the amount
of equity in the mortgaged property and the reason for the current inability to
make timely payments. If a borrower is experiencing difficulty in making
payments on time, UC Lending may modify the payment schedule (as permitted by
the related loan sale agreement). In the event a loan is extended and thereby
removed from delinquency status, UC Lending may require the borrower to pay an
extension fee. Modifications to payment schedules are considered on a
case-by-case basis and are limited to revisions to the contract rate and/or
term only. A request for modification must be submitted by the borrower to UC
Lending. Prior to evaluating each modification request, UC Lending obtains an
updated credit report and , in some cases, a budget analysis worksheet
application. Provided that the review and analysis of the circumstances and
relevant documentation substantiates a favorable decision to modify the related
loan, the appropriate documentation is generated by UC Lending and executed by
the borrower to facilitate formal modification of the home equity loan. Any
extension fees collected by UC Lending are retained by UC Lending as part of
its servicing compensation.
8
<PAGE> 10
Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a
senior lien is received; or (iii) UC Lending discovers circumstances indicating
potential loss exposure.
During the foreclosure process, any expenses incurred by UC Lending
are added to the amount owed by the borrower, as permitted by applicable law.
Upon completion of the foreclosure, the property is sold to an outside bidder
or passes to the mortgagee, in which case UC Lending proceeds to liquidate the
asset.
UC Lending may not foreclose on the property securing a second
mortgage loan unless it forecloses subject to each senior mortgage, in which
case UC Lending generally will pay the amount due on the senior mortgage to the
senior mortgagee, if UC Lending determines that doing so will minimize the
loss. In the event that foreclosure proceedings have been instituted on a
senior mortgage prior to the initiation of UC Lending's foreclosure action, UC
Lending may either satisfy such mortgage at the time of the foreclosure sale or
take other appropriate action.
Servicing and charge-off policies and collection practices may change
over time in accordance with UC Lending's business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations.
Regulations and practices regarding the liquidation of properties
(e.g., foreclosure) and the rights of the mortgagor in default vary greatly
from state to state. Only if UC Lending determines that a delinquency cannot
otherwise be cured will it decide that foreclosure is the appropriate course of
action. Many real estate properties owned by UC Lending are ultimately sold by
UC Lending to new borrowers to whom UC Lending will provide a mortgage. If,
after determining that purchasing a property securing a home equity loan will
minimize the loss associated with such defaulted loan, UC Lending may bid at
the foreclosure sale for such property or accept a deed in lieu of foreclosure.
At December 31, 1994, UC Lending's home equity portfolio of properties
acquired in foreclosure or for which deeds in lieu of foreclosure have been
accepted and held by UC Lending pending disposition represented approximately
$8.8 million (excluding the allowance for loan losses attributable to these
properties). This amount may include the first mortgage balance, delinquent
first mortgage payments and certain advances made on the property.
Refinancing policy. When UC Lending believes that borrowers with
existing loans with UC Lending are likely to refinance such loans due to
interest rate changes, equity build-up or other reasons, UC Lending actively
attempts to retain such borrowers through solicitations of such borrowers to
refinance with UC Lending. Such refinancings generate fee income and servicing
income for UC Lending.
9
<PAGE> 11
Credit Quality of Home Equity Loan Serviced Portfolio. The following
table shows selected credit quality data for the home equity loan portfolio
serviced by the Company (including loans owned by the Company) as of the dates
indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1994 1993 1992
------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C>
Number of home equity loans . . . . . . . . . . . 52,289 41,854 37,243
Dollar amount of home equity loans . . . . . . . $1,683,698 $1,125,139 $819,448
Delinquency period (1)
30-59 days . . . . . . . . . . . . . . . . . . . 2.40% 2.32% 2.27%
60-89 days . . . . . . . . . . . . . . . . . . . 0.91% 1.02% 1.32%
90 days and over . . . . . . . . . . . . . . . . 4.36% 4.92% 5.17%
Foreclosed properties (2)
Owned by the Company . . . . . . . . . . . . . . 0.52% 1.51% 1.60%
Serviced for third parties . . . . . . . . . . . 0.70% 0.74% 0.88%
Net write-offs - for the year ended . . . . . . . 0.84% 0.88% 0.59%
</TABLE>
(1) The dollar amount of delinquent home equity loans as a percentage of the
total "dollar amount of home equity loans" as of the date indicated.
(2) Foreclosed property as a percentage of home equity loans serviced.
Loans are placed on a 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 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.
Sales, Funding and Liquidity. Substantially all of the home equity
loans originated by UC Lending are sold either to United Companies Life
Insurance Company ("UC Life") or in the secondary market after which UC Lending
continues to provide servicing for a fee. UC Lending originated approximately
$909 million of home equity loans during 1994, substantially all of which were
sold on an interim basis to UC Life or held in a warehouse loan facility
pending sale in a securitization transaction. Also during 1994, $978 million
of home equity loans were sold in the secondary market. The buyers of
residential mortgage loans or the related mortgage-backed securities receive
the principal collected and the pass-through rate on the principal balance, and
UC Lending retains the excess of the interest at the contractual rate over the
pass-through rate, and, if applicable, servicing fees, trustee fees and surety
bond fees.
Since 1985, the Company has sold loans originated by it in the
secondary market, initially in transactions with government-sponsored mortgage
agencies or conduits and later in private placement transactions with financial
institutions. In 1992, the Company participated with a third party in the
securitization and sale of pass-through
10
<PAGE> 12
certificates backed by home equity loans originated by the Company. During the
second quarter of 1993, a $1 billion shelf registration statement filed with
the Securities and Exchange Commission by UCFC Acceptance Corporation, a
wholly-owned subsidiary of UC Lending, became effective. This registration
statement relates to certificates to be issued and backed by mortgage loans.
During 1994, the registration statement was amended to cover an additional $3
billion in principal amount of mortgage- backed securities. Approximately $1.5
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 by UC Lending or certain
subsidiaries or affiliates thereof were registered under the registration
statement and publicly sold in 1993 and 1994.
The purchasers of the pass-through certificates receive a
credit-enhanced security. Credit enhancement is generally achieved in part by
subordinating an amount (the "Subordinated Amount") of the excess interest
spread retained by the Company to the payment of scheduled principal and
interest on the certificates should there be a shortfall in collections from
borrowers in the form of monthly mortgage payments during any given period. If
cumulative payment defaults exceed the Subordinated Amount, a third party
insurer is obligated to pay any further losses experienced by the owners of the
pass-through certificates. In connection with the issuance in 1993 and 1994 of
approximately $1.5 billion in pass-through certificates discussed above, the
Subordinated Amounts aggregate approximately $225 million.
The pooling and servicing agreements that govern the distribution of
cash flows from the pooled loans require the establishment of an account (the
"Reserve Account") that may be funded with an initial deposit by the Company.
Thereafter, a portion of the excess interest is deposited in the Reserve
Account. There are no events that will require the aggregate deposits to the
Reserve Account to exceed the related Subordinated Amount. To the extent that
borrowers default on the payment of principal or interest on the loans
underlying the pass-through certificates issued, losses are paid out of the
Reserve Account to the extent that funds are available.
UC Lending funds its loan originations principally through the
Company's debt facilities (the "Company's Debt Facilities"), sales of loans in
the secondary market and to UC Life, and cash flow from its servicing
operations. At December 31, 1994, the Company's Debt Facilities were comprised
of: (i) $125 million publicly sold senior 9.35% unsecured notes, (ii) a $113.6
million unsecured revolving credit facility provided by a group of commercial
banks, (iii) several individual lines of credit provided by different
commercial banks which, in the aggregate, total $27.5 million, and (iv) a
transaction specific warehouse loan facility provided by the lead underwriter
for securitization transactions.
11
<PAGE> 13
Composition of Serviced Portfolio. The contractual balance of loans
owned and/or serviced by UC Lending, substantially all of which it originated,
were as follows for the dates indicated:
<TABLE>
December 31,
--------------------------------------------
1994 1993 1992
----------- ----------- -----------
(in thosuands)
<S> <C> <C> <C>
OWNED AND SERVICED:
Home equity . . . . . . . . . . . . . . . . . . . . $ 1,683,698 $ 1,125,139 $ 819,448
Commercial . . . . . . . . . . . . . . . . . . . . 274,413 345,365 404,857
Conventional . . . . . . . . . . . . . . . . . . . 74,294 98,277 143,517
----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 2,032,405 $ 1,568,781 $ 1,367,822
=========== =========== ===========
Total serviced for
third party investors . . . . . . . . . . . . . . $ 1,679,874 $ 1,065,549 $ 886,888
=========== =========== ===========
OWNED BY THE COMPANY:
Home equity . . . . . . . . . . . . . . . . . . . . $ 203,651 $ 318,334 $ 274,021
Commercial . . . . . . . . . . . . . . . . . . . . 147,722 183,065 204,149
Conventional . . . . . . . . . . . . . . . . . . . 1,157 1,833 2,764
----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 352,530 $ 503,232 $ 480,934
=========== =========== ===========
</TABLE>
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
General. The following discussion contains summaries, which are general
in nature, of certain legal matters relating to the mortgage loans. Because
such legal aspects are governed primarily by applicable state laws (which laws
may differ substantially), the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all
states in which the security for the Company's mortgage loans is situated. The
summaries are qualified in their entirety by reference to the appropriate laws
of the states in which the Company's mortgage loans may be originated.
Foreclosure/Repossession. The mortgage loans are secured by mortgages,
deeds of trust, security deeds or deeds to secure debt, depending upon the
prevailing practice in the state in which the property subject to the loan is
located. Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. Before such non-judicial sale takes place, typically a notice
of sale must be posted in a public place and published during a specific period
of time in one or more newspapers, posted on the property and sent to parties
having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
12
<PAGE> 14
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In general, the borrower, or any other
person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the mortgage is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some states
require that a copy of the notices of sale be posted on the property and sent
to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender assumes the burden of ownership, including obtaining
hazard insurance and making such repairs at its expense as are necessary to
render the property suitable for sale. The lender commonly obtains the
services of a real estate broker and pays the broker's commission in connection
with the sale. Depending upon market conditions, the ultimate proceeds of the
sale may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are designed to mitigate the legal consequences to the borrower of the
borrower's defaults. Some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
fair notice require that borrowers under deeds of trust receive notice longer
than that prescribed by statute. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that the sale by a
trustee under a deed of trust does not involve sufficient state action to
afford constitutional protection to the borrower.
Rights of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property from the sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have adopted statutory prohibitions restricting the right of the
beneficiary or mortgagee to obtain a deficiency judgment against borrowers
financing the purchase of their residence or following sale under a deed of
trust or certain other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, in
many instances the Company does not seek deficiency judgments against
defaulting mortgagors.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may impair the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
mortgaged property without bankruptcy court permission. The rehabilitation
plan proposed by the debtor may provide, if the court determines that the value
of the mortgaged property is less than
13
<PAGE> 15
the principal balance of the mortgage loan, for the reduction of the secured
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. Some states also have homestead exemption laws that
protect a principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of such loans. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific statutory
liabilities upon lenders who fail to comply with the provisions of the law. In
some cases, this liability may affect assignees of the loans.
Due-on-Sale Clauses. The mortgage loans typically contain a due-on-sale
clause which will generally provide that if the mortgagor sells, transfers or
conveys the underlying loan collateral, the mortgage loan may be accelerated by
the mortgagee. The Garn-St. Germain Depository Institutions Act of 1982 (the
"Garn-St. Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
could include a manufactured home), the Garn-St. Germain Act sets forth
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related mortgaged property to an uncreditworthy
person, which could increase the likelihood of default.
Prepayment Charges. Under certain state laws, prepayment charges may not
be imposed after a certain period of time following origination of the mortgage
loans with respect to prepayments on mortgage loans secured by liens
encumbering owner-occupied residential properties. The absence of such a
restraint on prepayment, particularly with respect to fixed-rate loans having
higher mortgage rates, may increase the likelihood of refinancing or other
early retirement of such mortgage loans.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March 31,
1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized the states to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
an application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
Environmental Considerations. Environmental conditions may diminish the
value of the mortgage loans and give rise to liability of various parties.
There are many federal and state environmental laws concerning hazardous waste,
hazardous substances, gasoline, radon and other materials which may affect the
property securing the mortgage loans. For example, under the federal
Comprehensive Environmental Response, Compensation and Liability Act, and
possibly under state law in certain states, a secured party which takes a deed
in lieu of foreclosure or purchases a mortgaged property at a foreclosure sale
may become liable in certain circumstances for the costs of a remedial action
("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be
substantial. Moreover, certain states by statute impose a lien for any Cleanup
Costs incurred by such state on the property that is the subject of such
Cleanup Costs (a "Superlien"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens.
14
<PAGE> 16
The Company owns and/or services several mortgage loans that are secured
by properties that are environmentally impaired and may own and/or service
other mortgage loans secured by environmentally impaired properties of which
the Company has no present knowledge. The Company, to the best of its
knowledge, does not own any environmentally impaired real property acquired
through foreclosure or otherwise. In any event, the Company has not
experienced, and does not expect that it will experience, any material adverse
effects on its results of operations or financial condition due to
environmental contamination of properties securing loans it owns or services or
the properties which it owns.
LIFE INSURANCE
Overview. United Companies Life Insurance Company ("UC Life or 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 UC Life 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. UC Life produced $250 million and $208 million in
sales of annuity products during the years ended December 31, 1994 and 1993,
respectively. At December 31, 1994, total annuity reserves were $1.4 billion.
The Company intends to add variable annuity products to its annuity line of
business during 1995. UC Life has also focused its efforts on improving the
quality and liquidity of its investment portfolio. At December 31, 1994, the
invested assets of UC Life consisted of $1.1 billion in investment grade fixed
maturity securities (at amortized cost), $159 million of residential first
mortgage loans (which were primarily originated by UC Lending) and $155 million
of commercial mortgage loans (also primarily originated by UC Lending). At
December 31, 1994, the weighted average rating of its publicly traded bond
portfolio was "AA", the assets allocated to investments in mortgage-backed
securities were $790 million and the amount of non-investment grade publicly
traded bonds in the portfolio was $18.1 million or 1.7% of the portfolio.
During 1994, the net interest spread on the Company's annuity business improved
to 2.73% from 2.20% during 1993. Measures taken by UC Life to improve this
margin included the reduction in crediting rates on new and existing annuity
contracts.
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 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.
In June 1994, A.M. Best Company ("Best") reaffirmed its "A-" (Excellent)
rating of UC Life. Best's ratings depend in part on its analysis of an
insurance company's financial strength, operating performance and claims paying
ability. In addition, UC Life's claims paying ability has been rated "A+" by
Duff & Phelps, Inc. During 1994, Standard & Poor's Ratings Group, a division
of McGraw-Hill, Inc., revised the formula used in assigning its qualified
solvency ratings of insurance companies and, as a result, revised its rating
assigned to UC Life from "BBBq" to "BBq." The Company believes that UC Life's
ratings will enable it to continue to compete successfully.
Principal Products. The principal products marketed by UC Life since 1978
have been deferred annuity contracts. A single premium, currently averaging
approximately $20,000, is received on the sale of these contracts. The
contracts typically guarantee an interest crediting rate for the first policy
year. Thereafter, the interest crediting rate generally may be adjusted by UC
Life at any time (subject to certain minimum crediting rates stated in the
contract). A policyholder is permitted at any time to withdraw all or part of
the single premium plus the amount of interest credited on the policy, less a
surrender charge if applicable. The initial surrender charge typically ranges
from 9-10% of the initial premium and decreases to zero during a penalty period
of from five to ten years. Approximately 76.6% of UC Life annuity policies at
December 31, 1994 were subject to a surrender penalty.
15
<PAGE> 17
The interest earned on the annuity contract accumulates on a
tax-deferred basis until withdrawal by the policyholder. The deferred annuity
contracts written by UC Life generally provide a death benefit equal to
the amount of the initial premium plus accumulated interest earned less the
amount of any prior withdrawals.
The following table presents UC Life's annuity sales by state by
percent of total premiums for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
State 1994 1993
----- ----- ----
<S> <C> <C>
Florida . . . . . . . . . . . . 28.9% 2.9%
Louisiana . . . . . . . . . . . 13.7 12.3
Missouri . . . . . . . . . . . 10.3 22.4
Illinois . . . . . . . . . . . 8.6 10.4
Oklahoma . . . . . . . . . . . 6.2 8.0
All others . . . . . . . . . . 32.3 44.0
------- -------
Total . . . . . . . . . . . 100.0% 100.0%
======= =======
</TABLE>
No other state individually accounted for more than 8% of premium
income during 1994 or 1993.
The increased annuity sales in Florida and the decline in annuity
sales in Missouri in 1994 are attributable, in the case of Florida, primarily
to the focus on expansion of the distribution network to independent general
agents. Annuity sales declined in Missouri during this period because of lower
sales by a major financial institution selling UC Life's annuities in Missouri.
Prior to 1992, UC Life was underwriting and marketing pre-need funeral
insurance products through funeral directors by an independent insurance agency
but discontinued this line of business in early 1992. Credit related insurance
products were underwritten and marketed primarily through financial
institutions and through automobile dealerships. In order to focus its
operations and management on underwriting and marketing its annuity contracts,
UC Life de-emphasized the credit insurance products and discontinued
underwriting this line of business in 1993.
Distribution. UC Life'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, UC Life must continue to provide products with competitive terms,
interest crediting rates, commissions and service to both policyholders and the
selling institutions and independent general agents. During 1994, UC Life
focused on expanding the independent general agent share of its distribution
network. Of the annuity contracts sold during 1994, approximately 46% of the
total dollar amount were attributable to sales by independent general agents.
Reinsurance. UC Life generally limits the amount of insurance risk
that it assumes with respect to any one insured to $100,000 and for larger
policies follows industry practice of reinsuring that portion of the risk in
excess of established retention limits. UC Life, however, remains contingently
liable for insurance ceded to reinsurers and remains liable to the policyholder
in the event the reinsurer is unable to meet the obligations assumed under the
reinsurance agreement. Reinsurance is currently ceded primarily to the
following companies: First Capital Life Insurance Company of Louisiana (not
affiliated with First Capital Holding Company of California), Aetna Life
Insurance Company, Continental Assurance Company, American United Life
Insurance Company and Transamerica Occidental Life Insurance Company. Each of
the foregoing companies is currently rated "A+" (Superior) by Best, except
Aetna Life Insurance Company, which is rated "A" (Excellent), and First Capital
Life Insurance Company of Louisiana, which is rated "B-" (Good). In the case
of First Capital Life Insurance Company, the dollar amount of reserve credit
taken by UC Life is held in trust for the benefit of UC Life.
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<PAGE> 18
Life Insurance and Annuity Reserves. In accordance with applicable
insurance regulations, UC Life records as liabilities in its statutory financial
statements actuarially determined reserves that are calculated to meet future
obligations under outstanding insurance. The reserves are based on statutorily
recognized methods using prescribed morbidity and mortality tables and interest
rates. Reserves include unearned premiums, premium deposits, claims that have
been reported but are not yet paid, claims that have been incurred but have not
been reported, and claims in the process of settlement. UC Life reserves
satisfy minimum statutory requirements.
The annuity reserves reflected in the Consolidated Financial
Statements are calculated based on generally accepted accounting principles
("GAAP"). As of December 31, 1994, annuity reserves were $1.4 billion, policy
benefit reserves were $116.5 million, and unearned premium reserves related to
credit insurance were $4.5 million. These reserves are based upon UC Life's
best estimates of mortality, persistency, expenses and investment income, with
appropriate provisions for adverse statistical deviation and the use of the net
level premium method for all non-interest sensitive products and the
retrospective deposit method for interest-sensitive products. GAAP reserves
differ from statutory reserves due to the use of different assumptions
regarding mortality and interest rates and the introduction of lapse
assumptions into the GAAP reserve calculation. See Note 1 of Notes to
Consolidated Financial Statements for additional information regarding reserve
assumptions under GAAP.
Investments. The investment function of UC Life is overseen by an
investment committee comprised of senior management, with the assistance of an
outside investment advisor in the management of certain assets. UC Life's
investment policy seeks to achieve attractive returns on low to moderate risk
portfolio of investments. These investments, primarily bonds and mortgage
loans, must be within regulatory constraints to qualify as permitted assets,
and within the yield, risk and maturity limitations established by UC Life as
necessary for meeting its objectives.
