<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K/A-2
AMENDMENT TO
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7067
UNITED COMPANIES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
LOUISIANA 71-0430414
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4041 ESSEN LANE
BATON ROUGE, LOUISIANA 70809
(Address of principal executive office) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code (504) 924-6007
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
-------------------------------------- -------------------------------------------------
<S> <C>
NONE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.00
(Title of Class)
------------------------
6 3/4% PRIDES(SM), Convertible Preferred 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. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant as reported by the National Association of Securities Dealers
Automated Quotation System/National Stock Market, as of March 11, 1996 was
$589,182,237.
The number of shares of $2.00 par value stock issued and outstanding as of
March 11, 1996 was 28,146,480 excluding 1,159,682 treasury shares.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
United Companies Financial Corporation (the "Company" or "UCFC"), founded
in 1946, is a financial services holding company having mortgage and insurance
operations. The Company's mortgage operations are focused on the origination,
purchase, sale and servicing of first mortgage, non-conventional, home equity
loans. Home equity loan production in 1995, 1994, and 1993 was $1.5 billion,
$909 million and $540 million, respectively. The Company sells substantially all
of its home equity loan production through loan securitizations pursuant to
which mortgage-backed securities are issued and publicly sold under a Company
sponsored shelf registration statement. The operating income before income taxes
of the Company's mortgage operations increased from $46.3 million in 1993 to
$81.2 million in 1994 and to $107.7 million in 1995. The Company's insurance
operations sell primarily deferred annuities marketed in 47 states, the District
of Columbia and Puerto Rico. On February 2, 1996, the Company signed an
agreement to sell all of the outstanding capital stock of its life insurance
subsidiary. The proposed sale is subject to the approval of the Company's
shareholders and regulatory authorities and the satisfaction of other
conditions. See "Life Insurance -- Recent Developments". For additional
information regarding the Company's operations by business segment, see Note 14
to Notes to Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company was incorporated in the State of Louisiana in 1946 and its
principal offices are located in Baton Rouge, Louisiana. It currently has
approximately 1,900 employees.
MORTGAGE
Overview. The Company's mortgage operations consist of the origination,
purchase, sale and servicing of primarily first mortgage, non-conventional, home
equity loans which are typically not loans for the purchase of homes. These
loans, which are fixed and variable rate mortgage loans, are made primarily to
individuals who may not otherwise qualify for conventional loans which are
readily marketable to government-sponsored mortgage agencies or conduits and
available through most commercial banks and many other lending institutions.
Distribution network. At December 31, 1995, the Company's mortgage
activities were primarily conducted through the following distribution channels:
Retail. The Company's retail operations are conducted through United
Companies Lending Corporation ("UCLC") which consists of a branch network
of 150 offices in 39 states.
Wholesale. The wholesale loan distribution network consists of two
separate divisions of UCLC which offer home equity loans through distinct
distribution channels. Both of these divisions, UNICOR MORTGAGE(R)
("UNICOR") and GINGER MAE(R) ("GINGER MAE") , operate under registered
service marks. UNICOR offers home equity loan products through
correspondents and brokers in 44 states, while GINGER MAE offers these
products to financial institutions, which include banks, savings and loan
associations and credit unions, in 23 states. UNICOR began operating as a
separate subsidiary of the Company in January, 1996.
Bulk purchasing. The Company also conducts a bulk loan purchase
program through Southern Mortgage Acquisition, Inc. ("SMA"), which from
time to time purchases pools of home equity loans from other lenders.
Manufactured housing finance. During the fourth quarter of 1995 the
Company expanded its lending operations to include additional manufactured
housing loan products. The manufactured housing lending is conducted
through a wholly owned subsidiary, United Companies Funding, Inc., based in
Minneapolis, Minnesota, with servicing provided by UCLC.