The investment strategy continues to focus on maintaining the
percentage of UC Life's invested assets committed to commercial and
residential mortgages and to investment grade corporate bonds and
mortgage-backed securities.
17
<PAGE> 19
The following table sets forth, at December 31, 1994, certain
information regarding UC Life's invested assets:
<TABLE>
<CAPTION>
Amortized Percent of
Cost Total
----------- ----------
(dollars in thousands)
<S> <C> <C>
Fixed Maturity Securities (1)
U.S. Government, government agencies & authorities . . . . . $ 10,720 .7%
Foreign governments and other . . . . . . . . . . . . . . . 18,858 1.2
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . 279,377 18.0
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . 789,922 50.9
------------ -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 1,098,877 70.8
Mortgage loans on real estate . . . . . . . . . . . . . . . . . . . 325,440 21.0
Short-term investments . . . . . . . . . . . . . . . . . . . . . . 54,664 3.5
Investment in limited partnership . . . . . . . . . . . . . . . . . 26,672 1.7
Real estate - investment properties . . . . . . . . . . . . . . . . 20,313 1.3
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,243 1.3
Capitalized excess servicing income . . . . . . . . . . . . . . . . 5,034 .3
Common and preferred stocks . . . . . . . . . . . . . . . . . . . . 721 .1
------------ --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,551,964 100.0%
============ ========
</TABLE>
------------
(1) Generally stated at amortized cost adjusted for permanent impairment in
value. Total fair value of fixed maturities at December 31, 1994 was
approximately $1.024 billion, representing net unrealized loss of $75.0
million.
As reflected in the following table, the carrying value of UC Life's
investments classified as investment grade at December 31, 1994 was $1.0 billion
or 98.3% of the fixed maturity portfolio:
<TABLE>
<CAPTION>
Amortized Fair Carrying Percent of
Investment Quality (1) Cost Value Value Carrying Value
----------- ------- -------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Aaa . . . . . . . . . . . . $ 755,296 $ 696,834 $ 696,834 67.8%
Aa . . . . . . . . . . . . 10,745 10,257 10,257 1.0
A . . . . . . . . . . . . . 179,857 171,387 171,292 16.7
Baa . . . . . . . . . . . . 134,838 128,422 131,680 12.8
------------- ------------ ------------ ------
Total Investment Grade . . 1,080,736 1,006,900 1,010,063 98.3
Ba and below . . . . . . . 18,141 16,991 17,185 1.7
------------- ------------ ------------ ------
Total Fixed Maturities . . $ 1,098,877 $ 1,023,891 $ 1,027,248 100.0%
============= ============ ============ ======
</TABLE>
(1) Fixed maturity investments are classified according to the ratings
assigned by Moody's Investors Service, Inc. or, in the absence of
such rating, by the National Association of Insurance Commissioners
("NAIC") whose ratings operate as follows: NAIC Class 1 was assumed
equivalent to an A rating; NAIC Class 2, BBB/Baa; and NAIC Classes
3-6, BB/Ba and below.
As a significant percentage of UC Life's investment portfolio is
invested in fixed rate, fixed maturity investments, the 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 UC Life's liquidity and require the sale of certain
assets, such as bonds prior to their maturity at a loss.
Fixed maturity investments. As of December 31, 1994, the amortized
cost of UC Life's fixed maturity investments totaled $1.1 billion or
approximately 70.8% of UC Life's invested assets. The amortized cost of fixed
maturity investments at that date exceeded its fair value by approximately $75
million. During the first quarter of
18
<PAGE> 20
1994, the Company implemented the provisions of Financial Accounting
Standards Board ("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 bonds 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 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. 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. UC Life may for business or regulatory
reasons be required to sell certain of its investments prior to maturity, and
in some cases these sales may be made at times when the 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, 1994, 50.9% of UC Life's total invested assets were
invested in mortgage-backed securities. These mortgage-backed securities
consist principally of collateralized mortgage obligations and mortgage-backed
pass-through securities. Mortgage-backed securities generally are
collateralized by mortgages backed by GNMA, FNMA and FHLMC. Only GNMA
mortgages are backed by the full faith and credit of the United States
Government. Certain mortgage-backed securities are subject to significant
prepayment risk. In periods of declining interest rates, mortgages may be
repaid more rapidly than scheduled as individuals refinance higher-rate
mortgages to take advantage of lower interest rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investments
that cannot be reinvested at an interest rate comparable to the rate on the
prepaid mortgage. In addition to decreased investment yields, earnings could
also be affected by capital gains or losses realized on these prepayments since
the carrying value of securities purchased at a discount or premium may be
different than the amount received upon prepayment. UC Life has reduced the
prepayment risk associated with mortgage-backed securities by investing
in planned amortization class ("PAC") instruments. These instruments are
designed to amortize in a predictable manner by shifting the primary risk of
prepayment of the underlying collateral to other investors. PAC instruments
represented approximately 57% of UC Life's investments in mortgage-backed
securities at December 31, 1994.
Mortgage loans on real estate. At December 31, 1994, UC Life's
portfolio of loans was comprised of $159 million in first mortgage residential
home equity loans and $155 million in first mortgage commercial real estate
loans substantially all of which were originated by UC Lending. Since 1991, UC
Life has limited its investment in commercial real estate mortgage loans but
will from time to time consider refinancing 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
1995 is $30.2 million. The mortgage loan portfolio of UC Life is serviced by
UC Lending. UC Life has full credit recourse to UC Lending with respect to all
residential mortgage loans acquired from UC Lending.
UC Life purchases on an interim basis substantially all of the first
mortgage home equity loans originated by UC Lending. These loans are typically
held by UC Life for short time periods (typically no longer than 90 days) and
then sold back to UC Lending prior to their sale in securitization
transactions. UC Lending, not UC Life, retains the contingent credit risk in
connection with these transactions.
Mortgage loans are carried at amortized cost less valuation
adjustments for permanently impaired value where appropriate. Commercial
mortgages range in size up to approximately $2 million with an average loan
size of approximately $.6 million (excluding one loan of approximately $7.5
million to a related entity). At origination, substantially all of the
mortgages were on existing leased properties rather than on properties in
construction or on start-up properties. The origination of commercial
mortgages was subject to underwriting procedures, including: (i) maximum loan
to value ratio of 75% of the property's appraised value; (ii) conservative debt
coverage
19
<PAGE> 21
requirements; (iii) on-site inspections; (iv) third-party appraisals;
and (v) personal guarantees of borrowers. For these reasons, the Company does
not consider its commercial loans to be high risk. The weighted average
interest rate on UC Life's commercial mortgage loan portfolio was 10.07% and
10.25% at December 31, 1994 and 1993, respectively.
UC Life's commercial mortgage portfolio is diversified by property
type, location and borrower. The following table provides information at
December 31, 1994 regarding UC Life's commercial mortgage loans on real estate
by property type, state and contractual maturity.
<TABLE>
<CAPTION>
AMOUNT PERCENT OF TOTAL
------ ----------------
(dollars in thousands)
<S> <C> <C>
COMMERCIAL MORTGAGE LOANS BY PROPERTY TYPE:
Retail . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,716 40.5%
Office and Warehouse . . . . . . . . . . . . . . . . . . 39,156 25.3
Office . . . . . . . . . . . . . . . . . . . . . . . . . 43,535 28.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 9,384 6.1
----------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,791 100.0%
=========== =======
COMMERCIAL MORTGAGE LOANS BY STATE:
Florida . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,466 22.3%
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . 25,502 16.5
Colorado . . . . . . . . . . . . . . . . . . . . . . . . 14,050 9.1
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . 16,774 10.8
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . 10,625 6.9
Tennessee . . . . . . . . . . . . . . . . . . . . . . . . 9,151 5.9
All Others . . . . . . . . . . . . . . . . . . . . . . . 44,223 28.5
----------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,791 100.0%
=========== =======
COMMERCIAL MORTGAGE LOANS BY CONTRACTUAL MATURITY:
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,457 10.6%
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 27,284 17.6
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 19,461 12.6
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 19,055 12.3
After 1998 . . . . . . . . . . . . . . . . . . . . . . . 72,534 46.9
----------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,791 100.0%
=========== =======
</TABLE>
At December 31, 1994, UC Life owned $19.2 million of commercial
properties obtained through foreclosure. For substantially all commercial
mortgages which UC Life has foreclosed, an independent appraisal was obtained
and, if warranted, UC Life established a specific reserve based on its judgment
as to the amount which may not be recoverable. As of December 31, 1994, the
specific reserve amounted to $4.1 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, 1994, the general reserve amounted to $4.8 million.
20
<PAGE> 22
OTHER OPERATIONS
The Company has developed an office park that includes its home office
building, which has approximately 77,000 square feet. In addition to its home
office building completed in 1981, the Company constructed a 200,000 square
foot office building in the park in 1984 at a cost of $12.8 million. This
building was approximately 100% leased at December 31, 1994. 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 100% leased at December 31, 1994. During
1994, UC Realty began construction of a 60,000 square feet office building on
property also located in the office park. The Company intends to use
approximately 26,000 square feet and lease 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
UG TITLE
On April 10, 1995, the Company made a decision to dispose of its
investment in United General Title Insurance Company ("UG Title"), a wholly
owned subsidiary of the Company, and, on May 1, 1995 approved a formal plan of
disposal. As a result of the Company's decision to dispose of UG Title, the
operations of UG Title have been classified as discontinued operations, and,
accordingly, the consolidated financial statements and the related notes of the
Company segregate continuing and discontinued operations. It is anticipated
that the transaction will be completed during 1995. In connection with the
decision to dispose of UG Title, the Company recorded a $128,000 after tax loss
in its financial statements as of and for the quarter ended March 31, 1995.
As discussed above, the Company has formalized a plan of disposition
of its investment in UG Title. In connection therewith, a letter of intent to
sell UG Title has been signed which provides a reduction of the sale price for
certain claims relating to transactions occurring prior to the date of sale and
discovered within twelve months thereafter. The Company has estimated the risk
of loss related to such potential claims and recorded a provision for such loss
in connection with the disposition. Should such claims materially exceed the
Company's estimates for such losses, such consequence will have an adverse
impact on the Company's operations by reducing the proceeds to be received from
the sale.
UG Title was formed in 1983 to compliment the Company's mortgage
operations; however, underwriting of affiliated transactions represented less
than 3% of UG Title's business in 1994. At December 31, 1994 UG Title was
licensed in 28 states, was represented by approximately 880 independent general
agents and had no direct operations. Key markets for UG Title are Colorado,
Louisiana, Florida and California. During 1994 and 1993, title insurance
premiums were $44.7 million and $24.4 million, respectively. During 1994, UG
Title experienced a net loss of $5.0 million compared to net income of $.8
million in 1993. Operations in 1994 suffered severely as the result of claims
related to agency escrow shortages in several states and losses associated with
a loan broker in California. In addition to the incurred losses, the
profitability of UG Title in 1994 was negatively impacted by a $3.8 million
increase in its reserve for policy losses.
UG Title provides single premium products insuring the validity of
residential first and second mortgage loans and indemnifying the policyholders
against loss or damage from obtaining an invalid title to real property. UG
Title focuses on underwriting title policies for resales and refinancings of
properties which policies averaged $80,100 in 1994. Risks in excess of
$350,000 are reinsured primarily with Fidelity National Title Insurance
Company; however, UG Title remains contingently liable for reinsurance ceded.
UG Title, unlike some other title insurers, operates exclusively through
independent title agents.
21
<PAGE> 23
FOSTER MORTGAGE CORPORATION
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As a result of this decision, the operations of
FMC have been classified as discontinued operations and, accordingly, the
Consolidated Financial Statements of the Company and the related Notes segregate
continuing and discontinued operations. In connection with the decision to
dispose of FMC, the Company recorded a $17.6 million after tax loss in its
financial statements as of and for the quarter ended March 31, 1993, reflecting
the operating loss of FMC for the quarter ended March 31, 1993 of $1.5 million,
net of tax benefit and the estimated loss from disposal of FMC of $16.1 million,
net of tax benefit. The Company has not reflected operating losses incurred by
FMC subsequent to that date in the Company's financial statements.
As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the institutional lenders under FMC's primary credit facility (the "FMC
Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause
the remaining affairs of FMC to be wound up under the supervision of the
bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court
has approved a plan of liquidation for FMC providing for the appointment of a
trustee selected by the FMC Institutional Lenders, disposal of FMC's remaining
assets, and distributions to FMC's creditors. 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 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. These matters may be
pursued by the trustee under the plan of liquidation approved by the bankruptcy
court. 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 is not final
and was appealed by the FMC Institutional Lenders to the U.S. District Court
which affirmed the bankruptcy court's decision. The FMC Institutional Lenders
have appealed this decision to the U.S. Fifth Circuit Court of Appeals.
Management of the Company does not believe that any additional amounts are owed
by the Company to FMC and intends to vigorously contest any claims which may be
brought against it for such amounts.
The Company did not guarantee any debt of FMC and believes, based
upon advice of its counsel, that it has no responsibility for the obligations
of FMC under FMC's primary credit facility or (excluding potential consequences
of the bankruptcy filing on certain prior intercompany transactions or
potential additional payment for tax benefits as discussed above) for any other
liabilities to FMC's lenders.
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
22
<PAGE> 24
multiple qualification and licensing requirements for doing business in various
jurisdictions. While the Company believes that it maintains all requisite
licenses, permits and approvals and is in compliance in all material respects
with applicable federal and state regulations, there can be no assurance that
more restrictive laws or regulations will not be adopted which could make
compliance in the future more difficult and/or more expensive. Legislative and
regulatory proposals are frequently advanced which, if adopted, could adversely
affect the Company's profitability or the manner in which the Company conducts
its activities. In particular, legislation passed in early August, 1994 by the
United States Congress and signed by the President in September, 1994 imposes
disclosure requirements and prohibits prepayment penalty charges, among other
requirements, on loans with a specified level of origination fees or a
specified interest rate level. A significant percentage of the Company's loans
could be subject to the restrictions of the proposed legislation when it
becomes effective. The Company is currently reviewing this legislation in its
final form to determine the impact of its provisions on the Company's business
or results of operations.
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.
The Truth-in-Lending Act and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. The Truth-in-Lending Act also allows consumers a three day right to
cancel certain credit transactions including many loans of the type originated
by the Company. Management of the Company believes that it is in substantial
compliance in all material respects with the Truth-in-Lending Act. However,
on March 21, 1994, the United States Court of Appeals for the 11th Circuit in,
Rodash v. AIB Mortgage Company, 16F.3d 1142 (11th Cir. 1994), held in part,
that a lender improperly disclosed the collection of the Florida state
intangible tax from the borrower, thereby subjecting the loan to rescission
under the Federal Truth-in-Lending Act (the "TILA") by the borrower for three
years after it was made. Subsequent to the court's initial decision and prior
to its refusal to reconsider its decision, the Florida legislature amended the
language of the intangible tax to clarify the legislature's previous intention
that the intangible tax be disclosed for purposes of the TILA in the manner
that had been followed by most lenders in Florida, including the Company.
Although the Florida legislature intended this legislation to apply
retroactively, no final court decision has been rendered as to the effect of
this legislation on loans originated prior to its effective date. This court
decision may also apply to a similar intangible tax imposed by other states.
To its knowledge, as of March 3, 1995, no claims have been filed against the
Company under this court decision (other than as a defense to foreclosure
proceedings) and no notice of a breach of a representation has been received
under the Company's loan sale agreements requesting it to repurchase, cure or
substitute other loans for the loans sold. If the intent of the Florida
Legislature is not upheld and if a substantial number of claims are filed by
borrowers against the Company resulting in rescission or repurchase, the
Company's financial statements and operations will be materially adversely
affected. As the financial impact, if any, of this contingency cannot
presently be reasonably estimated, the Company has made no accrual therefor.
The Company is also required to comply with the Equal Credit
Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from
discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires
lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit
23
<PAGE> 25
or the rate or charge for loans increase as a result of information obtained
from a consumer credit agency, another statute, the Fair Credit Reporting Act of
1970, as amended, requires lenders to supply the applicant with the name and
address of the reporting agency. The Company is also subject to the Real Estate
Settlement Procedures Act and is required to file an annual report with the
Department of Housing and Urban Development pursuant to the Home Mortgage
Disclosure Act.
In the course of its business, the Company may acquire properties
securing loans that are in default. There is a risk that hazardous or toxic
waste could be found on such properties. In such event, the Company could be
held responsible for the cost of cleaning up or removing such waste, and such
cost could exceed the value of the underlying properties.
There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance much
more difficult or expensive, restrict the Company's ability to originate,
broker or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated or sold by the Company,
or otherwise adversely affect the business or prospects of the Company.
LIFE INSURANCE
General Regulation. UC Life is subject to regulation by the State of
Louisiana, its state of domicile, and the other states in which it transacts
business. The laws of such states are designed for the protection of
policyholders rather than securityholders. UC Life is a member of a holding
company system in Louisiana. All transactions within a holding company system
affecting insurers must be both reasonable in relation to its outstanding
liabilities and adequate for its needs. State laws also require prior notice
or regulatory agency approval of changes in control of an insurer or its
holding company and of material intercorporate transfers of assets within the
holding company structure. Generally, under insurance holding company
statutes, a state insurance authority must approve in advance the direct or
indirect acquisition of 10% or more of the voting securities of an insurance
company chartered in its state.
The laws of the various states establish regulatory agencies with
broad administrative powers to approve policy forms, grant and revoke licenses
to transact business, regulate trade practices, license agents, and prescribe
the type and amount of investments permitted. Insurance companies are required
to file detailed annual statements with the state insurance regulators in each
of the states in which they do business, and their business and accounts are
subject to examination by such agencies at any time. In addition, insurance
regulators periodically examine the insurer's financial condition, adherence to
statutory accounting practices, and compliance with insurance department rules
and regulations.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissions ("NAIC"). UC
Life's last examination occurred during 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.
A substantial amount of the Company's annuity policies are marketed
through financial institutions. In August, 1993 the United States Court of
Appeals for the Fifth Circuit (the "Fifth Circuit") held that the United States
Comptroller of the Currency's decision to permit national banks to sell
annuities in towns with more than 5,000 inhabitants violated the National Bank
Act. In June 1994, the United States Supreme Court (the "Supreme Court")
granted certiorari and in January, 1995 heard arguments in connection with this
action. In a recent decision, the Supreme Court reversed the Fifth Circuit and
concurred with the position taken by the United States Comptroller of the
Currency.
24
<PAGE> 26
Regulation of Dividends and Other Payments from Insurance Subsidiaries.
As a Louisiana domiciled insurance company, UC Life is subject to Louisiana
requirements relating to dividends and restrictions on payments to affiliates.
The Louisiana Insurance Code (the "Code") provides that no Louisiana stock
insurance company shall declare and pay any dividends to its stockholders
unless (i) its capital is fully paid in cash and is unimpaired and (ii) it has
a surplus beyond its capital stock and the initial minimum surplus required and
all other liabilities equal to 15% of its capital stock, provided that this
restriction shall not apply to an insurance company when its paid-in capital
and surplus exceed the minimum required by the Code by 100% or more.
Additional dividend restrictions are imposed by the Louisiana Insurance Holding
Company System Regulatory Law (the "Insurance Holding Company Law").
Specifically, extraordinary dividends by insurance companies are subject to a
prior approval requirement by the Louisiana Commissioner of Insurance (the
"Louisiana Commissioner") and an insurance company's surplus as regards
policyholders following any dividends or distributions to affiliates must be
reasonable to the insurance company's outstanding liabilities and adequate to
its financial needs. Effective October 31, 1993, an extraordinary dividend is
defined as an amount in excess of the lesser of (a) 10% of surplus as of the
preceding December 31, or (b) the net gain from operations for the preceding
calendar year. The Insurance Holding Company Law also subjects all
transactions between a Louisiana insurance company and its affiliates to
certain fairness and reasonableness standards, and, furthermore, certain types
of transactions with its affiliates are subject to prior notice to the
Louisiana Insurance Commissioner who may disapprove the transaction if it is
determined that such transaction does not meet certain fairness and
reasonableness standards or if it may adversely affect the interests of
policyholders. If insurance regulators determine that payment of a dividend or
any other payment to an affiliate (such as a payment under a tax allocation
agreement or for employee or other services or pursuant to a surplus debenture)
would, because of the financial condition of the paying insurance company or
otherwise, be hazardous to such insurance company's policyholders or creditors,
the regulators may block payment of such dividend or such other payment to the
affiliate that would otherwise be permitted without prior approval. Under the
current statutory and regulatory scheme in Louisiana, UC Life has, as of
December 31, 1994, the capacity to pay dividends of $8.2 million. UC Life did
not pay any dividends to the Company during 1992, 1993, or 1994 in order to
retain capital in UC Life.
Insurance Regulatory Changes. The NAIC and insurance regulators have
undertaken a process of re-examining existing laws and regulations and their
application to insurance companies. In particular, this re-examination has
focused on insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law, the development
of new laws and the implementation of non-statutory guidelines. The NAIC has
formed committees to study and formulate regulatory proposals on such diverse
issues as the use of surplus debentures, accounting for reinsurance
transactions and the adoption of risk-based capital rules. It is not possible
to predict the future impact of changing state and federal regulation on the
operations of the Company or its insurance subsidiaries.
Statutory filings require classifications of investments and, for
periods ended prior to January 1, 1992, required the establishment of a
Mandatory Securities Valuation Reserve ("MSVR"), an account designed to
stabilize a company's statutory surplus against fluctuations in the market
value of stocks and bonds, according to regulations prescribed by the NAIC. In
December 1991, the NAIC adopted changes to its rules for establishing and
maintaining reserve accounts for assets of insurance companies in financial
statements prepared under statutory accounting practices. These changes became
effective as of January 1, 1992, for annual statements to be filed for the year
ended December 31, 1992, and thereafter. Under the revised rules, the MSVR
account was replaced by an Asset Valuation Reserve ("AVR") account which
consists of two main components: a "default component" to provide for future
credit-related losses on fixed income investments and an "equity component" to
provide for losses on all types of equity investments, including real estate.
The AVR at December 31, 1994 was $20.0 million. The changes also require the
establishment of a new reserve called the Interest Maintenance Reserve ("IMR"),
which is a reserve for fixed income realized capital gains and losses net of
tax, related to changes in interest rates. The IMR is required to be amortized
into statutory earnings on a basis reflecting the remaining period to maturity
of the fixed income securities sold. The deferred realized gains and losses
included in the IMR at December 31, 1994 was $3.3 million, net of taxes.
25
<PAGE> 27
Insurance Regulatory Information System. The NAIC has developed the
Insurance Regulatory Information System ("IRIS") which involves calculation of
ratios covering eleven (11) categories of financial data with defined "usual
ranges" for each category. The ratios are designed to provide regulators
"early warnings" as to when a given company might warrant special attention.
UC Life had only one ratio outside the usual range in 1994.
Risk-Based Capital Requirements. The NAIC has developed risk-based
capital ("RBC") requirements for life insurance companies. The formula, which
is set forth in instructions adopted by the NAIC, is designed to take into
account asset risks, insurance risks, interest rate risks and other relevant
risks with respect to the insurer's business. The NAIC has further provided
for categorization of life insurance companies according to the extent to which
they meet specified RBC thresholds, with increasing degrees of regulatory
scrutiny or intervention provided for companies in categories of lesser RBC
compliance. The following degrees or levels of regulatory action are triggered
by certain events with respect to an insurer's RBC compliance as follows: (i)
a "company action level event" (requiring the insurer to file and obtain
approval of a comprehensive financial plan for the improvement of its RBC
compliance); (ii) a "regulatory action level event" (resulting in, in addition
to the requirement of a financial plan, regulatory actions including
examination of the insurer's assets, liabilities and operations followed by an
order specifying such corrective actions as are determined to be required);
(iii) an "authorized control level event" (resulting in, in addition to the
regulatory actions specified above, such actions as are necessary to cause the
insurer to be placed under regulatory control under the applicable
rehabilitation and/or liquidation statutes if deemed to be in the best
interests of policyholders, creditors and the public); and (iv) a "mandatory
control level event" (resulting in, on a mandatory basis, such actions as are
necessary to cause the insurer to be placed under regulatory control under the
applicable rehabilitation and/or liquidation statutes). The Company believes
that UC Life is adequately capitalized under the RBC requirements and that the
thresholds will not have any significant regulatory effect on UC Life.
However, should UC Life's RBC position decline in the future, UC Life's
continued ability to pay dividends and the degree of regulatory supervision or
control to which it is subject may be affected. At December 31, 1994, UC
Life's risk-based capital ratio was approximately 228%. Substantial
conformance to the NAIC model legislation is necessary for a state insurance
department to meet the minimum standards for accreditation by the NAIC.
Assessments Against Insurers. Guaranty laws exist in all states, the
District of Columbia and Puerto Rico. Life insurers doing business in any of
these regions can be assessed for policyholder losses incurred by insolvent
life insurance companies. The amount and timing of any future assessment on
the Company's insurance subsidiary under these laws cannot be reasonably
estimated and are beyond the control of the Company and its insurance
subsidiary. Regulatory actions against life insurers encountering financial
difficulty have prompted the various state guaranty associations to assess life
insurance companies for the deemed loss. A large part of the assessments paid
by UC Life pursuant to these laws may be used as credits for a portion of
premium taxes.
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 UC Life. There can be no assurance that
future tax legislation will not contain provisions that may result in adverse
effects on UC Life's products.
Insurance Ratings. The ability of an insurance company to compete
successfully depends in part on its financial strength, operating performance
and claims-paying ability as rated by A.M. Best Company ("Best") and other
rating agencies. UC Life is currently rated "A-" (Excellent) by Best. 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
26
<PAGE> 28
operating performance, Best reviews the company's statutory profitability,
leverage and liquidity, as well as the company's spread of risk, quality and
appropriateness of its reinsurance program, quality and diversification of
assets, the adequacy of its policy reserves and surplus, capital structure and
the experience and competency of its management. Best ratings are based upon
factors of concern to policyholders, agents and intermediaries and are not
directed toward the protection of investors.
In addition, Duff and Phelps, Inc., another nationally recognized
rating agency, has rated UC Life's claim paying ability "A+". During 1994,
Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., revised the
formula used in assigning its qualified solvency ratings of insurance companies
and, as a result, revised its rating assigned to UC Life from "BBBq" to "BBq".
The Company believes that UC Life's ratings will enable it to continue to
compete successfully. Ratings held by UC Life are important to maintaining
public confidence in UC Life and its ability to market its annuity products. A
lower rating could materially and adversely affect UC Life'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 and the ability of the Company's mortgage operations to originate new
loans.
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 recently 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 77,000 square feet of usable space. UC
Life and the executive offices of UC Lending are located at the Company's home
office building and adjacent investment property, both of which are owned by UC
Life. At December 31, 1994, operations of UC Lending were conducted from 9
locations owned by the Company in 9 cities in 4 states and from 131 additional
leased offices in 124 cities. The offices owned or leased by UC Lending range
in size from approximately 600 square feet to 3,200 square feet; leases expire
from 1995 to 1999, excluding renewal options. During 1994, aggregate annual
rental expense for leased office space was approximately $2.8 million.
Management believes that the properties are adequately maintained and insured,
and satisfactorily meet the requirements of the business conducted therein.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business is such that it is routinely
involved in litigation and is a party to or subject to other items of pending
or threatened litigation. Although the outcome of certain of these matters
cannot be predicted, management of the Company believes, based upon information
currently available, that the resolution of these various matters will not
result in any material adverse effect on its consolidated financial condition.
As discussed more fully in Item 1, "Business - Discontinued
Operations", the remaining affairs of the Company's subsidiary, Foster Mortgage
Corporation ("FMC"), a discontinued operation, are now being wound up under
the supervision of a bankruptcy court. On December 21, 1993, the
institutional lenders under FMC's primary credit facility (the "FMC
Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause
the
27
<PAGE> 29
remaining affairs of FMC to be wound up under the supervision of the bankruptcy
court. The FMC Institutional Lenders filed and the bankruptcy court has
approved a plan of liquidation for FMC providing for the appointment of a
trustee selected by the FMC Institutional Lenders, disposal of FMC's remaining
assets, and distributions to FMC's creditors. 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 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. These matters may be
pursued by the trustee under the plan of liquidation approved by the bankruptcy
court. 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 is not final
and was appealed by the FMC Institutional Lenders to the U.S. District Court
which affirmed the bankruptcy court's decision. The FMC Institutional Lenders
have appealed this decision to the U.S. Fifth Circuit Court of Appeals.
Management of the Company does not believe that any additional amounts are owed
by the Company to FMC and intends to vigorously contest any claims which may be
brought against it for such amounts.
As also discussed more fully in Item 1, "Business - Government
Regulation, Legislation and Ratings - Mortgage Operations", if the Florida
legislation relating to the Rodash case is not applied retroactively and if a
substantial number of claims are filed by borrowers against the Company under
the interpretation of the Federal Truth-in-Lending Act made by the court in
that case, resulting in rescission or repurchase of such borrowers' loans, the
Company's financial statements and operations will be materially adversely
affected. As the financial impact, if any, of this contingency cannot
presently be reasonably estimated, the Company has made no accrual therefor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
<PAGE> 30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Common Stock Prices and Dividends
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System/National Stock Market ("the
National Stock Market") under the symbol "UCFC". The following table sets
forth for the periods indicated the high and low sale prices of the Company's
Common Stock as reported on the National Stock Market and the per share cash
dividends declared. All amounts have been adjusted for stock dividends.
<TABLE>
<CAPTION>
SALES PRICES
------------ CASH
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1994
First Quarter . . . . . . . . . . $ 43.641 $ 34.321 $ .0909
Second Quarter . . . . . . . . . . 38.185 28.639 .0909
Third Quarter . . . . . . . . . . 40.231 28.866 .0909
Fourth Quarter (1) . . . . . . . . 31.821 22.000 .0909
--------
Total . . . . . . . . . . . . . $ .3636
========
1993
First Quarter . . . . . . . . . . $ 8.524 $ 7.501 $ .0682
Second Quarter . . . . . . . . . 8.355 7.501 .0682
Third Quarter (2) . . . . . . . . . 29.889 7.901 .0864
Fourth Quarter . . . . . . . . . . 37.049 25.116 .0864
--------
Total . . . . . . . . . . . . . $ .3092
========
</TABLE>
____________________
(1) 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.
(2) On September 20, 1993, the Company announced a 100% Common Stock
dividend payable on October 18, 1993, to stockholders of record on
October 1, 1993.
The Company has declared and paid regular quarterly cash dividends on
its Common Stock since 1974. While the Company intends to continue to pay
regular quarterly cash dividends on its Common Stock, its ability to do so will
be subject to its earnings, financial condition, capital and regulatory
requirements, credit facility restrictions and such other factors as the
Company's Board of Directors may consider relevant. (See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.)
Under provisions of the Company's revolving credit facility with a
group of commercial banks restricting the payment of dividends, approximately
$45.4 million of retained earnings at December 31, 1994, was available for the
payment of dividends by the Company. See Notes 6 and 10 of Notes to
Consolidated Financial Statements.
Approximate Number of Equity Security Holders
<TABLE>
<CAPTION>
Approximate Number of Shareholders
Title of Class As of March 10, 1995
-------------- ----------------------------------------
<S> <C>
Common Stock, $2.00 par value 3,104
</TABLE>
29
<PAGE> 31
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from the
Company's audited Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31, (1)
-------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest, charges and fees on loans . . $ 116,747 $ 96,284 $ 92,785 $ 90,180 $ 63,300
Loan sale gains . . . . . . . . . . . . 86,735 59,441 33,475 29,627 18,613
Investment income . . . . . . . . . . . 84,666 75,527 65,548 61,828 65,349
Net insurance premiums . . . . . . . . 11,373 18,684 22,860 36,269 39,820
Loan servicing income . . . . . . . . . 15,173 10,077 10,611 9,492 10,592
---------- ---------- ---------- ----------- -----------
Total revenues . . . . . . . . . . . . 314,694 260,013 225,279 227,396 197,674
Total expenses . . . . . . . . . . . . 230,620 216,952 204,664 219,580 190,837
---------- ---------- ---------- ----------- -----------
Income from continuing operations
before income taxes . . . . . . . . 84,074 43,061 20,615 7,816 6,837
Provision for income taxes . . . . . . 29,492 14,744 7,601 3,164 2,473
---------- ---------- ---------- ----------- -----------
Income from continuing operations . . . 54,582 28,317 13,014 4,652 4,364
Income (loss) from discontinued
operations . . . . . . . . . . . . . (5,048) (16,742) (2,768) 6,824 3,943
---------- ---------- ---------- ----------- -----------
Net income . . . . . . . . . . . . . $ 49,534 $ 11,575 $ 10,246 $ 11,476 $ 8,307
========== ========== ========== =========== ===========
PER SHARE DATA (3):
Primary:
Income from continuing operations . . $ 3.83 $ 2.52 $ 1.31 $ .47 $ .44
Income (loss) from discontinued
operations . . . . . . . . . . . . . (.35) (1.51) (.28) .69 .40
---------- ---------- ---------- ----------- -----------
Net income . . . . . . . . . . . . . $ 3.48 $ 1.01 $ 1.03 $ 1.16 $ .84
========== ========== ========== =========== ===========
Fully Diluted:
Income from continuing operations . . $ 3.83 $ 2.38 $ 1.31 $ .47 $ .44
Income (loss) from discontinued
operations . . . . . . . . . (.35) (1.41) (.28) .69 .40
---------- ---------- ---------- ----------- -----------
Net income . . . . . . . . . . . . $ 3.48 $ .97 $ 1.03 $ 1.16 $ .84
========== ========== ========== =========== ===========
Weighted average shares outstanding
Primary . . . . . . . . . . . . . 14,245 11,104 9,917 9,883 9,832
Fully diluted . . . . . . . . . . 14,245 11,853 9,917 9,883 9,832
Cash dividends . . . . . . . . . . . . $ .3636 $ .3092 $ .2728 $ .2556 $ .2372
Stockholders' equity - year end (2) . . $ 11.34 $ 11.45 $ 9.70 $ 8.94 $ 8.08
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA - YEAR END:
Investment securities - net (2) . . . $ 1,044,842 $ 902,091 $ 759,354 $ 376,966 $ 588,397
Loans - net . . . . . . . . . . . . . 369,382 517,720 502,229 604,942 362,164
Capitalized excess servicing income . 179,065 113,192 72,062 53,942 47,153
Deferred policy acquisition costs . . 91,915 83,495 80,007 78,599 77,601
Total assets . . . . . . . . . . . . 1,978,255 1,817,153 1,627,900 1,492,816 1,363,955
Annuity reserves . . . . . . . . . . 1,425,973 1,294,983 1,147,555 1,014,649 875,346
Notes payable . . . . . . . . . . . . 213,668 155,500 206,850 200,447 216,971
Total liabilities . . . . . . . . . . 1,823,005 1,663,785 1,531,642 1,404,382 1,284,524
Stockholders' equity (2) . . . . . . 155,250 153,368 96,258 88,434 79,430
OTHER DATA:
Mortgage
Total loan originations . . . . . . . $ 913,319 $ 545,229 $ 321,198 $ 328,184 $ 397,794
Home equity loan originations . . . . 908,821 539,868 301,234 253,613 224,783
Average home equity loan size . . . . 41 39 28 24 23
Home equity loans serviced -
year end . . . . . . . . . . . . . 1,683,698 1,125,139 819,448 703,922 575,282
Total loans serviced - year
end . . . . . . . . . . . . . . . . 2,032,405 1,568,781 1,367,822 1,344,388 1,175,038
Average coupon on home equity
loans originated . . . . . . . . . 11.7% 11.8% 13.4% N/A N/A
Loan origination fees as % of home
equity loans . . . . . . . . . . . 6.0% 7.0% 7.9% 8.2% 7.9%
Weighted average interest spread
retained on home equity loans sold 4.49% 6.06% 4.56% 4.42% 4.01%
Life Insurance
Annuity sales . . . . . . . . . . . . $ 249,737 $ 207,682 $ 187,050 $ 175,796 $ 102,391
Net interest spread on
annuities . . . . . . . . . . . . 2.73% 2.20% 1.84% 1.88% 2.18%
Investment grade bonds as %
of invested assets . . . . . . . . 69.6% 59.6% 54.3% 25.1% 45.5%
</TABLE>
_________________________
(1) On April 10, 1995, the Company decided to dispose of its investment in
its wholly-owned subsidiary, United General Title Insurance Company
("UG Title"), and on May 1, 1995 approved a formal plan of
disposal. In addition, 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 UG Title 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 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. In accordance with the
provisions of SFAS 115, prior year investments were not restated.
(3) All share and per share data have been adjusted to reflect stock
dividends.
31
<PAGE> 33
SELECTED INCOME STATEMENT DATA BY SEGMENT
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
MORTGAGE
Interest, charges and fees on loans . . $ 68,658 $ 44,797 $ 35,003 $ 36,174 $ 33,029
Investment income . . . . . . . . . . . 2,762 1,054 696 1,137
Loan sale gains . . . . . . . . . . . . 86,289 59,220 29,679 15,571 14,636
Loan servicing income . . . . . . . . . 19,892 15,568 15,284 12,108 10,289
---------- ---------- ---------- ----------- -----------
Total revenues . . . . . . . . . . . . 177,601 120,639 80,662 64,990 57,954
Total expenses . . . . . . . . . . . . 96,446 74,344 56,661 60,592 54,406
---------- ---------- ---------- ----------- -----------
Income from continuing operations
before income taxes 81,155 46,295 24,001 4,398 3,548
---------- ---------- ---------- ----------- -----------
LIFE INSURANCE
Interest, charges and fees on loans . 43,647 45,561 51,396 51,585 32,399
Investment income . . . . . . . . . . 83,614 75,594 67,287 63,285 65,549
Net insurance premiums . . . . . . . 11,373 18,684 22,860 36,269 39,820
Loan sale gains . . . . . . . . . . . 3,310 3,977
Loan servicing income . . . . . . . . (505) 340 673 1,645 2,625
---------- ---------- ---------- ----------- -----------
Total revenues . . . . . . . . . . . 138,129 140,179 145,526 152,784 144,370
Total expenses . . . . . . . . . . . 129,049 137,544 140,061 150,707 131,216
---------- ---------- ---------- ----------- -----------
Income from continuing
operations before income taxes . 9,080 2,635 5,465 2,077 13,154
---------- ---------- ---------- ----------- -----------
CORPORATE, OTHER OPERATIONS AND
ELIMINATIONS
Income from continuing operations
before income taxes . . . . . . . . (6,161) (5,869) (8,851) 1,341 (9,865)
---------- ---------- ---------- ----------- -----------
CONSOLIDATED
Income from continuing operations
before income taxes . . . . . . . . 84,074 43,061 20,615 7,816 6,837
Provision for income taxes . . . . . 29,492 14,744 7,601 3,164 2,473
---------- ---------- ---------- ----------- -----------
Income from continuing operations . . 54,582 28,317 13,014 4,652 4,364
Income (loss) from discontinued
operations . . . . . . . . . . . . (5,048) (16,742) (2,768) 6,824 3,943
---------- ---------- ---------- ----------- -----------
Net income . . . . . . . . . . . . . $ 49,534 $ 11,575 $ 10,246 $ 11,476 $ 8,307
========== ========== ========== =========== ===========
</TABLE>
32
<PAGE> 34
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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1994 1993 1992
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Mortgage . . . . . . . . . . . . . . . . . . $ 81,155 $ 46,295 $ 24,001
Life insurance . . . . . . . . . . . . . . . 9,080 2,635 5,465
Corporate, other operations and eliminations (6,161) (5,869) (8,851)
----------- ---------- -----------
Total . . . . . . . . . . . . . . . . . . . $ 84,074 $ 43,061 $ 20,615
=========== ========== ===========
Home equity loan originations . . . . . . . . $ 908,821 $ 539,868 $ 301,234
Home equity loans sold . . . . . . . . . . . 977,653 462,873 271,920
Weighted average interest spread retained
on home equity loans sold . . . . . . . . 4.49% 6.06% 4.56%
</TABLE>
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 origination,
sale and servicing of first mortgage, non-conventional, home equity loans.