2
<PAGE> 3
Products and Production. The Company's principal products are home equity
loans with a fixed amount and term to maturity, which are secured by a first
lien mortgage on the borrower's residence. Typically the proceeds of the loan
will be used by the borrower to refinance an existing first mortgage in order to
finance home improvements or for debt consolidation. These types of loans are
commonly referred to as "B" and "C" grade loans. These loans are distinct from
home equity revolving lines of credit, not offered by the Company, which are
generally secured by a second mortgage and typically carry a floating interest
rate. The Company offers fixed rate and adjustable rate ("ARM") home equity loan
products.
The following table reflects home equity loan production by distribution
network by product type:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
LOAN LOAN LOAN
AMOUNT SIZE AMOUNT SIZE AMOUNT SIZE
---------- ------- ---------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Retail
Fixed....................... $ 740,707 37 $ 679,466 38 $ 460,164 36
ARM......................... 198,369 78 11,560 90 23,037 83
Wholesale
UNICOR
Fixed....................... 337,802 50 146,832 48 40,736 53
ARM......................... 85,208 104 45,248 97 15,931 103
GINGER MAE
Fixed....................... 44,497 59 9,864 55 -- --
ARM......................... 6,351 115 201 101 -- --
Bulk Purchase
Fixed....................... 7,709 50 1,739 38 -- --
ARM......................... 120,894 156 13,911 58 -- --
---------- ---------- ----------
Total Production....... $1,541,537 $ 908,821 $ 539,868
========== ========== ==========
</TABLE>
As of December 31, 1995, approximately 96.5% in aggregate principal amount
of the home equity loans owned and/or serviced by the Company were secured by a
first mortgage with the remaining 3.5% in aggregate principal amount secured by
second or multi-property mortgages. During 1995, approximately $1,486 million
first mortgage home equity loans were originated and $56 million in second and
multi-property mortgage loans. On most home equity loans for home improvements,
the loan proceeds are disbursed to an escrow agent which, according to
guidelines established by the Company, releases such proceeds upon completion of
the improvements or in draws as the work on the improvements progresses. The
weighted average interest rate on home equity loans produced during 1995 was
11.6%, compared to 11.7% during 1994. Costs incurred by the borrower for loan
origination, including origination points and appraisal, legal and title fees,
are often included in the amount financed. Over the past five years, contractual
maturities have generally ranged from seven to twenty years, and the weighted
average effective life using the historical constant prepayment rate for the
Company's home equity loans has been approximately three and one-half years.
Prior to July, 1991, the Company actively originated commercial real estate
loans for sale to United Companies Life Insurance Company ("UCLIC") with
servicing rights retained by the lending operations of the Company. From July
1991 to early 1995, the Company limited commercial real estate originations due
to a change in UCLIC's investment demand and lack of a secondary market for this
product. However, in 1995, originations of commercial real estate loans on
behalf of UCLIC resumed with $21.3 million of such loans being originated. The
servicing of the commercial loans owned by UCLIC and pass-through certificates
owned by third parties and UCLIC, which are backed by commercial real estate
loans originated by UCLC, will be transferred from UCLC to UCLIC under the terms
of the proposed sale of UCLIC. At December 31, 1995, the principal balance of
such loans and pass-through certificates was approximately $251 million. See
"Life Insurance -- Recent Developments" below.
3
<PAGE> 4
The Company's principal market for its home equity loans is individuals who
may not otherwise qualify for conventional loans which are readily marketable to
the government-sponsored mortgage agencies or conduits and available through
most commercial banks and many other lending institutions. Loans to such
borrowers may present a greater credit risk and therefore produce higher loan
origination fees and interest rates as compared to loans to customers of banks
and thrifts. The Company believes that its customers generally place a higher
priority on the amount of the monthly payment and prompt credit approval than on
the interest rate and origination fees associated with the loan. Management of
the Company believes that any greater credit risk arising out of making loans to
these borrowers is compensated by higher fees and interest rates. There are
generally numerous competitors for these borrowers in each of the Company's
geographic markets. Principal competitors include recognized national and
regional lenders. The Company believes that prompt underwriting and response to
loan applications provides a competitive advantage in loan originations.