Fundamental to the profitability and funding of the Company's mortgage
operations is the sale of these 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, however, the secondary mortgage market's growing
acceptance of mortgage-backed securities based on non-conventional home equity
loans has allowed the Company to pool large numbers of loans for sale as
mortgage-backed securities. In late 1991 and 1992, this was accomplished
primarily through private placement transactions. In 1993, the Company began
selling its loans in public securitization transactions through its own shelf
registration statement and sold publicly $973 million and $451 million of home
equity loans during 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 loan originations, and will
influence the funding costs of such originations and the amount of gain
recognized on loans sold in the secondary market. During periods of declining
interest rates 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 and a
lower cost of funding loan originations than experienced in 1992 or 1994. 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 fees) increased from 4.56% in 1992 to 6.06% in 1993 and declined
33
<PAGE> 35
to 4.49% in 1994 due to a rising interest rate environment. The weighted
average interest spread on loans sold is determined without regard to credit
losses. Therefore, the spread is not impacted by projected or actual credit
losses. The lower interest spread on loans sold during 1994 was somewhat offset
by an increased volume of loans originated and sold. In 1994 $909 million of
home equity loans were originated and $978 million were sold to third parties
compared to $540 million originated and $463 million sold to third parties in
1993.
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.
The Company began originating adjustable rate mortgage loans in 1993 and the
effects of changes in interest rates discussed above should be less for such
loans than with respect to fixed rate loans. (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.
UC Life has focused its efforts on increased annuity sales by expanding
its distribution network of financial institutions and independent general
agents. In 1994, annuity sales were $250 million, the largest annual
production since 1982. UC Life focused in 1994 on expanding the independent
general agents share of its distribution network, which agents sold
approximately 46% of the total dollar amount of annuities written in 1994
compared to 30% in 1993. As with the Company's mortgage operation,
fluctuations in and the level of interest rates also impacts the operations of
UC Life. The average spread on the annuity business was 1.84% in 1992 and
increased to 2.20% and to 2.73% during 1993 and 1994, respectively. Measures
taken by UC Life to improve this margin include the reduction in interest
crediting rates on new and existing annuity contracts. Surrenders of annuity
policies increased in 1994 compared to prior years due in part to these actions
and to a rising interest rate environment and an increase in the number of
annuity contracts which were beyond the surrender penalty period.
UC Life has continued its efforts to improve the quality and liquidity
of its investment portfolio. At December 31, 1994, 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 $291 million or 25.8% of the portfolio and in investment grade
mortgage-backed securities was $790 million or 70.2% of the portfolio. At
December 31, 1994 the amortized cost of UC Life's holdings of non-investment
grade publicly traded bonds was $18.1 million or 1.7% of the portfolio. UC
Life's invested assets also include residential and commercial real estate
mortgages originated and serviced by UC Lending; however, the percentage of
assets invested in mortgage loans in recent years has been reduced primarily as
the result of their disfavor with insurance regulatory authorities and rating
agencies.
The annuities sold by UC Life are monetary in nature and therefore
sensitive to changes in the interest rate environment. Profitability of UC
Life is directly affected by its ability to invest annuity premiums at yields
above the interest crediting rates on the related policy liabilities. One of
the primary financial objectives of UC Life is
34
<PAGE> 36
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 UC Life's investments, primarily fixed
maturity investments, increases; however, yields earned on investments made
during such periods decline. In contrast, during periods of rising 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 UC Life 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.
UG TITLE
On April 10, 1995, the Company made a decision to dispose of its
investment in United General Title Insurance Company ("UG Title"), a wholly
owned subsidiary of the Company, and, on May 1, 1995 approved a formal plan of
disposal. As a result of the Company's decision to dispose of UG Title, the
operations of UG Title have been classified as discontinued operations, and,
accordingly, the consolidated financial statements and the related notes of the
Company segregate continuing and discontinued operations. It is anticipated
that the transaction will be completed during 1995. In connection with the
decision to dispose of UG Title, the Company recorded a $128,000 after tax loss
in its financial statements as of and for the quarter ended March 31, 1995.
As discussed above, the Company has formalized a plan of disposition of
its investment in UG Title. In connection therewith, a letter of intent to
sell UG Title has been signed which provides a reduction of the sale price for
certain claims relating to transactions occurring prior to the date of sale and
discovered within twelve months thereafter. The Company has estimated the risk
of loss related to such potential claims and recorded a provision for such loss
in connection with the disposition. Should such claims materially exceed the
Company's estimates for such losses, such consequence will have an adverse
impact on the Company's operations by reducing the proceeds to be received from
the sale.
UG Title was formed in 1983 to compliment the Company's mortgage
operations; however, underwriting of affiliated transactions represented less
than 3% of UG Title's business in 1994. At December 31, 1994 UG Title was
licensed in 28 states, was represented by approximately 880 independent general
agents and had no direct operations. Key markets for UG Title are Colorado,
Louisiana, Florida and California. During 1994 and 1993, title insurance
premiums were $44.7 million and $24.4 million, respectively. During 1994, UG
Title experienced a net loss of $5.0 million compared to net income of $.8
million in 1993. Operations in 1994 suffered severely as the result of claims
related to agency escrow shortages in several states and losses associated with
a loan broker in California. In addition to the incurred losses, the
profitability of UG Title in 1994 was negatively impacted by a $3.8 million
increase in its reserve for policy losses.
UG Title provides single premium products insuring the validity of
residential first and second mortgage loans and indemnifying the policyholders
against loss or damage from obtaining an invalid title to real property. UG
Title focuses on underwriting title policies for resales and refinancings of
properties which policies averaged $80,100 in 1994. Risks in excess of $350,000
are reinsured primarily with Fidelity National Title Insurance Company; however,
UG Title remains contingently liable for reinsurance ceded. UG Title, unlike
some other title insurers, operates exclusively through independent title
agents.
35
<PAGE> 37
FOSTER MORTGAGE CORPORATION
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As a result of this decision, the operations of
FMC have been classified as discontinued operations, and, accordingly, the
Consolidated Financial Statements of the Company and the related Notes
segregate continuing and discontinued operations. In connection with the
decision to dispose of FMC, the Company recorded a $17.6 million after tax loss
in its financial statements as of and for the quarter ended March 31, 1993,
reflecting the operating loss of FMC for the quarter ended March 31, 1993 of
$1.5 million, net of tax benefit and the estimated loss from disposal of FMC of
$16.1 million, net of tax benefit. The Company has not reflected operating
losses incurred by FMC subsequent to that date in the Company's financial
statements.
As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the institutional lenders under FMC's primary credit facility (the "FMC
Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause
the remaining affairs of FMC to be wound up under the supervision of the
bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court
has approved a plan of liquidation for FMC providing for the appointment of a
trustee selected by the FMC Institutional Lenders, disposal of FMC's remaining
assets, and distributions to FMC's creditors. 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 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. These matters may be
pursued by the trustee under the plan of liquidation approved by the bankruptcy
court. 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 is not final
and was appealed by the FMC Institutional Lenders to the U.S. District Court
which affirmed the bankruptcy court's decision. The FMC Institutional Lenders
have appealed this decision to the U.S. Fifth Circuit Court of Appeals.
Management of the Company does not believe that any additional amounts are owed
by the Company to FMC and intends to vigorously contest any claims which may be
brought against it for such amounts.
The Company did not guarantee any debt of FMC and believes, based upon
advice of its counsel, that it has no responsibility for the obligations of FMC
under FMC's primary credit facility or (excluding potential consequences of the
bankruptcy filing on certain prior intercompany transactions or potential
additional payment for tax benefits as discussed above) for any other
liabilities to FMC's lenders.
Net income for 1994 was $49.5 million ($3.48 per share based on
14,245,325 weighted average shares outstanding) compared to net income of $11.6
million for 1993 ($.97 per share based on 11,852,764 weighted average shares
outstanding). The increase in net income in 1994 resulted primarily from an
increase in the gain on sale of loans and an improved interest margin earned on
annuities. In addition, as previously discussed in "Discontinued operations",
net income for 1994 and 1993 was reduced by a $5.0 million and $16.7 million
loss
36
<PAGE> 38
1994 COMPARED TO 1993
recognized in connection with the Company's decisions to divest United
General Title Insurance Company and Foster Mortgage Corporation.
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1994 1993
------ -----
(in thousands)
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . $ 314,694 $ 260,013
Total expenses . . . . . . . . . . . . . . . . . 230,620 216,952
Income from continuing operations before income
taxes . . . . . . . . . . . . . . . . . . . . . 84,074 43,061
Income from continuing operations . . . . . . . 54,582 28,317
</TABLE>
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the year ended December 31, 1994 and
1993.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1993
------ ------
(in thousands)
<S> <C> <C>
Interest, charges and fees on loans . . . . . . . . $ 116,747 $ 96,284
Loan sale gains . . . . . . . . . . . . . . . . . . 86,735 59,441
Investment income . . . . . . . . . . . . . . . . . 84,666 75,527
Loan servicing income . . . . . . . . . . . . . . 15,173 10,077
Net insurance premiums . . . . . . . . . . . . . . 11,373 18,684
------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . $ 314,694 $ 260,013
============ ===========
</TABLE>
Interest, charges and fees on loans increased $20.5 million for 1994.
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 on a loan sold to third parties. During 1994 and 1993, the Company
sold approximately $978 million and $463 million, respectively, in home equity
loans and recognized approximately $32.5 million and $18.9 million,
respectively, in net loan origination fees in connection with these sales.
Other loan income includes primarily prepayment fees, late charges and
insurance commissions.
The following table presents the composition of interest, charges and
fees on loans for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1993
-------- ------
(in thousands)
<S> <C> <C>
Loan origination fees . . . . . . . . . . . . . . . . . $ 56,576 $ 35,987
Mortgage loan interest . . . . . . . . . . . . . . . . 47,996 51,763
Other loan income . . . . . . . . . . . . . . . . . . . 12,175 8,534
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 116,747 $ 96,284
========== ========
</TABLE>
37
<PAGE> 39
The Company estimates that nonaccrual loans reduced mortgage loan
interest for 1994 and 1993 by approximately $10.3 million and $9.5 million,
respectively. During 1994 the average amount of nonaccrual loans owned by the
Company was $25.5 million compared to approximately $31.7 million during 1993.
In addition, the average balance of loans serviced for third parties which were
on a nonaccrual basis or in foreclosure was $55.6 million and $43.4 million
during 1994 and 1993, respectively, representing 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, 1994 the Company owned
approximately $7.8 million of commercial loans which were on an accrual status,
but which the Company considers as potential problem loans, compared to $8.1
million at December 31, 1993. 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 recognized by the Company's mortgage division increased
$27.1 million during 1994 over 1993. Loan sale gains approximate the present
value over 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
$515 million increase in the amount of loans sold which offset a decrease in
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). Interest spread retained by the Company on loans
sold includes the normal servicing fee. During 1994, guidelines were published
by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., defining a
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 servicing fee rate used by the Company in its 1994 third and
fourth quarter loan securitization transactions was 50 basis points. This
resulted in an increase in the amount of loan sale gain recognized on the home
equity loans sold in the 1994 third and fourth quarters compared to previous
securitization transactions which include a servicing fee rate of 75 basis
points.
The following table presents information regarding home equity loan
sale transactions for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1994 1993
------ ------
(dollars in thousands)
<S> <C> <C>
Home equity loans sold . . . . . . . . . . . . . . . . . . . $ 977,653 $ 462,873
Average coupon on home equity loans sold . . . . . . . . . . 11.80% 12.00%
Weighted interest spread retained on home equity loans sold 4.49% 6.06%
Home equity loan sale gains . . . . . . . . . . . . . . . . $ 86,735 $ 59,220
</TABLE>
In comparison to 1993, market interest rates were higher in 1994, and,
as a result, the Company experienced a decrease in the weighted average
interest spread retained on home equity loans sold from 6.06% in 1993 to 4.49%
in 1994. 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. Although actions have been taken by the Company during a rising
interest rate environment to mitigate the impact on earnings of fluctuations in
market rates, such as increasing the coupon rate charged on its loan products,
the effect of such action will generally lag the impact of market rate
fluctuations. The weighted average interest spread retained by the Company on
loan sales during the fourth quarter of 1994 declined to 4.10% from 4.63%
retained on loan sales during the first nine months of 1994.
38
<PAGE> 40
This decrease is primarily attributable to increases in the pass-through rates
on mortgage backed securities sold under the Company sponsored shelf
registration statement due to increases in market rates. Historically, the
Company has not entered into commercial interest rate hedge transactions in
connection with warehousing loans for future loan securitizations. The Company
has used a prefunding feature in connection with recent loan securitization
transactions. Such prefunding feature "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
such 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 1994,
approximately $53 million was held in a prefunding account for purchase of the
Company's home equity loans during the first quarter of 1995.
Investment income totaled $84.7 million on average investments of
approximately $1.1 billion for 1994 compared to investment income of $75.5
million on average investments of approximately $872 million during the same
period of 1993. The impact on revenue of the increased asset base in 1994 was
partially offset by lower weighted average investment yields than those
obtained during 1993. Investment income for 1994 and 1993 includes investment
gains of $.2 million and $.6 million, respectively. At December 31, 1994 the
amortized cost of the fixed income portfolio totaled $1.1 billion and was
comprised principally of $790 million in investment grade mortgage-backed
securities and $281 million in investment grade bonds. At December 31, 1994,
the weighted average rating of the publicly traded bond portfolio according to
nationally recognized statistical rating agencies was "AA". During 1994, the
Company established a trading account for a portion of its investment portfolio
invested in common stocks. At December 31, 1994 the carrying value of
investments in the Company's trading account was $679,000 reflecting a $22,751
unrealized gain which is included in investment income for 1994.
Loan servicing income increased $5.1 million for 1994 compared to 1993,
reflecting the impact of an increased amount of home equity loans serviced for
third parties offset by an increase in the amortization of capitalized excess
servicing income. The reduced normal servicing fee rate from 75 to 50 basis
points as discussed above has the impact of increasing current revenues (loan
sale gains) while reducing future revenues (loan servicing income) with respect
to the loan sale transactions occurring on and after the reduction. The
following table reflects the components of loan servicing income for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1994 1993
------ -------
(in thousands)
<S> <C> <C>
Servicing fees earned . . . . . . . . . . . . . . . . . . $ 55,428 $ 31,621
Amortization of capitalized excess servicing income . . . . (40,255) (21,544)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,173 $ 10,077
=========== ===========
</TABLE>
Net insurance premiums declined $7.3 million for 1994 compared with
1993. Net insurance premiums reflect revenues associated primarily with credit
insurance underwritten by UC Life. The decrease in premium income is primarily
the result of the impact of UC Life's decision to discontinue sales of credit
insurance products.
39
<PAGE> 41
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1994 1993
------ ------
(in thousands)
<S> <C> <C>
Interest on annuity policies . . . . . . . . . . . . . . . . . $ 73,065 $ 76,086
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,380 40,784
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,563 10,158
Insurance commissions . . . . . . . . . . . . . . . . . . . . . 14,264 13,920
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . 13,457 17,343
Insurance benefits . . . . . . . . . . . . . . . . . . . . . . 12,654 18,200
Other operating . . . . . . . . . . . . . . . . . . . . . . . . 45,237 40,461
---------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 230,620 $ 216,952
========== ===========
</TABLE>
Interest on annuity policies declined $3.0 million in 1994 when
compared to 1993 as the result of a reduction in the average interest crediting
rate on the Company's annuity policies offset by the impact of an increase in
annuity reserves. Average annuity reserves were $1.4 billion during the 1994,
an increase of approximately $117 million from 1993.
Personnel expenses increased approximately $16.6 million primarily
because of costs associated with the expansion of the Company's mortgage
operations, loan production related incentives and an increase in the cost of
the Company's employee benefit and incentive plans.
Insurance commissions for 1994 increased by approximately $.3 million
over commissions for the same period of 1993. 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 1994, the Company capitalized approximately $20.7 million 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 $9.5 million during 1994, compared to $5.6 million during 1993.
Insurance benefits for 1994 declined $5.5 million compared to 1993
primarily as the result of a reduction in benefits associated with ordinary
life and credit insurance products.
The Company's loan loss provision was $13.5 million and $17.3 million
for 1994 and 1993, respectively. The decrease in the provision resulted from a
decrease in the provision for losses on home equity loans due to a reduction in
the amount of loans owned by the Company, a decrease in the amount of property
placed into foreclosure and a lower incidence of loss per property sold.
Interest expense for 1994 increased approximately $4.4 million
compared to 1993 primarily as the result of an increase in the weighted average
interest rate charged on debt.
Other operating expenses for 1994 increased approximately $4.8 million
when compared to 1993 primarily as the result of costs associated with the
expansion of the Company's mortgage operations, including a $2.3 million
increase in advertising expenses and a $1.3 million increase in occupancy and
equipment expenses. 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.
40
<PAGE> 42
1993 COMPARED TO 1992
Net income for 1993 was $11.6 million ($.97 per share based on
11,852,764 weighted average shares outstanding) compared to $10.2 million for
1992 ($1.03 per share based on 9,917,217 weighted average shares outstanding).
Income from continuing operations was $28.3 million and $13.0 million,
respectively, for 1993 and 1992. Operations in 1993 were positively affected
by an increase in the interest spread retained on loans sold and an increase in
the interest margin earned on annuities offset by a $2.3 million settlement of
litigation and $1.4 million estimated loss in connection with the third party
administration of credit life business. As previously discussed in
Discontinued operations, net income for 1993 was reduced by a $16.7 million
loss recognized in connection with the Company's decision to divest Foster
Mortgage Corporation compared to a loss of $3.3 million incurred by FMC in
1992. In addition, loss from discontinued operations in 1993 and 1992 includes
net income of $.8 million and $.5 million, respectively, earned by UG Title.
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1993 1992
--------- ---------
(in thousands)
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . $ 260,013 $ 225,279
Total expenses . . . . . . . . . . . . . . . . . . 216,952 204,664
Income from continuing operations
before income taxes . . . . . . . . . . . . . . 43,061 20,615
Income from continuing operations . . . . . . . . 28,317 13,014
</TABLE>
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the year ended December 31, 1993 and
1992.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1993 1992
--------- ---------
(in thousands)
<S> <C> <C>
Interest, charges and fees on loans . . . . . . . $ 96,284 $ 92,785
Investment income . . . . . . . . . . . . . . . . 75,527 65,548
Loan sale gains . . . . . . . . . . . . . . . . . 59,441 33,475
Net insurance premiums . . . . . . . . . . . . . . 18,684 22,860
Loan servicing income . . . . . . . . . . . . . . 10,077 10,611
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . $ 260,013 $ 225,279
========= =========
</TABLE>
Interest, charges and fees on loans increased $3.5 million for 1993.
This line item includes interest on mortgage loans owned by the mortgage and
insurance divisions and loan origination fees earned by the mortgage division.
Loan origination fees in excess of direct origination costs on loans held by
the Company are recognized over the life of the loan or recognized at the time
of sale on loans sold to third parties. During 1993 and 1992, the Company sold
approximately $463 million and $272 million, respectively, in home equity
loans and recognized approximately $18.9 million and $12.1 million,
respectively, in net loan origination fees in connection with these sales. The
average loan portfolio owned totaled approximately $487 million during 1993
compared to $540 million during 1992, due to an increased level of loan sales
which, in turn, decreased mortgage loan interest. Other loan income includes
primarily prepayment fees, late charges, and insurance commissions.
41
<PAGE> 43
The following table presents the composition of interest, charges and
fees on loans.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1993 1992
--------- ---------
(in thousands)
<S> <C> <C>
Mortgage loan interest . . . . . . . . . . . . . . . $ 51,763 $ 57,467
Loan origination fees . . . . . . . . . . . . . . . 35,987 26,340
Other loan income . . . . . . . . . . . . . . . . . 8,534 8,978
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . $ 96,284 $ 92,785
========= =========
</TABLE>
The Company estimates that nonaccrual loans reduced mortgage loan
interest for 1993 and 1992 by approximately $9.5 million and $8.1 million,
respectively. During 1993 the average amount of nonaccrual loans owned by the
Company was $31.7 million compared to approximately $31.6 million during 1992.
In addition, the average balance of loans serviced for third parties which were
on a nonaccrual basis or in foreclosure was $43.4 million and $32.2 million
during 1993 and 1992, respectively, representing 4.5% and 3.9%, respectively,
of the average amount of loans serviced for third parties. The Company is
generally obligated to advance interest on delinquent loans to the investor or
holder of the mortgage-backed security, as the case may be, at the pass-through
rate until satisfaction of the note, liquidation of the collateral or charge
off of the delinquent loan. At December 31, 1993, the Company owned
approximately $8.1 million of commercial loans which were on an accrual status,
but which the Company considers as potential problem loans, compared to $13.8
million at December 31, 1992. The Company evaluates each of these commercial
loans to estimate its risk of loss in the investment and provides for such loss
through a charge to earnings.
Investment income totaled $75.5 million on average investments of
approximately $872 million for 1993 compared to investment income of $65.5
million on average investments of approximately $690 million during 1992. In
addition to the impact on revenue of the increased asset base, investment
income during 1993 was increased as the result of a reduction in the amount of
funds invested in short term maturities when compared to 1992. Investment
income for 1993 and 1992 includes gains on the sale of investments of $.6
million and $3.1 million, respectively. At December 31, 1993, the fixed income
portfolio totaled $902 million and was comprised principally of $598 million in
investment grade mortgage-backed securities and $238 million in investment
grade corporate bonds. At December 31, 1993, the weighted average rating of
the publicly traded bond portfolio according to nationally recognized
statistical rating agencies was "AA".
Loan sale gains recognized by the Company's mortgage unit increased
$29.5 million during 1993 over 1992. Loan sale gains approximate the present
value over the estimated life of the loan of the difference between the
contractual interest rates on the loans sold, over the sum of the pass-through
rate paid to the buyer, a normal servicing fee, a trustee fee and a surety bond
fee, if any, in mortgage-backed securitization transactions, and an estimate of
future credit losses. The increase in amount of loan sale gains was due
primarily to an increase in the excess servicing income retained by the Company
(i.e., the stated interest rate on the loan less the pass-through rate and the
normal servicing fee and other applicable recurring fees) and a $191 million
increase in the amount of home equity loans sold. Interest spread retained by
the Company on loans sold includes the normal servicing fee.
42
<PAGE> 44
The following table presents information regarding home equity loan
sale transactions by the Company's mortgage subsidiary for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1993 1992
--------- ---------
(dollars in thousands)
<S> <C> <C>
Home equity loans sold . . . . . . . . . . . . . . $ 462,873 $ 271,920
Average coupon on home equity loans sold . . . . . 12.00% 13.69%
Weighted average interest spread retained
on home equity loans sold . . . . . . . . . . . 6.06% 4.56%
Home equity loan sale gains . . . . . . . . . . . $ 59,220 $ 29,679
</TABLE>
Historically, the Company has originated and sold portfolios of home
equity loans on a whole loan basis (or participations therein) to institutional
investors or government-sponsored mortgage agencies or conduits and, during
1992, with the participation of one of these investors, securitized and
publicly sold home equity loan pass-through certificates. In 1993, the Company
began selling its loans in public securitization transactions through its own
shelf registration statement. As a primary consequence of this process and a
lower interest rate environment, the Company realized an increase in the
interest spread retained on home equity loans sold from 4.56% in 1992 to 6.06%
in 1993.
Net insurance premiums declined $4.2 million during 1993 compared to
1992. The decrease in premium income was primarily the result of a reduction
in premiums earned on credit insurance products.
Loan servicing income declined in 1993 compared to 1992 as the
result of higher amortization of capitalized excess servicing income partially
offset by an increase in the amount of home equity loans serviced. The
following table reflects the components of loan servicing income for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1993 1992
--------- ---------
(in thousands)
<S> <C> <C>
Servicing fees earned . . . . . . . . . . . . . . $ 31,621 $ 23,021
Amortization of capitalized excess
servicing income . . . . . . . . . . . . . . . . (21,544) (12,410)
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . $ 10,077 $ 10,611
========= =========
</TABLE>
Expenses. The following table presents the components of the
Company's expenses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1993 1992
---------- ----------
(in thousands)
<S> <C> <C>
Interest on annuity policies . . . . . . . . . . . $ 76,086 $ 77,268
Personnel . . . . . . . . . . . . . . . . . . . . 40,784 34,702
Insurance commissions . . . . . . . . . . . . . . 13,920 15,283
Insurance benefits . . . . . . . . . . . . . . . . 18,200 20,843
Loan loss provision . . . . . . . . . . . . . . . 17,343 10,027
Interest . . . . . . . . . . . . . . . . . . . . . 10,158 12,082
Other operating . . . . . . . . . . . . . . . . . 40,461 34,459
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . $ 216,952 $ 204,664
========== ==========
</TABLE>
43
<PAGE> 45
Interest on annuity policies declined $1.2 million during 1993
compared to 1992. Due to the sustained lower interest rate environment, the
average interest crediting rate on these annuity policies was reduced which
offset the impact of an increase in average annuity reserves of approximately
$156 million during 1993 compared to 1992. In addition, by comparison with
1992, the rate of annuity surrenders declined during 1993 notwithstanding
reductions in renewal crediting rates on these policies.
Personnel expenses increased approximately $6.1 million primarily
because of the costs associated with the geographic expansion of the Company's
mortgage operations and incentive compensation paid in connection with loan
originations.
Insurance commissions for 1993 declined by approximately $1.4
million over commissions for 1992 primarily as the result of a decrease in
commissions associated with ordinary life and credit insurance products.
Commissions paid on issuance of the Company's single premium deferred annuity
products are generally capitalized as DPAC and amortized over the estimated
life of the policy. During 1993, the Company capitalized approximately $13.7
million in commissions paid on sales of annuities compared to $11.6 million
during 1992. Amortization of commission expense on annuities capitalized in
prior periods was $5.6 million during 1993, compared to $4.1 million during
1992.
The Company's loan loss provision was $17.3 million and $10.0
million for 1993 and 1992, respectively. The increase in the provision
resulted primarily from an increase in the amount of losses incurred in 1993 as
the result of an increase in the number of properties placed in foreclosure and
an increase in the average amount of loss per property sold.
Interest expense for 1993 declined $1.9 million from 1992 primarily
as the result of lower borrowing costs.
Other operating expenses for 1993 were approximately $6.0 million
higher than 1992. Included in other operating expenses is the $2.3 million
accrual for the settlement of litigation and approximately $1.4 million in
estimated loss recognized in connection with the previously terminated
agreement to administer certain blocks of the Company's credit life business.
44
<PAGE> 46
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, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
Year Ended December 31, 1994
------------------------------------------------------------
Corporate,
Life Other Operations
Mortgage Insurance & Eliminations Total
------------ ---------- ---------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans . $ 68,658 $ 43,647 $ 4,442 $ 116,747
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 . . . . . . . . 19,892 (505) (4,214) 15,173
------------ ----------- ------------- ------------
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
============= =========== ============ ============
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
Year Ended December 31, 1994
------------------------------------------------------------
Corporate,
Life Other Operations
Mortgage Insurance & Eliminations Total
------------ ---------- ---------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans . $ 44,797 $ 45,561 $ 5,926 $ 96,284
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 . . . . . . . . 15,568 340 (5,831) 10,077
------------- ----------- ---------- ------------
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
============ =========== ========== ============
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
Year Ended December 31, 1994
------------------------------------------------------------
Corporate,
Life Other Operations
Mortgage Insurance & Eliminations Total
------------ ---------- ---------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans $ 35,003 $ 51,396 $ 6,386 $ 92,785
Investment income . . . . . . . . 696 67,287 (2,435) 65,548
Net insurance premiums . . . . . 22,860 22,860
Loan sale gains . . . . . . . . . 29,679 3,310 486 33,475
Loan servicing income . . . . . . 15,284 673 (5,346) 10,611
------------ ---------- ---------- ------------
Total . . . . . . . . . . . . . 80,662 145,526 (909) 225,279
------------ ---------- ---------- ------------
Expenses:
Interest on annuity policies . . 77,268 77,268
Personnel . . . . . . . . . . . . 26,441 3,372 4,889 34,702
Insurance commissions . . . . . . 14,328 955 15,283
Insurance benefits . . . . . . . 20,843 20,843
Loan loss provision . . . . . . . 5,152 4,875 10,027
Interest . . . . . . . . . . . . 3,995 1,197 6,890 12,082
Other operating . . . . . . . . . 21,073 18,178 (4,792) 34,459
------------ ---------- ---------- ------------
Total . . . . . . . . . . . . 56,661 140,061 7,942 204,664
------------ ---------- ---------- ------------
Income (loss) from continuing operations
before income taxes . . . . . . $ 24,001 $ 5,465 $ (8,851) $ 20,615
============ ========== ========== ============
</TABLE>
ASSET QUALITY AND RESERVES
The quality of the Company's loan and bond portfolios and of the loan
portfolio serviced for third parties significantly affects the profitability of
the Company. The values of and markets for these assets are dependent on a
number of factors, including general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors, which become more
pronounced in periods of economic decline, may affect the quality of these
assets and the Company's resulting ability to sell these assets for acceptable
prices. General economic deterioration can result in increased delinquencies
on existing loans, reductions in collateral values and declines in the value of
investments resulting from a reduced capacity of issuers to repay the bonds.
Loans. Substantially all of the loans owned by the Company were
originated by UC Lending through its branch (i.e., retail) network or wholesale
loan programs. The Company's loan portfolio at December 31, 1994 was comprised
primarily of $204 million in home equity loans and $155 million in commercial
loans. In connection with its origination of home equity loans, the Company
relies on thorough underwriting and credit review procedures by UC Lending, a
mortgage on the borrower's residence and, in some cases, other security, and,
in its retail origination program, contact with borrowers through its branch
office system to manage credit risk on its loans. In addition to servicing the
loans owned by the Company, UC Lending serviced approximately $1.7 billion in
loans for third parties at December 31, 1994, $1.5 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 generally achieved in part by subordinating
the excess interest spread retained by the Company to the payment of scheduled
principal and interest
47
<PAGE> 49
on the certificates. 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 termination of the agreement pursuant to which the loans
were sold. If cumulative payment defaults exceed the amount subordinated, a
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, 1994, the Company's
allowance for loan losses was $16.5 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, 1994, the allowance for loss on
loans serviced was $26.8 million. The maximum recourse associated with sales
of home equity loans according to terms of the loan sale agreements totaled
approximately $275 million, of which amount approximately $264 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 operations.
At December 31, 1994, the contractual balance of loans serviced by UC
Lending was approximately $2.0 billion comprised of approximately $360 million
serviced for the Company and approximately $1.7 billion serviced for investors.
The portfolio is geographically diversified. Although the Company services
loans in 45 states, at December 31, 1994 a substantial portion of the loans
serviced were originated in Florida (14.3%), Ohio (11.6%) and Louisiana
(10.1%), respectively, and no other state accounted for more than 8.0% 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 (27.8%) and Georgia (17.0%) and no other state accounted for more than
8.5% 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.
48
<PAGE> 50
The following table provides a summary of loans owned and/or serviced
by UC Lending which are past due 30 days or more, foreclosed properties and
loans charged off as of the dates indicated.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
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
============ ========== ========== ========= ===========
December 31, 1992
-----------------
Home equity . . . $ 819,448 $ 71,762 8.76% $ 13,092 $ 7,244 $ 4,498 0.59%
Commercial . . . 404,857 29,954 7.40% 20,976 7,338 4,805 1.14%
Conventional . . 143,517 2,997 2.08% 291 86 0.05%
------------ ---------- ---------- --------- -----------
Total . . . $ 1,367,822 $ 104,713 7.66% $ 34,359 $ 14,582 $ 9,389
============ ========== ========== ========= ===========
</TABLE>
Management continues to focus on reducing the level of non-earning
assets owned and/or serviced by focusing on expediting the foreclosure process.
As the result of being aggressive in liquidating foreclosed property, the
Company's charge-offs in 1994 increased compared to prior years. The balance
of foreclosed home equity loans owned and/or serviced in 1994 totaled $20.6
million at December 31, 1994 compared to $25.4 million at December 31, 1993.
The above delinquency and loan loss experience represents the
Company's recent experience. However, the delinquency, foreclosure and net
loss percentages may be affected by the increase in the size and relative lack
of seasoning of the portfolio. In addition, the Company can neither quantify
the impact of 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.
Recent legal developments related to mortgage loans. On March 21,
1994, the United States Court of Appeals for the Eleventh Circuit held, in
part, that a lender improperly disclosed the collection of the Florida state
49
<PAGE> 51
intangible tax from the borrower, thereby subjecting the loan to rescission
under the Federal Truth-in-Lending Act (the "TILA") by the borrower for three
years after it was made. Subsequent to the court's initial decision and prior
to its refusal to reconsider its decision, the Florida Legislature amended the
language of the intangible tax to clarify the Legislature's previous intention
that the intangible tax be disclosed for purposes of the TILA in the manner
that had been followed by most lenders in Florida, including the Company.
Although the Florida Legislature intended this legislation to apply
retroactively, no final court decision has been rendered as to the effect of
this legislation on loans originated prior to its effective date. This court
decision may also apply to a similar intangible tax imposed by other states.
To its knowledge, as of March 3, 1995, no claims have been filed against the
Company under this court decision (other than as a defense in foreclosure
proceedings) and no notice of a breach of a representation has been received
under the Company's loan sale agreements requesting it to repurchase, cure or
substitute other loans for the loans sold. If the intent of the Florida
Legislature is not upheld and if a substantial number of claims are filed by
borrowers against the Company resulting in rescission or repurchase, the
Company's financial statements and operations will be materially adversely
affected. As the financial impact, if any, of this contingency cannot
presently be reasonably estimated, the Company has made no accrual therefor.
Investment securities. Investment purchases are made with the
intention of holding fixed income securities until maturity. Prior to January
1, 1994 securities were generally carried at cost adjusted for discount
accretion and premium amortization. At December 31, 1994, the amortized cost
of the Company's bond portfolio was $1.1 billion consisting primarily of $790
million in mortgage-backed securities and $269 million in corporate bonds. In
connection with the adoption of SFAS 115 (see Note 1.5 of the Notes to the
Consolidated Financial Statements), bonds with an amortized cost of
approximately $1.0 billion or 92.4% 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, 1994, the Company owned
$.7 million in equity securities classified as trading securities. The net
unrealized loss in the bond portfolio (amortized cost over fair value) at
December 31, 1994 was $73.9 million compared to an unrealized gain of $31.3
million at December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding loan
originations in its mortgage operations and the payment of policyholder claims
and surrenders incurred in its insurance operations. The Company's mortgage
operations require continued access to short and long-term sources of debt
financing, the sale of loans to UC Life and the sale of loans and asset-backed
securities in the secondary market; whereas liquidity requirements for the
Company's insurance operations are generally met by funds provided from the
sale of annuities and cash flow from its investments in fixed income securities
and mortgage loans.
The Company's primary debt facility has been 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.
The net proceeds from the sale of the senior notes were used to repay a portion
of the principal amount of the indebtedness outstanding under the Bank
Facility. The senior notes bear interest at the rate of 9.35% per annum,
provide for interest payable semi-annually, mature on November 1, 1999 and are
not redeemable prior to maturity. The senior notes rank on a parity with other
unsecured and unsubordinated indebtedness of the Company. An amendment to the
Bank Facility became effective upon the consummation of the sale of the senior
notes which (i) extended the maturity of the Bank Facility from December 31,
1995 to December 31, 1996, (ii) released liens on the stock of the Company's
subsidiaries and other collateral, (iii) reduced the amount available under the
Bank Facility from $200 million to $113.6 million and (iv) permitted the
non-insurance subsidiaries of the Company to have one or more warehouse lines
of credit with an aggregate amount outstanding of up to $300 million.
In addition, at December 31, 1994, UC Lending had available a secured
warehouse facility provided by the investment bank that acted as sole
underwriter of the Company's fourth quarter public loan securitization
50
<PAGE> 52
transaction. The warehouse facility was directly related to the public
securitization and initially provided funding for up to $200 million of
eligible home equity loans for such securitization and matured on February 10,
1995 with the closing of the last delivery of loans for the securitization.
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 originations, repayments of inter-company debt
borrowed by the Company under the Bank Facility and the 9.35% senior notes due
November 1, 1999, payments of operating and interest expenses, deposits to
reserve accounts and income taxes related to loan sale transactions. Loan
originations have historically been funded principally through the Bank
Facility and short-term bank facilities pending loan sales to UC Life and in
the secondary market.
Substantially all of the loans originated or acquired by UC Lending
are sold. Net cash used by operating activities of the Company in 1994 and
1993, respectively, reflects approximately $948 million and $596 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 $978 million and $463 million in 1994 and 1993, 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 UC Lending and its subsidiaries to the payment of
principal and interest due to certificate holders. In connection with these
transactions, UC Lending was required, in some instances, to fund an initial
deposit, and thereafter, in each transaction, a portion of the amounts
receivable by UC Lending and its subsidiaries from the excess interest spread
is required to be placed and maintained in a reserve account to the extent of
the subordination requirements. The subordination requirements generally
provide that the excess interest spread is payable to 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 $1.5 billion of pass-through certificates
through December 31, 1994, the subordination amounts aggregate approximately
$225 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, 1994, the amounts on deposit in such reserve accounts totaled $82.0
million.
Life insurance. The principal cash requirement of UC Life 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 in 1994 and 1993 was approximately $64
million and $78 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 1994 and 1993 reflect approximately $250 million and $208 million,
respectively, in cash received primarily from sales by UC Life of its annuity
products. As reflected in the net cash used by investing activities during the
same periods, investment purchases were approximately $300 million and $293
million, respectively, reflecting the investment of these funds and the
reinvestment of proceeds from maturities of
51
<PAGE> 53
investments. Cash used by financing activities during these twelve month
periods also reflects payments of $192 million and $136 million primarily on
annuity products resulting from policyholder surrenders and claims. The
increase in annuity surrenders during 1994 was expected, due in part to an
increase in the amount of annuity policies which were beyond the surrender
penalty period and to a planned widening of the interest margin on the
Company's annuity products by reducing annuity crediting rates in a rising
interest rate environment. The interest margin on the Company's annuity
liabilities during 1994 was 2.73% compared to 2.20% during 1993. UC Life's
investments at December 31, 1994, included approximately $325 million in
residential and commercial mortgage loans, and the amortized cost of its bond
portfolio included $309 million in corporate and government bonds and private
debt placements and $790 million in mortgage-backed securities.
The investment portfolio is also managed to provide a secondary source
of liquidity as investments can be sold, if necessary, to fund abnormal levels
of policy surrenders, claims and expenses. An unanticipated increase in
surrenders would impact the Company's liquidity, potentially requiring the sale
of certain assets, such as bonds and loans prior to their maturities, which may
be at a loss.
As a Louisiana domiciled insurance company, UC Life is subject to
certain regulatory restrictions on the payment of dividends. UC Life had the
capacity at December 31, 1994 to pay dividends of $8.2 million. UC Life did
not pay any dividends to the Company during 1992, 1993 or 1994 in order to
retain capital in UC Life.
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. SFAS 114 and SFAS 118 are effective for financial statements
for fiscal years beginning after December 15, 1994. Management believes that
the adoption of these statements will not have a material effect on the
financial statements of the Company.
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, Inc. ("D&P") rated the issue BBB, Standard and Poor's Ratings
Group, a division of McGraw-Hill, 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.
Life insurance subsidiary. In June, 1994, A.M. Best Company ("Best")
reaffirmed its "A-" (Excellent) rating of UC Life. Best's ratings depend in
part on its analysis of an insurance company's financial strength, operating
performance and claims paying ability. In addition, UC Life's claims paying
ability has been rated "A+" by Duff & Phelps, Inc. Recently, Standard & Poor's
Ratings Group, a division of McGraw-Hill, Inc., revised the formula used in
assigning its qualified solvency ratings of insurance companies and, as a
result, revised its rating assigned to UC Life from "BBBq" to "BBq." The
Company believes that UC Life's ratings will enable it to continue to compete
successfully.
52
<PAGE> 54
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, 1994
and 1993, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1994. 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, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994 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 1.5 of the Notes to the Consolidated Financial Statements,
in 1994 the Company changed its method of accounting for investments to conform
with Statement of Financial Accounting Standards No. 115.