Underwriting. Regardless of the manner of origination, all home equity
loans are underwritten (or, in the case of bulk purchases are re-underwritten)
prior to approval and funding utilizing substantially similar underwriting
guidelines. The underwriting function is centralized at the home office.
Underwriting guidelines are modified from time to time. The following is a
description of the current underwriting guidelines, which are not materially
different from prior guidelines.
The underwriting process is intended to assess primarily the prospective
borrower's ability and willingness to repay the loan and secondarily the
adequacy of the real property security as collateral for the loan granted. A
credit package is submitted to the home office which includes a current
appraisal from an independent appraiser on the Company's approved list, a
property inspection, a credit report and a verification of employment. On a
case-by-case basis, after review and approval by home office underwriters, home
equity loans may be made which vary from the underwriting guidelines. However,
variations from guidelines with respect to home equity loans primarily are
approved by the home office underwriting department.
The Company originates fixed-rate home equity loans which generally fully
amortize over a period not to exceed: 360 months for single family, owner
occupied first mortgages; 360 months for single family, non-owner occupied first
mortgages; 240 months for single family, combination owner occupied/rental
property first mortgages; and 180 months for single family, owner occupied
second mortgages. The fixed-rate loan amounts generally do not exceed $500,000
unless a higher amount is specifically approved by the home office. The Company
also originates a fixed rate loan product with an original term to maturity of
180 months and an amortization schedule of 360 months ("Balloon Loans"). Balloon
loans must be secured by first liens on single family, owner occupied
residential properties. Fixed-rate home equity loans secured by second mortgages
generally do not exceed $150,000. Adjustable-rate home equity loans, in general,
fully amortize over a period not to exceed 360 months. The maximum amount for
adjustable-rate home equity loans is $500,000 unless a higher amount is
specifically approved by home office.
The homes used for collateral to secure the home equity loans may be owner
occupied, non-owner occupied rental properties or a combination of owner
occupied rental properties, which in any case are one-to-four family residences
(which may be a detached or semi-detached row house, townhouse, a condominium
unit or a unit in a planned unit development). In addition, fixed rate home
equity loans may be secured by single-family owner occupied manufactured or
mobile homes with land if the manufactured or mobile homes are permanently
affixed and defined as real estate under applicable state law. Second mortgages
are generally permitted only for fixed-rate home equity loans and generally are
limited to one-to-four family owner occupied property. Such a loan secured by a
second mortgage typically will not be made if the first mortgage is a balloon or
an individual or owner financed mortgage.
In general, the value of each property proposed as security for a home
equity loan is required to be determined by a current appraisal from an
independent appraiser who has been approved by the home office. The originator
selects the appraiser and orders the appraisal. The Company requires that the
appraisal provide an adequately supported estimate of the value of the property
proposed as security for the requested home equity loan and a complete, accurate
description of the property. In some cases, the appraisal is subject to
completion of improvements which are to be made with the proceeds of the home
equity loan. The property is analyzed, based on the appraisal, to determine its
acceptability as security for the loan requested.
4
<PAGE> 5
Loan-to-Value. The total amount of a home equity loan generally includes
origination fees, credit life insurance premium, if any, prepaid interest and
other closing costs (such as the cost of an appraisal report and title insurance
premiums). Loan-to-value is the percentage equal to the note amount divided by
the lesser of appraised value or the purchase price of the real estate. For
fixed-rate and adjustable rate home equity loans originated through the
wholesale loan programs, the maximum loan-to-value is 90%, with the maximum for
rural properties generally being 80%. For home equity loans originated through
the branch network, an Underwriting Loan-to-Value Ratio, as described below, is
utilized. The total amount of a home equity loan, net of the origination fees,
credit life insurance premium, if any, prepaid tax and insurance escrow, real
estate tax service fee, loan application fee and prepaid interest, is defined as
the "Cash Out." The "Underwriting Loan-to-Value Ratio" for underwriting purposes
is the Cash Out divided by the appraised value or purchase price of the
property, whichever is less. The Cash Out with respect to fixed-rate and
adjustable-rate loans originated through the branch network is limited to 90% of
the lesser of the applicable appraised value or purchase price of the property.