As discussed in Note 13 of the Notes to the Consolidated Financial Statements,
on May 1, 1995, the Company approved a formal plan of disposal of United
General Title Insurance Company. As a result, the accounts of United General
Title Insurance Company are presented as discontinued operations in the
accompanying Consolidated Financial Statements.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
February 28, 1995
(May 1, 1995 as to Note 13 and Item 14, Schedules V and VI)
53
<PAGE> 55
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1994 1993
Assets ---------------- ----------------
------ (in thousands)
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 56,359 $ 39,942
Temporary investments - reserve accounts . . . . . . . . . . . 81,980 27,672
Investment securities - net
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . 679 -
Available-for-sale . . . . . . . . . . . . . . . . . . . . 960,100 -
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . 57,391 875,393
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,672 26,698
Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . . 369,382 517,720
Capitalized excess servicing income . . . . . . . . . . . . . . 179,065 113,192
Deferred policy acquisition costs . . . . . . . . . . . . . . . 91,915 83,495
Accrued interest receivable . . . . . . . . . . . . . . . . . . 37,200 30,167
Property - net . . . . . . . . . . . . . . . . . . . . . . . . 30,565 28,878
Deferred income tax benefit . . . . . . . . . . . . . . . . . . 7,420 -
Net assets of discontinued operations . . . . . . . . . . . . . 9,736 12,285
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 69,791 61,711
------------- ------------
Total assets . . . . . . . . . . . . . . . . . . $ 1,978,255 $ 1,817,153
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . $ 1,425,973 $ 1,294,983
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . 213,668 155,500
Insurance reserves . . . . . . . . . . . . . . . . . . . . . . 120,992 133,587
Allowance for loss on loans serviced . . . . . . . . . . . . . 26,822 12,938
Deferred income taxes payable . . . . . . . . . . . . . . . . . - 5,510
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 35,550 61,267
------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . 1,823,005 1,663,785
------------- ------------
Stockholders' equity:
Common stock, $2 par value;
Authorized - 100,000,000 shares;
Issued - 14,270,577 and 12,684,858 shares . . . . . . 28,541 25,370
Additional paid-in capital . . . . . . . . . . . . . . . . 122,670 76,312
Net unrealized loss on securities . . . . . . . . . . . . . (46,858) -
Retained earnings . . . . . . . . . . . . . . . . . . . . . 62,025 59,988
Treasury stock and ESOP debt . . . . . . . . . . . . . . . (11,128) (8,302)
------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . 155,250 153,368
------------- ------------
Total liabilities and stockholders' equity . . . $ 1,978,255 $ 1,817,153
============= ============
</TABLE>
See notes to consolidated financial statements.
54
<PAGE> 56
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1994 1993 1992
---------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Interest, charges and fees on loans . . . . . . . . . . . $ 116,747 $ 96,284 $ 92,785
Loan sale gains . . . . . . . . . . . . . . . . . . . . . 86,735 59,441 33,475
Investment income . . . . . . . . . . . . . . . . . . . . 84,666 75,527 65,548
Loan servicing income . . . . . . . . . . . . . . . . . . 15,173 10,077 10,611
Net insurance premiums . . . . . . . . . . . . . . . . . 11,373 18,684 22,860
------------ ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 314,694 260,013 225,279
------------ ------------ ----------
Expenses:
Interest on annuity policies . . . . . . . . . . . . . . 73,065 76,086 77,268
Personnel . . . . . . . . . . . . . . . . . . . . . . . . 57,380 40,784 34,702
Insurance commissions . . . . . . . . . . . . . . . . . . 14,264 13,920 15,283
Insurance benefits . . . . . . . . . . . . . . . . . . . 12,654 18,200 20,843
Loan loss provision . . . . . . . . . . . . . . . . . . . 13,457 17,343 10,027
Interest . . . . . . . . . . . . . . . . . . . . . . . . 14,563 10,158 12,082
Other operating . . . . . . . . . . . . . . . . . . . . . 45,237 40,461 34,459
------------ ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . 230,620 216,952 204,664
------------ ------------ ----------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . 84,074 43,061 20,615
Provision for income taxes . . . . . . . . . . . . . . . . . 29,492 14,744 7,601
------------ ----------- ----------
Income from continuing operations . . . . . . . . . . . . . . 54,582 28,317 13,014
Loss from discontinued operations:
Loss from operations net of applicable tax benefit
of $2,702, $314 and $1,363 . . . . . . . . . . . . . . (5,048) (676) (2,768)
Loss on disposal net of applicable tax benefit of $8,326 - (16,066) -
------------ ------------ ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . (5,048) (16,742) (2,768)
------------ ------------ ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,534 $ 11,575 $ 10,246
============ ============ ==========
Per share data:
Primary:
Income from continuing operations . . . . . . . . . . . . $ 3.83 $ 2.52 $ 1.31
Loss from discontinued operations . . . . . . . . . . . . (.35) (1.51) (.28)
------------ ------------ ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.48 $ 1.01 $ 1.03
============ ============ ==========
Fully diluted:
Income from continuing operations . . . . . . . . . . . . $ 3.83 $ 2.39 $ 1.31
Loss from discontinued operations . . . . . . . . . . . . (.35) (1.42) (.28)
------------ ------------ ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.48 $ .97 $ 1.03
============ ============ ==========
Weighted average shares outstanding
Primary . . . . . . . . . . . . . . . . . . . . . . . . 14,245 11,104 9,917
Fully diluted . . . . . . . . . . . . . . . . . . . . . 14,245 11,853 9,917
</TABLE>
See notes to consolidated financial statements.
55
<PAGE> 57
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1993 1992
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations . . . . . . . . . . . . . . . . . $ 54,582 $ 28,317 $ 13,014
Adjustments to reconcile income from continuing operations
to net cash provided (used) by continuing operating activities:
Increase in deferred policy acquisition costs . . . . . . . . . (8,420) (3,488) (1,409)
Increase in accrued interest receivable . . . . . . . . . . . . (7,033) (3,401) (4,097)
Decrease (increase) in other assets . . . . . . . . . . . . . . (8,155) 595 1,973
Decrease in insurance reserves . . . . . . . . . . . . . . . . (12,596) (8,727) (11,279)
Increase (decrease) in other liabilities . . . . . . . . . . . (2,829) 18,241 (331)
Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . . (86,735) (59,441) (33,475)
Amortization of capitalized excess servicing income . . . . . . 40,255 21,544 12,410
Investment gains . . . . . . . . . . . . . . . . . . . . . . . (219) (595) (3,110)
Interest on annuity policies . . . . . . . . . . . . . . . . . 73,065 76,086 77,268
Loan loss provision . . . . . . . . . . . . . . . . . . . . . . 13,457 17,343 10,027
Amortization and depreciation . . . . . . . . . . . . . . . . . 3,387 3,624 4,197
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 12,301 (3,532) (3,714)
Proceeds from sales and principal collections of loans
held for sale . . . . . . . . . . . . . . . . . . . . . . . . 993,032 474,758 311,210
Originations and purchases of loans held for sale . . . . . . . (949,448) (595,893) (344,584)
Net cash flows from trading investment securities . . . . . . . (687) - -
---------- ---------- ----------
Net cash provided (used) by continuing operating activities . 113,957 (34,569) 28,100
---------- ---------- ----------
Cash flows from discontinued operating activities . . . . . . . . . . . 2,889 (5,612) 210
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of loans held for investment . . . . . . . . . - 593 53,096
Principal collected on loans held for investment . . . . . . . . . 94,588 95,755 80,381
Originations and acquisition of loans held for investment . . . . . (8,798) (4,560) (1,192)
Increase in reserve accounts . . . . . . . . . . . . . . . . . . . (54,308) (20,046) (7,627)
Proceeds from sales of investment securities . . . . . . . . . . . 9,459 25,475 147,122
Proceeds from maturities or calls of investment securities . . . . 76,978 117,117 104,811
Purchases of held-to-maturity securities . . . . . . . . . . . . . - (283,853) (631,661)
Purchases of available-for-sale securities . . . . . . . . . . . . (300,384) - -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (4,693) (893) (1,015)
---------- ---------- -----------
Net cash used by investing activities . . . . . . . . . . . . (187,158) (70,412) (256,085)
---------- ---------- -----------
Cash flows from financing activities:
Payments on mortgage loan . . . . . . . . . . . . . . . . . . . . . - (15,750) (4,697)
Proceeds from senior debt and mortgage loan . . . . . . . . . . . . 125,192 - -
Increase (decrease) in revolving credit debt . . . . . . . . . . . (82,838) (35,000) 15,000
Increase (decrease) in repurchase agreement . . . . . . . . . . . . (30,000) 30,000 -
Increase (decrease) in debt with maturities of three months or less 14,250 (600) (3,900)
Deposits received from annuities . . . . . . . . . . . . . . . . . 249,737 207,682 187,050
Payments on annuities . . . . . . . . . . . . . . . . . . . . . . . (191,811) (136,340) (131,412)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (5,050) (3,624) (2,705)
Increase in managed cash overdraft . . . . . . . . . . . . . . . . 10,374 2,409 -
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . 4,545 48,714 -
Increase in unearned ESOP compensation . . . . . . . . . . . . . . (2,434) - -
Proceeds from exercise of stock options and warrants . . . . . . . 542 298 60
---------- ---------- ----------
Net cash provided by financing activities . . . . . . . . . . 92,507 97,789 59,396
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . 16,417 (12,804) (168,379)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . 39,942 52,746 221,125
---------- ---------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . $ 56,359 $ 39,942 $ 52,746
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
56
<PAGE> 58
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Treasury
Additional Unrealized Stock and Total
Common Preferred Paid-in Loss on Retained ESOP Stockholders'
Stock Stock Capital Securities Earnings Debt Equity
--------- --------- ---------- ----------- -------- -------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 . . $ 18,622 $ 31,157 $ 44,496 $ (5,841) $ 88,434
Net income . . . . . . . . . . 10,246 10,246
Dividends paid . . . . . . . . (2,705) (2,705)
Decrease in ESOP debt . . . . . 223 223
Stock options exercised . . . . 108 304 412
Treasury shares acquired . . . (352) (352)
---------- --------- ----------- ------------ ---------- ---------- ------------
Balance, December 31, 1992 . . 18,730 31,461 52,037 (5,970) 96,258
Net income . . . . . . . . . . 11,575 11,575
Dividends paid . . . . . . . . (3,624) (3,624)
Decrease in ESOP debt . . . . . 147 147
Stock options exercised . . . . 738 2,039 2,777
Treasury shares acquired . . . (2,479) (2,479)
Preferred stock issued . . . . $ 20,000 (1,239) 18,761
Preferred stock converted into
common stock . . . . . . . . 3,902 (20,000) 16,098 -
Common stock issued . . . . . . 2,000 27,953 29,953
---------- --------- ----------- ------------ ---------- --------- ------------
Balance, December 31, 1993 . . 25,370 - 76,312 59,988 (8,302) 153,368
Net income . . . . . . . . . . 49,534 49,534
Dividends paid . . . . . . . . 2,592 39,855 (47,497) (5,050)
Increase in ESOP debt . . . . . (2,222) (2,222)
Stock options exercised . . . . 199 1,948 2,147
Treasury shares acquired . . . (604) (604)
Common stock issued . . . . . . 300 4,245 4,545
Common stock warrants
exercised . . . . . . . . . . 80 310 390
Mark-to-market adjustment
on investments . . . . . . . $ (46,858) (46,858)
---------- --------- ----------- ------------ ---------- --------- ------------
Balance, December 31, 1994 . . $ 28,541 $ - $ 122,670 $ (46,858) $ 62,025 $ (11,128) $ 155,250
========== ========= =========== ============ ========== ========= ============
</TABLE>
See notes to consolidated financial statements.
57
<PAGE> 59
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
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. The Company uses prepayment assumptions based on the prepayment
experience of its owned and serviced loan portfolio for fixed rate loans.
Prepayment rates for adjustable rate mortgages sold were derived from available
market data. The weighted average discount rates used by the Company to
determine the present value of expected cash flows from excess servicing
arising from loan sale transactions occurring in 1994, 1993 and 1992 were
10.0%, 10.0%, and 9.1%, respectively. Gains from partial sales of loans are
adjusted based on fair value on the date that the loan was acquired or, if not
practicable, the date of the sale. The Company believes that the capitalized
excess servicing income recognized at the time of sale does not exceed the
amount that would have been received if it were sold in the marketplace.
In calculating loan sale gains, the Company considers current
economic and market conditions at the date of sale. In subsequent periods, the
Company reviews as of each balance sheet date its prepayment assumptions in
relation to current rate of prepayment and, if necessary, revises its estimates
using the original discount rate. Any losses arising from adverse prepayment
experience are recognized immediately. Favorable experience is recognized
prospectively.
1.2(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 on loans sold, less amounts paid to investors, is reported as loan
servicing income. Capitalized excess servicing income
58
<PAGE> 60
is amortized systematically to reduce loan servicing income to an amount
representing normal servicing income and the present value discount. Late
charges and other ancillary income are recognized when collected. Costs to
service mortgage loans are charged to income as incurred.
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 subsequent to 1991, the interest
retained by the Company was subordinated to a limited extent to the sold
certificates and will be used to fund a reserve account, thereby providing a
credit enhancement to the holders of the certificates. 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 UC Lending 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.
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
59
<PAGE> 61
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 6.0%, 5.3%, and 4.3% of the life
insurance in force as of December 31, 1994, 1993 and 1992, respectively. The
amount of dividends paid on participating policies is based on published
dividend scales and totaled $1.0 million, $1.5 million and $1.8 million for the
years ended December 31, 1994, 1993 and 1992, respectively.
1.3(b) Reinsurance.
Life insurance. UC Life 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. UC Life is contingently liable for
insurance ceded to reinsurers. Premiums ceded under reinsurance agreements
were $2.4 million, $3.0 million, and $5.0 million in 1994, 1993 and 1992,
respectively. Reserve credit taken under reinsurance agreements totaled $34.0
million, $35.2 million, and $30.4 million at December 31, 1994, 1993 and 1992,
respectively.
UC Life has assumed the following reinsurance from other insurers:
<TABLE>
<CAPTION>
Insurance
in Force Premiums
----------- ---------
(in thousands)
<S> <C> <C>
1994 . . . . . . . . . . . . . $ 1,106,148 $ 2,966
1993 . . . . . . . . . . . . . 1,106,721 2,892
1992 . . . . . . . . . . . . . 963,449 2,446
</TABLE>
UC Life has a receivable at December 31, 1994 of approximately
$35.2 million from one reinsurer; however, the funds supporting the receivable
are escrowed in a separate trust account for the benefit of UC Life by the
reinsurer.
The following table reflects the effect of reinsurance agreements on
premiums and the amounts earned for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1994 1993 1992
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Direct premiums . . . . . . . . . . . $ 10,537 $ 18,678 $ 25,379
Reinsurance assumed . . . . . . . . . 2,966 2,892 2,446
Reinsurance ceded . . . . . . . . . . (2,130) (2,886) (4,965)
--------- --------- ----------
Net insurance premiums . . . . . . $ 11,373 $ 18,684 $ 22,860
========= ========= ==========
</TABLE>
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
60
<PAGE> 62
Company, and, at the termination of the transaction, any remaining amounts on
deposit will be distributed to the Company.
1.5 Investment securities. During the first quarter of 1994, the
Company implemented the provisions of Financial Accounting Standards Board
("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 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.
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.
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, 1994,
cash equivalents totaled $56.4 million bearing interest rates ranging from 4.1%
to 5.7% per annum.
1.9 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. SFAS 114 and SFAS 118 are effective for
financial statements for fiscal years beginning after December 15, 1994.
Management believes that the adoption of these statements will not have a
material effect on the financial statements of the Company.
1.10 Reclassifications. Certain prior year amounts have been
reclassified to conform with the current year presentation. Such
reclassifications had no effect on net income.
61
<PAGE> 63
2. INVESTMENT SECURITIES - NET
The Company's portfolio of investment securities as of December 31, 1994
consisted of the following:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
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 partnership $ 26,672 $ 26,672
=========== ==========
</TABLE>
62
<PAGE> 64
The cost and estimated fair value of bonds at December 31, 1994, 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.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
--------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----- ----- ---- -----
(in thousands)
<S> <C> <C> <C> <C>
1 year or less . . . . . . . . . . . . . . . $ 11,039 $ 11,085 $ 2,700 $ 2,506
Over 1 year through 5 years . . . . . . . . . 69,692 68,677 3,424 3,443
Over 5 years through 10 years . . . . . . . . 194,472 182,408 4,705 4,968
After 10 years . . . . . . . . . . . . . . . 12,924 12,523 - -
Mortgage-backed securities . . . . . . . . . 743,359 685,163 46,562 44,167
------------ ----------- ---------- ---------
Total . . . . . . . . . . . . . . . $ 1,031,486 $ 959,856 $ 57,391 $ 55,084
============ =========== ========== =========
</TABLE>
Net unrealized losses on available-for-sale securities included in
Stockholders' equity at December 31, 1994 are presented net of deferred income
taxes of $25.2 million.
The following table reflects the composition of investment securities at
December 31, 1993.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Corporate . . . . . . . . . . . . . . . . . . $ 248,133 $ 17,218 $ 379 $ 264,972
U.S. Treasury . . . . . . . . . . . . . . . . 10,572 636 - 11,208
Mortgage-backed . . . . . . . . . . . . . . . 597,744 14,464 2,481 609,727
Other . . . . . . . . . . . . . . . . . . . . 18,944 1,878 - 20,822
------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . $ 875,393 $ 34,196 $ 2,860 $ 906,729
============ =========== =========== ===========
Other
Investment in limited partnership . . . . . $ 26,698 $ 26,698
============ ===========
</TABLE>
Proceeds from the sales of investments during 1994 totaled $9.5
million and resulted in realized investment gains of $.2 million. Net
investment gains for the years ended December 31, 1994, 1993 and 1992 were $.2
million, $.6 million and $3.1 million and are included in investment income.
At December 31, 1994, securities with a cost of $8.5 million were on deposit
with insurance regulatory authorities.
63
<PAGE> 65
3. LOANS - net
3.1 Loans Owned. The following schedule sets forth the components of
Loans owned by the Company at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1993
----------- -----------
(in thousands)
<S> <C> <C>
Home equity . . . . . . . . . . . . $ 202,551 $ 318,208
Commercial . . . . . . . . . . . . . 155,271 190,771
Conventional . . . . . . . . . . . . 1,106 1,745
Foreclosed properties . . . . . . . 31,073 38,062
Nonrefundable loan fees . . . . . . (4,538) (8,278)
Consumer and other . . . . . . . . . 1,536 211
----------- -----------
Total . . . . . . . . . . . . . $ 386,999 $ 540,719
=========== ===========
</TABLE>
Included in owned loans at December 31, 1994 and 1993 were nonaccrual
loans totaling $21.7 million and $30.9 million, respectively.
The following schedule summarizes the composition of Loans - net at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1993
------------ -----------
(in thousands)
<S> <C> <C>
Loans . . . . . . . . . . . . . . . $ 386,999 $ 540,719
Allowance for loan losses . . . . . (16,508) (21,017)
Unearned discount . . . . . . . . . (1,109) (1,982)
----------- -----------
Loans - net . . . . . . . . . . $ 369,382 $ 517,720
=========== ===========
</TABLE>
3.2 Loans Serviced. The following table sets forth the loans serviced
by the Company for third parties at December 31, 1994 and 1993, 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.
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1993
----------- -----------
(in thousands)
<S> <C> <C>
Home equity . . . . . . . . . . . . $ 1,480,047 $ 806,805
Commercial . . . . . . . . . . . . . 126,691 162,300
Conventional . . . . . . . . . . . . 73,136 96,444
------------ ------------
Total . . . . . . . . . . . . . $ 1,679,874 $ 1,065,549
============ ============
</TABLE>
3.3 Loan Loss Allowances. The Company provides an estimate for future
credit losses in an Allowance for Loan Losses for loans owned by the Company
and in an Allowance for Loss on Loans Serviced for loans serviced for others.
64
<PAGE> 66
A summary analysis of the changes in the Company's Allowance for Loan
Losses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1994 1993 1992
----------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . . $ 21,017 $ 15,842 $ 15,962
Loans charged to allowance
Home equity . . . . . . . . . . . . (12,745) (9,114) (5,511)
Commercial . . . . . . . . . . . . . (5,767) (3,579) (4,805)
Conventional . . . . . . . . . . . . (149) (142) (158)
---------- ----------- ----------
Total . . . . . . . . . . . . . (18,661) (12,835) (10,474)
Recoveries on loans previously
charged to allowance . . . . . . . . . . . 1,209 631 1,085
---------- ----------- ----------
Net loans charged off . . . . . . . . . . . . (17,452) (12,204) (9,389)
Loan loss provision . . . . . . . . . . . . . 13,457 17,343 10,027
Reserve reclassification . . . . . . . . . . (514) 36 (758)
---------- ----------- ----------
Balance at end of year . . . . . . . . . . . $ 16,508 $ 21,017 $ 15,842
========== =========== ==========
Specific reserves . . . . . . . . . . . . . . $ 6,571 $ 8,500 $ 7,067
Unallocated reserves . . . . . . . . . . . . 9,937 12,517 8,775
---------- ----------- ----------
Total reserves . . . . . . . . . . . $ 16,508 $ 21,017 $ 15,842
========== =========== ==========
</TABLE>
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, 1994, the Company owned $31.0 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:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1994 1993 1992
------------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Allowance for loan losses
(applicable to loans and
foreclosed properties owned
by the Company) . . . . . . . . . . . . . . $ 16,508 $ 21,017 $ 15,842
Allowance for loss on loans serviced
(applicable to loans sold with recourse). . 26,822 12,938 7,015
------------- ---------- -----------
Total . . . . . . . . . . . . . . . $ 43,330 $ 33,955 $ 22,857
============= ========== ===========
</TABLE>
As of December 31, 1994, approximately $1.5 billion of home equity
loans sold were serviced by UC Lending under agreements substantially all of
which provide for the subordination of cash and excess interest spread owned by
the
65
<PAGE> 67
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 $275 million at December 31, 1994, of which $264
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 $26.8 million at December 31, 1994 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 45
states, at December 31, 1994, a substantial portion of loans serviced were
originated in Florida (14.3%), Louisiana (10.1%) and Ohio (11.6%),
respectively, and no other state accounted for more than 8.0% 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
(27.8%) and Georgia (17.0%) and no other state accounted for more than 8.5% 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 has used a prefunding feature in
connection with certain loan securitization transactions during 1994. At
December 31, 1994, approximately $53 million was held in a prefunding account
for the purchase of the Company's home equity loans during the first quarter of
1995. Pursuant to this commitment, home equity loans with a remaining
principal balance of approximately $53 million were delivered February 10,
1995.
4. PROPERTY - NET
Property is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1994 1993
---------- ----------
(in thousands)
<S> <C> <C>
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . $ 34,716 $ 32,885
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . 18,943 17,670
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 53,659 50,555
Less accumulated depreciation . . . . . . . . . . . . . . . . . . (23,094) (21,677)
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,565 $ 28,878
========== ==========
</TABLE>
Rental expense on operating leases, including real estate, computer
equipment and automobiles, totaled $5.3 million, $3.3 million, and $2.2
million during 1994, 1993 and 1992, respectively. Minimum annual commitments
at December 31, 1994 under noncancellable operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . $ 4,702
1996 . . . . . . . . . . . . . . . . . . . 3,481
1997 . . . . . . . . . . . . . . . . . . . 1,570
1998 . . . . . . . . . . . . . . . . . . . 346
1999 . . . . . . . . . . . . . . . . . . . 155
Thereafter . . . . . . . . . . . . . . . . 2
---------
Total . . . . . . . . . . . . . . . $ 10,256
=========
</TABLE>
66
<PAGE> 68
5. OTHER ASSETS AND OTHER LIABILITIES
At December 31, 1994, Other assets included amounts due from reinsurers of
$35.0 million and Policy loans of $20.2 million compared to $36.6 million and
$19.6 million, respectively, at December 31, 1993. 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, 1994 included a $12.8 million managed
cash overdraft. At December 31, 1993, Other liabilities included a repurchase
agreement totaling $30.0 million and current federal income taxes payable of
$5.8 million.
6. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
----------- ----------
(in thousands)
<S> <C> <C>
Senior unsecured notes . . . . . . . . . . . . . . . . . . . $ 125,000 $ -
Revolving credit agreement . . . . . . . . . . . . . . . . . 72,163 155,000
Construction loan . . . . . . . . . . . . . . . . . . . . . 1,755 -
Short-term borrowings . . . . . . . . . . . . . . . . . . . 14,750 500
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . $ 213,668 $ 155,500
========== =========
</TABLE>
On November 2, 1994, the Company publicly sold $125 million of its senior
unsecured notes. The notes bear interest at the rate of 9.35% per annum,
provide for interest payable semi-annually, mature on November 1, 1999 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 to repay a portion of the principal amount
of indebtedness outstanding under the Company's existing revolving credit
facility with a group of banks (the "Bank Facility"). An amendment to the Bank
Facility became effective upon consummation of the sale of the notes which (i)
extended the maturity of the Bank Facility from December 31, 1995 to December
31, 1996, (ii) provided for the release by the banks of all of their liens on
the stock of the Company's subsidiaries and other collateral, (iii) reduced the
amount available under the Bank Facility from $200 million to $113.6 million
and (iv) permitted the non-insurance subsidiaries of the Company to have one or
more warehouse lines of credit with an aggregate amount outstanding of up to
$300 million. The Company is required under the Bank Facility and the senior
notes to maintain certain financial ratios and meet certain net worth and
indebtedness tests. At December 31, 1994, $45.4 million of retained earnings
were available for cash dividends.
In addition, at December 31, 1994, UC Lending had available a secured
warehouse facility provided by the investment bank that acted as sole
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 $200 million of
eligible home equity loans for such securitization and matured on February 10,
1995 with the closing of the last delivery of loans for the securitization.
In addition to the above facilities, the Company has arrangements with
banks providing for short-term unsecured borrowings of up to $27.5 million, of
which $14.8 million was outstanding at December 31, 1994. All of these loans
bear interest at market or prime rates. Notes payable at December 31, 1994
include $1.8 million borrowed under a $5.5 million committed line of credit for
the construction of an office building adjacent to the Company's home office
building. This loan, which bears interest at a market or prime rate, matures
on June 2, 1995 and is secured by a mortgage on the property.
The Company made payments for interest of $13.0 million, $9.5 million, and
$13.2 million during the years ended December 31, 1994, 1993 and 1992,
respectively.
67
<PAGE> 69
7. INCOME TAXES
The provision for income taxes attributable to continuing operations is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1993 1992
-------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Current . . . . . . . . . . . . . . . . . $ 17,191 $ 18,276 $ 11,476
Deferred . . . . . . . . . . . . . . . . . 12,301 (3,532) (3,875)
-------- ---------- ---------
Total . . . . . . . . . . . . . . . . . . $ 29,492 $ 14,744 $ 7,601
======== ========== =========
</TABLE>
Deferred income taxes attributable to continuing operations were provided
for temporary differences as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1992
-----
(in thousands)
<S> <C>
Reserves for future policy benefits . . . . . . . . . . . $ (4,362)
Policy acquisition costs . . . . . . . . . . . . . . . . . 977
Loan income . . . . . . . . . . . . . . . . . . . . . . . 787
Accelerated depreciation . . . . . . . . . . . . . . . . . 270
Loan sale gains . . . . . . . . . . . . . . . . . . . . . (3,582)
Bond valuation adjustments . . . . . . . . . . . . . . . . 506
Alternative minimum tax . . . . . . . . . . . . . . . . . 1,838
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (309)
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,875)
=========
</TABLE>
Reported income tax expense attributable to continuing operations differs
from the amount computed by applying the statutory federal income tax rate to
consolidated income from continuing operations before income taxes for the
following reasons:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1993 1992
---------- ------------ ---------
<S> <C> <C> <C>
Federal income tax at statutory rate . . . . . . $ 29,426 $ 15,072 $ 7,009
Differences resulting from:
Reversal of timing differences at
prior tax rates . . . . . . . . . . . . . . . 15 19
State income taxes . . . . . . . . . . . . . . . (72) 75 634
Other . . . . . . . . . . . . . . . . . . . . . 138 (418) (61)
---------- ------------ ---------
Reported income tax provision . . . . . . . . . $ 29,492 $ 14,744 $ 7,601
========== ============ =========
</TABLE>
68
<PAGE> 70
The significant components of the Company's net deferred income tax
(benefit) liability at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
---------- ----------
(in thousands)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses . . . . . . . . . . . . . . $ 1,011 $ 3,216
Nonrefundable loan fees . . . . . . . . . . . . . . . 1,588 2,897
Policy reserves . . . . . . . . . . . . . . . . . . . 21,464 16,172
Mark-to-market adjustment . . . . . . . . . . . . . . 25,231 -
Investment securities . . . . . . . . . . . . . . . . 1,924 1,026
Other . . . . . . . . . . . . . . . . . . . . . . . . 913 649
---------- ----------
52,131 23,960
---------- ----------
Deferred income tax liabilities:
Loan income . . . . . . . . . . . . . . . . . . . . . 10,910 (1,262)
Real estate . . . . . . . . . . . . . . . . . . . . . 4,175 3,932
Deferred policy acquisition costs . . . . . . . . . . 29,626 26,800
---------- ---------
44,711 29,470
---------- ----------
Net deferred income tax (benefit) liability . . . . . . . $ (7,420) $ 5,510
========== ==========
</TABLE>
Payments made for income taxes during the years ended December 31, 1994,
1993 and 1992 were $28.3 million, $5.4 million, and $8.8 million, respectively.
Consolidated retained earnings at December 31, 1994 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, 1994, the Company had a current income tax receivable of
$6.2 million which is included in "Other assets" and at December 31, 1993, the
Company had a current income tax payable of $5.8 million which is included in
"Other liabilities".
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 13,690,736 and 12,173,256 shares
outstanding at December 31, 1994 and 1993, respectively, excluding 579,841 and
511,602 treasury shares, respectively. The Company also has authorization to
issue 20,000,000 shares of preferred stock of which none is currently issued.
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.
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 September 20, 1993,
the Company's Board of Directors declared a two-for-one common stock split
effected in the form of a 100% stock dividend on outstanding stock which was
distributed October 18, 1993, to stockholders of record on October 1, 1993.
During 1994 and 1993, the Company paid cash dividends in the amount of $5.1
million, or $.3636 per share and $3.6 million, or $.3092 per share,
respectively. 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. See
Notes 6 and 10 for a discussion of dividend restrictions on retained earnings.
69
<PAGE> 71
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 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).
On December 21, 1993, the Company sold 1,000,000 shares of its $2.00 par
value common stock through a public offering, resulting in net proceeds of $30
million after deducting underwriting discounts and expenses of the offering.
The net proceeds were used to reduce debt and for general corporate purposes.
In January, 1994, the underwriters of the common stock offering exercised their
over-allotment rights and, in connection therewith, the Company sold an
additional 150,000 shares of its common stock resulting in net proceeds of $4.6
million.
On June 29, 1993 the Company issued 800,000 shares of 6.5% Cumulative
Convertible Preferred Stock. The terms of the preferred stock permitted the
conversion of the preferred stock into common stock at the option of the holder
thereof and allowed the Company to redeem the preferred stock after August 1,
1993. On August 26, 1993, the Company called for redemption the outstanding
shares of the preferred stock. All of the holders of the preferred stock
exercised their right to convert their shares into common stock of the Company.
Effective as of July 1, 1993, the Company entered into an agreement to
issue a warrant to an investment banking firm, granting the right to purchase
200,000 shares of common stock of the Company at an exercise price of $8.75,
equal to the average of the high and low sale prices of the Company's common
stock on June 30, 1993. The warrant was issued in exchange for financial
advisory services to be performed over a twenty-four month period and is
exercisable from February 1, 1994 through July 1, 1995. During 1994, a warrant
representing the right to purchase 40,000 shares of common stock of the Company
was exercised. As of December 31, 1994, the remaining warrant representing the
right to purchase 176,000 shares of common stock of the Company at a price of
$7.95 per share (as adjusted for the 10% common stock dividend declared October
26, 1994) was outstanding. Subsequent to year-end, these warrants were
exercised. The Company filed a shelf registration statement with the SEC to
register the shares of the common stock issuable upon exercise of the warrant
and such registration statement was declared effective by the SEC on April 8,
1994.
At December 31, 1994, 579,841 shares of the Company's common stock, or 4.2%
of the issued common stock, were held as treasury stock at a cost of $6.8
million, compared to 511,602 shares held at December 31, 1993 at a cost of $6.2
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"). Under the ESOP, the Company makes tax deductible contributions
of its common stock (or cash which is used to purchase its common stock or to
repay debt used by the ESOP to purchase such stock) to a trust for the benefit
of participating employees. Contributions are allocated among participants
based on years of service and compensation. Upon retirement, death or
disability, the employee or a beneficiary receives the designated common stock.
Contributions to the Company's ESOP are determined on an annual
basis. The Company's contributions to the ESOP were $2.2 million, $.9 million
and $.7 million for the years ended December 31, 1994, 1993 and 1992,
respectively. Shares held by the ESOP at December 31, 1994, 1993 and 1992 were
approximately 2,349,000, 2,125,000, and 2,182,000, respectively. At December
31, 1994 and 1993, the ESOP had borrowed $4.3 million and $2.1 million,
respectively, from the Company. These loans bear interest at interest rates
ranging from 7.85%
70
<PAGE> 72
to 9.50% and will be paid in quarterly installments over a ten year period. The
balance of these loans is reflected as a decrease in the Company's stockholders'
equity.
9.2 Stock Option Plans. The following is a summary of options
granted, exercised or canceled during 1992, 1993 and 1994.
<TABLE>
<CAPTION>
Option Price
Shares Per Share
--------- --------------------
<S> <C> <C>
January 1, 1992 . . . . . . . . . 1,047,564 $ 5.53 to $ 8.25
Granted . . . . . . . . . . . 3,795 $ 9.09
Exercised . . . . . . . . . . (59,326) $ 5.53 to $ 7.44
Canceled . . . . . . . . . . (56,508)
-----------
December 31, 1992 . . . . . . . . 935,525 $ 5.53 to $ 9.09
Granted . . . . . . . . . . . 423,940 $ 8.24 to $ 12.84
Exercised . . . . . . . . . . (405,826) $ 5.53 to $ 8.25
Canceled . . . . . . . . . . (48,716)
-----------
December 31, 1993 . . . . . . . . 904,923 $ 5.53 to $ 12.84
Granted . . . . . . . . . . . 69,298 $30.91 to $ 38.41
Exercised . . . . . . . . . . (109,587) $ 5.53 to $ 8.25
Canceled . . . . . . . . . . (14,911)
-----------
December 31, 1994 . . . . . . . . 849,723 $ 5.53 to $ 38.41
===========
</TABLE>
At December 31, 1994 options for 403,345 of the Company's common
stock were exercisable and 772,131 shares were available for the granting of
options. During 1994, the Company recognized a $1.4 million federal income tax
benefit 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 $1.0 million, $.4
million and $.4 million during 1994, 1993 and 1992, respectively. Employees
have five investment options, one of which is to invest in the Company's common
stock. The plan held 279,193 and 264,001 shares of the Company's common stock
at December 31, 1994 and 1993, 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 each of 1994 and 1993 was $.3
million. The Company calculated its postretirement benefit obligation as of
December 31, 1994 using a weighted average discount rate of 8.4%. A
reconciliation of the funded status of the deferred compensation plan as of
December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
December 31, 1994 Net Change December 31, 1993
--------------------- -------------------- -------------------
(in thousands)
<S> <C> <C> <C>
Accumulated postretirement
benefit obligation . . . . . . $ (1,822) $ (274) $ (1,548)
Plan assets . . . . . . . . . . - - -
--------- --------- ---------
Funded status . . . . . . . . . (1,822) (274) (1,548)
Unrecognized transition
obligation . . . . . . . . . . 1,204 (67) 1,271
--------- --------- ---------
Accrued postretirement
benefit cost . . . . . . . . . $ (618) $ (341) $ (277)
========= ========= =========
</TABLE>
71
<PAGE> 73
10. REGULATORY ACCOUNTING
Accounting records of UC Life 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. UC Life's
capital and surplus pursuant to the regulatory accounting basis as of December
31, 1994 and 1993 was $90.0 million and $84.8 million, respectively. UC Life's
regulatory accounting basis net gain from operations for the years ended
December 31, 1994, 1993 and 1992 was $9.7 million, $13.0 million, and $14.0
million, respectively. Net income (loss) of UC Life on a regulatory accounting
basis, which includes realized capital gains and losses, was $5.8 million,
$(1.7) million, and $11.0 million for the years ended December 31, 1994, 1993
and 1992, respectively. As a Louisiana domiciled insurance company, UC Life is
subject to certain regulatory restrictions on the payment of dividends. UC
Life has the capacity at December 31, 1994 to pay dividends of $8.2 million
without prior regulatory approval. UC Life did not pay any dividends to the
Company during 1992, 1993 or 1994 in order to retain capital in UC Life. At
December 31, 1994, UC Life has $102 million of net assets for financial
reporting purposes.
UC Life received written approval from the Louisiana Department of
Insurance to invest in first lien residential mortgage loans originated by UC
Lending on a short-term basis without recording the assignment of the mortgage
loans to UC Life, 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, 1994, statutory surplus was
increased by approximately $46 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.
72
<PAGE> 74
The carrying value and fair value of the Company's financial assets and
liabilities at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
Carrying
Value Fair Value
----------- ----------
(in thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 56,359 $ 56,359
Temporary investments - reserve accounts . . . . . . 81,980 81,980
Loans - net . . . . . . . . . . . . . . . . . . . . . 344,880 343,121
Capitalized excess servicing income . . . . . . . . . 179,065 179,065
Bonds . . . . . . . . . . . . . . . . . . . . . . . . 1,017,248 1,014,942
Other assets . . . . . . . . . . . . . . . . . . . . 61,430 61,430
Financial liabilities:
Annuity reserves . . . . . . . . . . . . . . . . . . 1,425,973 1,354,944
Notes payable . . . . . . . . . . . . . . . . . . . . 213,668 212,314
Allowance for loss on loans serviced . . . . . . . . 26,822 26,822
Other liabilities . . . . . . . . . . . . . . . . . . 15,679 15,679
</TABLE>
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 were valued at remaining principal balance which is
believed to represent an estimate of market discount from similar loans
identified for sale. The fair value of delinquent loans was estimated by using
the Company's historical recoverable amount on defaulted loans.
Capitalized excess servicing income. The value of capitalized excess
servicing, which relates to the excess interest retained on loans sold, was
estimated by discounting the future cash flows, adjusted for prepayments and
estimated losses on loans sold with recourse. The carrying value is considered
to be a reasonable estimate of fair value.
Bonds. The estimated fair value for the Company's bond 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
73
<PAGE> 75
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.
Other assets and other liabilities. Other assets include primarily due
from reinsurers, policy loans and accrued interest. 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, 1994.
Notes payable. Notes payable consists primarily of amounts payable for the
Company's senior unsecured notes and the revolving credit facility. 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 revolving
credit facility provides for revolving credit borrowing at market or prime
rates through December 1996. Because of the short term nature of this facility
and its pricing structure, its carrying value is considered a reasonable
estimate of its fair value.
The fair values presented herein are based on pertinent information
available to management as of December 31, 1994. 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 - FOSTER MORTGAGE CORPORATION.
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As a result of this decision, the operations of
FMC have been classified as discontinued operations, and, accordingly, the
Consolidated Financial Statements of the Company and the related Notes
segregate continuing and discontinued operations. In connection with the
decision to dispose of FMC, the Company recorded a $17.6 million after tax loss
in its financial statements as of and for the quarter ended March 31, 1993,
reflecting the operating loss of FMC for the quarter ended March 31, 1993 of
$1.5 million, net of a tax benefit of $.8 million and the estimated loss from
disposal of FMC of $16.1 million, net of a tax benefit of $8.3 million. The
operating loss from discontinued operations of $3.2 million for the year ended
December 31, 1992 is net of a tax benefit of $1.6 million. The Company has not
reflected operating losses incurred by FMC subsequent to that date in the
Company's financial statements.
As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the institutional lenders under FMC's primary credit facility (the "FMC
Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause
the remaining affairs of FMC to be wound up under the supervision of the
bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court
has approved a plan of liquidation for FMC providing for the appointment of a
trustee selected by the FMC Institutional Lenders, disposal of FMC's remaining
assets, and distributions to FMC's creditors. 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 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
74
<PAGE> 76
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. These matters may be pursued by the trustee under the plan of
liquidation approved by the bankruptcy court. 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 is not final and was appealed by the FMC Institutional Lenders to
the U.S. District Court which affirmed the bankruptcy court's decision. The FMC
Institutional Lenders have appealed this decision to the U.S. Fifth Circuit
Court of Appeals. Management of the Company does not believe that any
additional amounts are owed by the Company to FMC and intends to vigorously
contest any claims which may be brought against it for such amounts.