Generally, the maximum Underwriting Loan-to-Value Ratio is 80% for a loan
with a second mortgage on the property. With respect to rural properties, the
maximum Underwriting Loan-to-Value Ratio (utilizing only up to ten acres and the
improvements thereon) is 80%. The maximum Underwriting Loan-to-Value Ratio
generally applicable to non-owner occupied homes is 75% and is generally 80% for
owner occupied manufactured/mobile homes with land. Because the Underwriting
Loan-to-Value Ratio is based on the Cash Out rather than the actual principal
balance of the related loan, the Loan-to-Value Ratio of such loan will be higher
and could be substantially higher than the Underwriting Loan-to-Value Ratio.
Creditworthiness. Verification of personal financial information for each
applicant is required. The applicant's total monthly obligations (including
principal and interest on each mortgage, tax assessments, other loans, charge
accounts and all scheduled indebtedness) generally should not exceed 50% of a
borrower's gross monthly income. In the case of adjustable-rate home equity
loans, the debt ratio calculation is based upon the principal and interest
payment amount utilizing the maximum rate on the second change date. Generally,
the borrowers are required to have two years of employment with their current
employer or two years of like experience. Applicants who are salaried employees
must provide current employment information in addition to recent employment
history. This information is verified for salaried borrowers based on written
confirmation from employers, or a combination of a telephone confirmation from
the employer and the most recent pay stub and the most recent W-2 tax form. A
self-employed applicant is generally required to provide copies of complete
federal income tax returns filed for the most recent two years. Re-verification
of the foregoing information is generally not undertaken for home equity loans
purchased through the bulk purchase program of the Company.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's credit history is required. The credit report
should reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies and similar instances of adverse credit
that can be discovered by a search of public records. Verification is required
to be obtained of the first mortgage balance, if any, its status and whether
local taxes, interest, insurance and assessments are included in the applicant's
monthly payment. All taxes and assessments not included in the payment are
required to be verified as current. A borrower's mortgage payment history should
generally reflect no more than three payments over 30 days delinquent in the
last twelve months; however, in some cases, a borrower is permitted to have no
more than five payments over 30 days delinquent in the last twelve months and
one payment over 60 days delinquent in the last twelve months. Credit analysis
is subjective and subject to interpretation in the underwriting process.
Certain laws protect loan applicants by offering them a timeframe after
loan documents are signed, called the "rescission period," during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law.
The Company generally requires title insurance coverage on each home equity
loan it originates. The Company and its assignees are generally named as the
insured on the title insurance policies and the addressee of the title opinion.
5
<PAGE> 6
The borrower is required to obtain property insurance in an amount
sufficient to cover, in the case of a first mortgage, the new loan and in the
case of a fixed-rate second mortgage, the new loan and any prior mortgage. If
the sum of an outstanding first mortgage, if any, and the fixed-rate home equity
loan exceeds the lesser of replacement or insurable value, insurance equal to
the lesser of replacement or insurable value may be accepted. The Company
requires that its name and address are properly added to the "mortgagee clause"
of the insurance policy. In the event the policy does not provide for written
notice of policy changes or cancellation, an endorsement adding such provision
is required. The borrower is required to obtain flood insurance to the extent
such insurance is available under the Flood Disaster Protection Act of 1973, as
amended.
After a loan is underwritten, approved and funded, the mortgage loan
packages are reviewed by home office loan review personnel. A random sample of
the mortgage loan packages are subsequently subjected to a quality control
audit.
Loan sales and securitizations. Substantially all of the loans originated
or purchased by the Company are sold. Since 1985, the Company has sold loans
originated by it in the secondary market, initially in transactions with
government-sponsored mortgage agencies or conduits, later in private placement
transactions with financial institutions and, since the second quarter of 1993,
through a shelf registration statement filed with the Securities and Exchange
Commission by a subsidiary of the Company. Approximately $2.9 billion of
mortgage-backed pass-through certificates backed primarily by first mortgage
home equity loans originated directly or through correspondents or mortgage
brokers, or purchased and re-underwritten have been registered under the
registration statement and publicly sold since 1993. The Company intends to
continue to effect securitization transactions on a quarterly basis, but the
amount and timing of sales of securities under the shelf registration statement
will depend upon market and other conditions affecting the operations of the
Company.
The following table reflects certain information regarding home equity loan
production, sales and securitizations during the indicated periods:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Home equity loan production........................ $1,541,537 $908,821 $539,868
Home equity loan sales............................. $1,471,868 $977,653 $462,873
Average coupon on loans sold....................... 11.67% 11.80% 12.00%
Interest spread retained on loans sold............. 4.98% 4.49% 6.06%
</TABLE>
The weighted average interest spread on loans sold (the difference between
the stated rate on the loan and the rate paid to purchasers, less certain
recurring fees) is determined without regard to expected credit losses.
Servicing rights are retained on substantially all loans sold.
The Company's securitization transactions are credit enhanced and the
certificates issued pursuant thereto have received ratings of "Aaa" from Moody's
Investors Service, Inc. and "AAA" (or "AAAr" in the case of variable rate
certificates) from Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. Credit enhancement is achieved in part through a guaranty provided by a
third party insurer and by subordinating an amount (the "Subordinated Amount")
of the excess interest spread retained by the Company to the payment of
scheduled principal and interest on the certificates should there be a shortfall
in collections from borrowers in the form of monthly mortgage payments during
any given period. If cumulative payment defaults exceed the Subordinated Amount,
the third party insurer is obligated to pay any further losses experienced by
the owners of the pass-through certificates. The Company has, from time to time,
used the Financial Guaranty Insurance Company ("FGIC") and MBIA Insurance
Corporation ("MBIA") as third party insurers. In connection with the issuance of
approximately $2.9 billion in pass-through certificates discussed above, the
Subordinated Amounts aggregate approximately $426 million.
Each pooling and servicing agreement that governs the distribution of cash
flows from the pooled loans requires the establishment of an account (the
"Reserve Account") that may require an initial deposit by the Company.
Thereafter, a portion of the excess interest is deposited in the Reserve
Account. There are no events that will require the aggregate deposits to the
Reserve Account to exceed the related Subordinated Amount.
6
<PAGE> 7
To the extent that losses are incurred on the loans underlying the pass-through
certificates issued in a securitization transaction, such losses are paid out of
the related Reserve Account to the extent that funds are available.
The Company derives a significant portion of its income by realizing gains
upon the sale of loans due to the excess servicing income of such loans. Excess
servicing income represents the excess of the interest rate payable by a
borrower on a loan over the interest rate passed through to the investor
acquiring an interest in such loan, less the Company's normal servicing fee and
other applicable recurring fees. When loans are sold, the Company recognizes as
current income the present value of the excess servicing income expected to be
realized over the anticipated average life of the loans sold less future
estimated credit losses relating to the loans sold. At December 31, 1995, the
Company's balance sheet reflected capitalized excess servicing income of
approximately $283 million and an allowance for loss on loans serviced of
approximately $45 million. The capitalized excess servicing income is computed
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar instruments at the time of
sale. The weighted average discount rate used to determine the present value of
the balance of capitalized excess servicing income on home equity loans
reflected on the Company's balance sheet at December 31, 1995, was approximately
10%. The Company is not aware of an active market for this kind of receivable.
No assurance can be given that this receivable could in fact be sold at its
stated value on the balance sheet.