The Company did not guarantee any debt of FMC and believes, based upon
advice of its counsel, that it has no responsibility for the obligations of FMC
under FMC's primary credit facility or (excluding potential consequences of the
bankruptcy filing on certain prior intercompany transactions or potential
additional payment for tax benefits as discussed above) for any other
liabilities to FMC's lenders.
13. SUBSEQUENT EVENT - 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 ("UG Title"), a wholly owned
subsidiary of the Company, and, on May 1, 1995, approved a formal plan of
disposal. As a result, the operations of UG Title have been classified as
discontinued operations, and, accordingly, the accompanying Consolidated
Financial Statements and the related Notes of the Company segregate continuing
and discontinued operations. It is anticipated that the disposal will be
completed during 1995. In connection with the decision to dispose of UG Title,
the Company recorded a $128,000 after tax loss in its financial statements as
of and for the quarter ended March 31, 1995.
Assets and liabilities of the discontinued business at December 31, 1994
and 1993 were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1993
--------- ---------
(in thousands)
<S> <C> <C>
Assets:
Investment securities - held to maturity . . . . . . $ 6,882 $ 3,907
Loans - net . . . . . . . . . . . . . . . . . . . . 1,101 1,914
Cash and cash equivalents . . . . . . . . . . . . . 4,254 7,997
Other . . . . . . . . . . . . . . . . . . . . . . . 5,794 1,308
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . $ 18,031 $ 15,126
========= =========
Liabilities:
Policy benefit reserves . . . . . . . . . . . . . . $ 7,254 $ 2,012
Other . . . . . . . . . . . . . . . . . . . . . . . 1,041 829
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . $ 8,295 $ 2,841
========= =========
</TABLE>
75
<PAGE> 77
Operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1993 1992
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Revenues:
Net insurance premiums . . . . . . . . . . . . . . . $ 44,667 $ 24,435 $ 10,935
Investment income . . . . . . . . . . . . . . . . . 879 671 477
--------- --------- ---------
Total revenues . . . . . . . . . . . . . . . . . $ 45,546 $ 25,106 $ 11,412
========= ========= =========
Expenses:
Insurance commissions . . . . . . . . . . . . . . . $ 37,808 $ 20,893 $ 8,773
Insurance benefits . . . . . . . . . . . . . . . . . 8,853 720 316
Personnel . . . . . . . . . . . . . . . . . . . . . 1,213 741 548
Other operating . . . . . . . . . . . . . . . . . . 5,423 1,441 1,020
--------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . $ 53,297 $ 23,795 $ 10,657
========= ========= =========
</TABLE>
As discussed above, the Company has formalized a plan of disposition of its
investment in UG Title. In connection therewith, a letter of intent to sell UG
Title has been signed which provides a reduction of the sale price for certain
claims relating to transactions occurring prior to the date of sale and
discovered within twelve months thereafter. The Company has estimated the risk
of loss related to such potential claims and recorded a provision for such loss
in connection with the disposition. Should such claims materially exceed the
Company's estimates for such losses, such consequence will have an adverse
impact on the Company's operations by reducing the proceeds to be received from
the sale.
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, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1993 1992
------------ ------------ -------------
(in thousands)
<S> <C> <C> <C>
Revenues
Mortgage . . . . . . . . . . . . . . $ 177,601 $ 120,639 $ 80,662
Life insurance . . . . . . . . . . . 138,129 140,179 145,526
Corporate, other operations, and
eliminations . . . . . . . . . (1,036) (805) (909)
----------- ------------ -------------
Total . . . . . . . . $ 314,694 $ 260,013 $ 225,279
=========== ============ =============
Income from continuing operations
before income taxes
Mortgage . . . . . . . . . . . $ 81,155 $ 46,295 $ 24,001
Life insurance . . . . . . . . . 9,080 2,635 5,465
Corporate, other operations, and
eliminations . . . . . . . (6,161) (5,869) (8,851)
------------ ------------ -------------
Total . . . . . . . . $ 84,074 $ 43,061 $ 20,615
============ ============ =============
Assets - Year-end
Mortgage . . . . . . . . . . . $ 301,330 $ 182,672 $ 140,893
Life insurance . . . . . . . . . 1,641,026 1,622,879 1,464,475
Corporate, other operations, and
eliminations . . . . . . . 35,899 11,602 22,532
------------ ------------ -------------
Total . . . . . . . . $ 1,978,255 $ 1,817,153 $ 1,627,900
============ ============ =============
</TABLE>
76
<PAGE> 78
15. CONTINGENCIES
On March 21, 1994, the United States Court of Appeals for the
Eleventh Circuit held, in part, that a lender improperly disclosed the
collection of the Florida state intangible tax from the borrower, thereby
subjecting the loan to rescission under the Federal Truth-in-Lending Act (the
"TILA") by the borrower for three years after it was made. Subsequent to the
court's initial decision and prior to its refusal to reconsider its decision,
the Florida Legislature amended the language of the intangible tax to clarify
the Legislature's previous intention that the intangible tax be disclosed for
purposes of the TILA in the manner that had been followed by most lenders in
Florida, including the Company. Although the Florida Legislature intended this
legislation to apply retroactively, no final court decision has been rendered
as to the effect of this legislation on loans originated prior to its effective
date. This court decision may also apply to a similar intangible tax imposed by
other states. To its knowledge, as of February 28, 1995, no claims have been
filed against the Company under this court decision (other than as a defense in
foreclosure proceedings) and no notice of a breach of a representation has been
received under the Company's loan sale agreements requesting it to repurchase,
cure or substitute other loans for the loans sold. If the intent of the Florida
Legislature is not upheld and if a substantial number of claims are filed by
borrowers against the Company resulting in rescission or repurchase, the
Company's financial statements and operations will be materially adversely
affected. As the financial impact, if any, of this contingency cannot
presently be reasonably estimated, the Company has made no accrual therefor.
The Company is the subject of various litigation arising during the
ordinary course of business. While the outcome of such litigation cannot be
predicted with certainty, management does not expect the resolution of these
matters to have a material adverse effect on the financial condition or results
of operations of the Company.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
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 $ .93 $ 1.04 $ 1.06 $ .77
Income (loss) from discontinued operations .02 (.02) .01 (.36)
--------- --------- --------- ---------
Total $ .95 $ 1.02 $ 1.07 $ .41
========= ========= ========= =========
Fully Diluted
Income from continuing operations $ .93 $ 1.04 $ 1.06 $ .77
Income (loss) from discontinued operations .02 (.02) .01 (.36)
--------- -------- --------- ---------
Total $ .95 $ 1.02 $ 1.07 $ .41
========= ========= ========= =========
</TABLE>
77
<PAGE> 79
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1993
Total revenues . . . . . . . . . . . . . . . . . . . . . $ 56,957 $ 63,537 $ 66,131 $ 73,388
Income from continuing operations before income taxes . . 615 9,382 14,803 18,261
Net income (loss) . . . . . . . . . . . . . . . . . . . . (17,016) 6,377 9,827 12,387
Per share data:
Primary:
Income from continuing operations . . . . . . . . . . . $ .04 $ .63 $ .87 $ .91
Income (loss) from discontinued operations . . . . . . (1.76) .02 .01 .02
--------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ (1.72) $ .65 $ .88 $ .93
========= ========= ========= =========
Fully diluted:
Income from continuing operations . . . . . . . . . . . $ .04 $ .63 $ .75 $ .91
Income (loss) from discontinued operations . . . . . . (1.76) .02 .01 .02
--------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ (1.72) $ .65 $ .76 $ .93
========= ========= ========= =========
</TABLE>
78
<PAGE> 80
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.
79
<PAGE> 81
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 53
December 31, 1994 and 1993
Consolidated Balance Sheets Page 54
For the three years ended December 31, 1994
Consolidated Statements of Income Page 55
Consolidated Statements of Cash Flows Page 56
Consolidated Statements of Stockholders' Equity Page 57
Notes to Consolidated Financial Statements Pages 58-78
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, 1994, 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, 1994. Page 83
Schedule V* Supplementary Insurance Information, for the three years
ended December 31, 1994. Page 84
Schedule VI* Reinsurance, for the three years ended December 31,
1994. Page 85
_________________
* Filed in compliance with Article 7 of Regulation S-X.
80
<PAGE> 82
Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1(1) Articles of Incorporation, as amended
3.1A(2) Amendment to Articles of Incorporation effective April
28, 1994
3.2(1) By-Laws, as amended
4.2(5) Series A Junior Participating Preferred Stock Purchase
Rights
10.1(1) 1986 Employee Incentive Stock Option Plan
10.2(1) Employee Stock Ownership Plan and Trust
10.3(1) Management and compensatory contracts with executive
officers and directors
10.4(1) Deferred compensation agreements
10.5(6) Management Incentive Plan, as amended
10.6(1) Employees' Savings Plan and Trust
10.7(1) Agreement for termination of employee agreement
10.8(1) Credit agreement dated October 11, 1988, as amended
10.9(1) Agreement for termination of employment agreement
10.10(1) Unfunded Salary Deferral Agreement dated April 1, 1989
with executive officer
10.11(1) Split-Dollar Insurance Agreement dated April 1, 1989
with executive officer
10.12(1) 1989 Stock Incentive Plan
10.13(1) 1989 Non-Employee Director Stock Option Plan
10.14(1) FMCA, Inc. Note Agreement dated as of October 1, 1990
10.15(1) 1992 Form 11K, Employees' Savings Plan and Trust
10.16(3) Stock Purchase Warrant dated as of July 1, 1993
10.17(1) 1993 Form 11K, Employees' Savings Plan and Trust
10.18(6) 1993 Stock Incentive Plan
10.19(6) 1993 Non-Employee Director Plan
10.20(4) 1994 Form 11-K, Employees' Savings Plan and Trust
11.1(7) Statement regarding computation of per share earnings
21.1(7) List of Subsidiaries of the Company
23.1(7) Consent of Deloitte & Touche LLP
(1) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-K dated December 31, 1993.
(2) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-Q dated June 30, 1994.
81
<PAGE> 83
(3) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-3 (SEC File No. 33-52739).
(4) To be filed as Amendment to Form 10-K for the year ended December 31,
1994.
(5) Incorporated by reference to the designated Exhibit of the Company's Form
8-A dated August 5, 1994.
(6) Incorporated by reference from the designated Exhibit of the Company's
Proxy Statement filed with the Commission in connection with the 1994
Annual Meeting of Shareholders.
(7) Filed herewith.
Exhibit No. 11.1 - Page 88
Exhibit No. 21.1 - Page 89
Exhibit No. 23.1 - Page 90
Reports on Form 8-K
None
82
<PAGE> 84
SCHEDULE II
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
======================================================================================================================
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)
<S> <C> <C> <C> <C> <C>
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
============ ========== =========== =========== =========
December 31, 1992
-----------------
Allowance for loan losses . . . . . . . $ 15,962 $ 10,027 $ (758) $ 9,389 $ 15,842
Allowance for bond losses . . . . . . . 3,000 - - 3,000 -
Unearned loan charges . . . . . . . . . 5,914 - 1,079 3,733 3,260
------------ ---------- ----------- ----------- ---------
Total . . . . . . . . . . . . . $ 24,876 $ 10,027 $ 321 $ 16,122 $ 19,102
============ ========== =========== =========== =========
</TABLE>
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.
83
<PAGE> 85
SCHEDULE V
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Three Years Ended December 31, 1994
<TABLE>
<CAPTION>
===============================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J
Deferred Policy
Deferred Future Benefits, Acquisition Cost
Policy Policy Premium Net Claims, Amortization and
Acquisition Benefits Unearned Revenue Investment Losses, Other Operating
Costs (1) Premiums (3) Income Etc. Expenses(4)
-------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1994 . . $91,915 $1,542,475 $ 4,490 $11,373 $126,108 $12,654 $47,828
Year ended December 31, 1993 . . $83,495 $1,418,310 $10,260 $18,684 $109,728 $18,200 $24,967
Year ended December 31, 1992 . . $80,007 $1,272,732 $17,138 $22,860 $107,661 $20,843 $22,755
</TABLE>
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.
84
<PAGE> 86
SCHEDULE VI
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
===================================================================================================================
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)
<S> <C> <C> <C> <C> <C>
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 . . . . . . . $ 12,260 $ 2,672 $ 2,893 $ 12,481 23.2%
Accident and health
insurance . . . . . . . . 6,418 214 (1) 6,203 -
----------- ----------- ------------ -------------
Total premiums . . . $ 18,678 $ 2,886 $ 2,892 $ 18,684 15.5%
=========== =========== ============ =============
December 31, 1992
-----------------
Life insurance in force . . . . $ 1,220,191 $ 267,942 $ 963,449 $ 1,915,698 50.3%
=========== =========== ============ =============
Premiums
Life insurance . . . . . . . $ 18,437 $ 4,761 $ 2,468 $ 16,144 15.3%
Accident and health
insurance . . . . . . . . 6,942 204 (22) 6,716 -
----------- ----------- ------------ -------------
Total premiums . . . $ 25,379 $ 4,965 $ 2,446 $ 22,860 10.7%
=========== =========== ============ =============
</TABLE>
85
<PAGE> 87
INDEX TO EXHIBITS
Exhibit No. Description of Document
----------- -----------------------
3.1(1) Articles of Incorporation, as amended
3.1A(2) Amendment to Articles of Incorporation effective April
28, 1994
3.2(1) By-Laws, as amended
4.2(5) Series A Junior Participating Preferred Stock Purchase
Rights
10.1(1) 1986 Employee Incentive Stock Option Plan
10.2(1) Employee Stock Ownership Plan and Trust
10.3(1) Management and compensatory contracts with executive
officers and directors
10.4(1) Deferred compensation agreements
10.5(6) Management Incentive Plan, as amended
10.6(1) Employees' Savings Plan and Trust
10.7(1) Agreement for termination of employee agreement
10.8(1) Credit agreement dated October 11, 1988, as amended
10.9(1) Agreement for termination of employment agreement
10.10(1) Unfunded Salary Deferral Agreement dated April 1, 1989
with executive officer
10.11(1) Split-Dollar Insurance Agreement dated April 1, 1989
with executive officer
10.12(1) 1989 Stock Incentive Plan
10.13(1) 1989 Non-Employee Director Stock Option Plan
10.14(1) FMCA, Inc. Note Agreement dated as of October 1, 1990
10.15(1) 1992 Form 11K, Employees' Savings Plan and Trust
10.16(3) Stock Purchase Warrant dated as of July 1, 1993
10.17(1) 1993 Form 11K, Employees' Savings Plan and Trust
10.18(6) 1993 Stock Incentive Plan
10.19(6) 1993 Non-Employee Director Plan
10.20(4) 1994 Form 11-K, Employees' Savings Plan and Trust
11.1(7) Statement regarding computation of per share earnings
21.1(7) List of Subsidiaries of the Company
23.1(7) Consent of Deloitte & Touche LLP
(1) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-K dated December 31, 1993.
(2) Incorporated herein by reference to the designated Exhibit of the
Company's form 10-Q dated June 30, 1994.
86
<PAGE> 88
(3) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-3 (SEC File No. 33-52739).
(4) To be filed as Amendment to Form 10-K for the year ended December 31, 1994.
(5) Incorporated by reference to the designated Exhibit of the Company's Form
8-A dated August 5, 1994.
(6) Incorporated by reference from the designated Exhibit of the Company's
Proxy Statement filed with the Commission in connection with the 1994
Annual Meeting of Shareholders.
(7) Filed herewith.
Exhibit No. 11.1 - Page 88
Exhibit No. 21.1 - Page 89
Exhibit No. 23.1 - Page 90
87
<PAGE> 1
EXHIBIT 11.1
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1993 1992
----------- ------------ -----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Primary Earnings Per Share
--------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . $ 54,582 $ 28,317 $ 13,014
Less: Loss from discontinued operations . . . . . (5,048) (16,742) (2,768)
----------- ------------ -----------
Net income . . . . . . . . . . . . . . . . . . . . 49,534 11,575 10,246
Less: Dividends on preferred stock . . . . . . . . - (333) -
----------- ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 49,534 $ 11,242 $ 10,246
=========== ============ ===========
Weighted average number of common and
common equivalent shares:
--------------------------------------------
Average common shares outstanding . . . . . . . . 13,649 10,652 9,917
Add: Dilutive effect of stock options after
application of treasury stock method . . . 596 452 -
----------- ------------ -----------
14,245 11,104 9,917
=========== ============ ===========
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . $ 3.83 $ 2.52 $ 1.31
Loss from discontinued operations . . . . . . . . (.35) (1.51) (.28)
----------- ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 3.48 $ 1.01 $ 1.03
=========== ============ ===========
Fully Diluted Earnings Per Share
--------------------------------
Income available to common shareholders:
----------------------------------------
Income from continuing operations . . . . . . . . $ 54,582 $ 28,317 $ 13,014
Less: Loss from discontinued operations . . . . . (5,048) (16,742) (2,768)
----------- ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 49,534 $ 11,575 $ 10,246
=========== ============ ===========
Weighted average number of common and
all dilutive contingent shares:
-----------------------------------------------
Average common shares outstanding . . . . . . . . 13,649 10,652 9,917
Add: Dilutive effect of stock options after
application of treasury stock method . . . 596 687 -
Dilutive effect of preferred stock after
application of "if converted" method . . . - 514 -
----------- ------------ -----------
14,245 11,853 9,917
=========== ============ ===========
Earnings (loss) per share:
--------------------------
Income from continuing operations . . . . . . . . $ 3.83 $ 2.39 $ 1.31
Loss from discontinued operations . . . . . . . . (.35) (1.42) (.28)
----------- ------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 3.48 $ .97 $ 1.03
=========== ============ ===========
</TABLE>
88
<PAGE> 1
EXHIBIT 21.1
UNITED COMPANIES FINANCIAL CORPORATION
LIST OF SUBSIDIARIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
State of
Name Incorporation
---- -------------
<S> <C>
UNITED COMPANIES LIFE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES LENDING CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED PLAN INSURANCE AGENCY, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES MORTGAGE OF TENNESSEE, INC. (1) . . . . . . . . . . . . . . . . . . . . . . . . . Tennessee
PELICAN MORTGAGE COMPANY, INC. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
ADOBE, INC (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
GINGER MAE(R), INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNICOR MORTGAGE(R), INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UCFC ACCEPTANCE CORPORATION (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES REALTY AND DEVELOPMENT COMPANY, INC. . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMPANIES MANAGEMENT COMPANY, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED COMMUNICATIONS CORPORATION OF LOUISIANA, INC. . . . . . . . . . . . . . . . . . . . . . . . Louisiana
UNITED GENERAL TITLE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
FOSTER MORTGAGE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
SOUTHERN MORTGAGE ACQUISITION, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana
</TABLE>
____________________
(1) Wholly-owned by United Companies Lending Corporation.
(2) Wholly-owned by Pelican Mortgage Company, Inc.
89
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our opinion dated February 28,
1995 (May 1, 1995 as to Note 13 and Item 14, Schedules V and VI) appearing in
this Annual Report on Form 10-K/A-1 of United Companies Financial Corporation
for the year ended December 31, 1994 in the following: Registration Statement
No. 33-15326 on Form S-8 pertaining to the United Companies Financial
Corporation 1986 Employee Incentive Stock Option Plan, Registration Statement
No. 33-17366 on Form S-8 pertaining to the United Companies Financial
Corporation Employees' Savings Plan and Trust, Registration Statement No.
33-29994 on Form S-8 pertaining to the 1989 Stock Incentive Plan and the 1989
Non-Employee Director Stock Option Plan, Registration Statement No. 33-54955
on Form S-8 pertaining to the 1993 Stock Incentive Plan and the 1993
Non-Employee Director Stock Option Plan, Registration Statement No. 33-68626 on
Form S-3 pertaining to the registration of 1,951,204 shares of United Companies
Financial Corporation Common Stock, Registration Statement No. 33-55227 on Form
S-3 pertaining to the registration of $200 million of United Companies
Financial Corporation Debt Securities and Preferred Stock, and Registration
Statement No. 33-52739 on Form S-3 pertaining to the registration of 200,000
shares of United Companies Financial Corporation Common Stock.
Baton Rouge, Louisiana
May 22, 1995
90