Capitalized excess servicing income is amortized over the lesser of the
estimated or actual remaining life of the underlying loans as an offset against
the excess servicing income component of servicing income actually received in
connection with such loans. Although management of the Company believes that it
has made reasonable estimates of the excess servicing income likely to be
realized, it should be recognized that the rate of prepayment and the amount of
defaults utilized by the Company are estimates and actual experience may vary
from these estimates. The Company periodically reviews its prepayment
assumptions in relation to current rates of prepayment and, if necessary, writes
down the remaining asset to the net present value of the estimated remaining
future excess servicing income. Rapid increases in interest rates or competitive
pressures may result in a reduction of excess servicing income, thereby reducing
the gains recognized by the Company upon the sale of loans in the future.
The gain recognized by the Company upon the sale of loans will have been
overstated if the excess servicing income actually received by the Company is
less than originally assumed. An acceleration of future prepayments and/or
delinquencies could result in capitalized excess servicing income amortization
expense exceeding realized excess servicing income, thereby adversely affecting
the Company's servicing income.
The ability of the Company to sell loans and/or mortgage-backed securities
in the secondary market, or an alternative source of funding loan production, is
essential for continuation of the Company's loan origination operations. A
prolonged, substantial reduction in the size of the secondary market for home
equity loans may adversely affect the Company's ability to sell its loan
originations and/or mortgage-backed securities in the secondary market with
consequent adverse impact on the Company's profitability and future
originations. Moreover, market and other considerations could affect the timing
of the Company's securitization transactions and delays in such sales could
reduce the amount of gains recognized from the sale of loans in a given quarter.
Loan Servicing. The Company retains the servicing on substantially all
loans it originates, including approximately 69,700 home equity loans with an
aggregate principal balance of $2.7 billion owned and/or serviced at December
31, 1995, up 60% from the prior year-end. The following services are performed
for investors to whom the Company has sold loans and for which it has retained
servicing: investor reporting; collecting and remitting periodic principal and
interest payments to investors and performing other administrative services,
including maintaining required escrow accounts for payment of real estate taxes
and standard hazard insurance; determining the adequacy of standard hazard
insurance; advising investors of delinquent loans; conducting foreclosure
proceedings, and inspecting and reporting on the physical condition of the
mortgaged properties securing the mortgage loans; and disposing of foreclosed
properties. The Company is generally obligated to advance interest on delinquent
loans to the secondary market investors at the applicable pass-through rate
until satisfaction of the note, liquidation of the mortgaged property or charge
off of the loan.
7
<PAGE> 8
To the extent that the amount recovered through liquidation of collateral is
insufficient to cover the unpaid balance of the loan, the Company incurs a loss
until such losses aggregate the limit specified in the related loan sale
agreement. In connection with its servicing activities, the Company sends to
borrowers payment coupon books that specify the fixed payment amount and due
date in the case of fixed-rate home equity loans and the adjusted payment amount
and due date in the case of adjustable-rate home equity loans and the late
payment amount, if any. Due dates for payments generally occur on the first day
of the calendar month. With respect to adjustable-rate home equity loans, the
Company provides written notices to borrowers of upcoming rate adjustments along
with new payment coupon books reflecting the adjusted payment amounts.
The Company, as master servicer, is required under each loan sale agreement
to service the mortgage loans either directly or through sub-servicers.
Substantially all servicing activities are centralized at the home office.
Under the terms of the pending sale of UCLIC, servicing of commercial real
estate loans owned by UCLIC and passthrough certificates owned by third parties
and UCLIC which are backed by commercial real estate loans originated by UCLC
will be transferred from UCLC to UCLIC at the closing of the sale.
The contractual balance of loans owned and/or serviced by UCLC,
substantially all of which it originated, were as follows for the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Owned and serviced:
Home equity.................................. $2,701,481 $1,683,698 $1,125,139
Commercial................................... 251,241 274,413 345,365
Conventional................................. 58,554 74,294 98,277
Manufactured housing......................... 888 -- --
---------- ---------- ----------
Total................................ $3,012,164 $2,032,405 $1,568,781
========== ========== =========
Total serviced for third party
investors.......................... $2,602,944 $1,679,875 $1,065,549
========== ========== ==========
Owned by the Company:
Home equity.................................. $ 236,987 $ 203,651 $ 318,334
Commercial................................... 169,990 147,722 183,065
Conventional................................. 1,355 1,157 1,833
Manufactured housing......................... 888 -- --
---------- ---------- ----------
Total................................ $ 409,220 $ 352,530 $ 503,232
========== ========== ==========
</TABLE>
At December 31, 1995, the Company's home equity portfolio of properties
acquired in foreclosure or for which deeds in lieu of foreclosure have been
accepted and held by the Company pending disposition represented approximately
$8.5 million (excluding the allowance for loan losses attributable to these
properties). This amount may include the first mortgage balance, delinquent
first mortgage payments and certain advances made on the property.
When the Company believes that borrowers with existing loans with the
Company are likely to refinance such loans due to interest rate changes, equity
build-up or other reasons, the Company actively attempts to retain such
borrowers through solicitations of such borrowers to refinance with the Company.
Such refinancings generate fee income and servicing income for the Company.
8
<PAGE> 9
Delinquency and Loss Experience. The following two tables set forth
information relating to delinquency, loan loss and foreclosure experience for
the home equity loan portfolio serviced by the Company (including loans owned by
the Company) as of the dates and for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Number of home equity loans..................... 69,723 52,289 41,854
Dollar amount of home equity loans.............. $2,701,481 $1,683,698 $1,125,139
Delinquency period(1)
30-59 days.................................... 2.93% 2.40% 2.32%
60-89 days.................................... 0.91% 0.91% 1.02%
90 days and over.............................. 4.31% 4.36% 4.92%
Foreclosed properties(2)
Owned by the Company.......................... 0.31% 0.52% 1.51%
Serviced for third parties.................... 0.80% 0.70% 0.74%
Net write-offs -- for the year ended............ 0.56% 0.84% 0.88%
</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.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Average dollar amount of home equity loans
outstanding during period...................... $2,192,590 $1,404,419 $972,294
Net losses
Gross Losses(1)................................ $ 13,818 $ 12,745 $ 9,114
Recoveries(2).................................. $ (1,597) $ (1,051) $ (566)
---------- ---------- --------
Net Losses(3).................................. $ 12,221 $ 11,694 $ 8,548
========== ========== ========
</TABLE>
---------------
(1) "Gross Losses" are amounts which have been determined to be uncollectible
relating to home equity loans for each respective period.
(2) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(3) "Net Losses" means "Gross Losses" minus "Recoveries".
Loans are placed on a nonaccrual status when they are past due 150 days.
The above delinquency and loan loss experience represents the Company's
recent experience. However, the delinquency, foreclosure and net loss
percentages may be affected by the increase in the size and relative lack of
seasoning of a substantial portion of the portfolio. In addition, the Company
can neither quantify the impact of 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.
9
<PAGE> 10
LIFE INSURANCE
Overview. United Companies Life Insurance Company ("UCLIC"), the Company's
wholly-owned life insurance company domiciled in Louisiana and organized in
1955, is currently authorized to conduct business in 47 states, the District of
Columbia and Puerto Rico. The primary products of UCLIC are deferred annuities
marketed on a commission basis principally through financial institutions and
independent general agents and are generally sold to middle income customers
seeking tax deferred insurance products, primarily to provide savings for
retirement. During the fourth quarter of 1995, UCLIC added variable annuities to
its product line.
At December 31, 1995, the invested assets of UCLIC consisted of $1.1
billion in investment grade fixed maturity securities (at amortized cost), $169
million of residential first mortgage loans and $170 million of commercial
mortgage loans. At December 31, 1995, the weighted average rating of its
publicly traded bond portfolio was "AA", the assets allocated to investments in
mortgage-backed securities were $778 million and the amount of non-investment
grade bonds in the portfolio was $22 million or 1.9% of the portfolio. During
1995, the net interest spread on the Company's annuity business was 2.37%
compared to 2.73% during 1994.
Reserves for annuity policies constitute the Company's primary liabilities.
At December 31, 1995 total annuity reserves were $1.4 billion. The duration of
these liabilities is affected by a number of factors, including interest rates,
surrender penalties, ratings, public confidence in the insurance industry
generally and in the Company specifically, governmental regulations and tax
laws. Since insurance commissions incurred at the origination of annuity
policies are generally deferred and recognized over the estimated life of the
policies, any unexpected increase in surrenders of annuity contracts would
require more rapid recognition of these expenses, thereby adversely impacting
profitability.
Recent Developments. On February 2, 1996, the Company signed a stock
purchase agreement dated as of January 30, 1996, for the sale of all of the
outstanding capital stock of UCLIC to UC Life Holding Corp., a new Delaware
corporation formed by Knightsbridge Capital Fund I, L.P. for an aggregate amount
of $164 million plus earnings of UCLIC from January 1, 1996, to closing of the
transaction. Knightsbridge, which is a private investment partnership with
institutional partners, was formed in 1995 to make equity investments in
companies engaged primarily in the life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash,
currently estimated to be $109 million and UCLIC real estate and other assets to
be distributed to the Company prior to the closing. The real estate to be
distributed includes portions of the United Plaza office park, including the
Company's home office. In addition, the Company will purchase a convertible
promissory note from an affiliate of the purchaser for $15 million in cash. The
note matures in 11 years and bears interest at 8% per annum payable at maturity.
The purchaser also agreed that UCLIC would continue to be an investor in
first lien home equity loans originated by the Company's lending operations and
that UCLIC's home office operations would be maintained in its present location
in Baton Rouge, Louisiana following the closing for at least two years. The
agreement is subject to approval by UCFC's shareholders and regulatory
authorities and the satisfaction of other conditions, and provides that the
closing will occur on or before July 31, 1996.
Principal Products. The principal products marketed by UCLIC since 1978
have been deferred annuity contracts. A single premium, currently averaging
approximately $21,000, is received on the sale of these contracts. The contracts
typically guarantee an interest crediting rate for the first policy year.
Thereafter, the interest crediting rate generally may be adjusted by UCLIC at
any time (subject to certain minimum crediting rates stated in the contract). A
policyholder is permitted at any time to withdraw all or part of the accumulated
premium plus the amount of interest credited on the policy, less a surrender
charge if applicable. The initial surrender charge typically ranges from 9-10%
of the initial premium and decreases to zero during a penalty period of from
five to ten years. Approximately 78% of UCLIC annuity policies at December 31,
1995 were subject to a surrender penalty.
UCLIC produced $136 million and $250 million in sales of annuity products
during the years ended December 31, 1995 and 1994, respectively. The Company
believes that the decrease in annuity sales in 1995 is due in part to the
interest rate environment, particularly the relative relationship between short
term and
10
<PAGE> 11
intermediate term interest rates, and to the focus of the Company's resources on
development of the variable annuity product. In addition, a financial
institution which produced approximately 10% of UCLIC's annuity sales in 1994
discontinued the sale of annuities for UCLIC in 1995 subsequent to the merger of
such financial institution.
The interest earned on the annuity contract accumulates on a tax-deferred
basis until withdrawal by the policyholder. The deferred annuity contracts
written by UCLIC generally provide a death benefit equal to the amount of the
accumulated premium plus accumulated interest earned less the amount of any
prior withdrawals.
The following table presents UCLIC's annuity sales by state by percent of
total premiums for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
STATE 1995 1994
---------------------------------------------------------------------- ----- -----
<S> <C> <C>
Florida............................................................... 21.8% 28.9%
Missouri.............................................................. 20.9 10.3
Louisiana............................................................. 9.8 13.7
Illinois.............................................................. 9.8 8.6
Texas................................................................. 7.3 5.8
All others............................................................ 30.4 32.7
----- -----
Total....................................................... 100.0% 100.0%
===== =====
</TABLE>
No other state individually accounted for more than 7% of premium income
during 1995 or 1994.
Distribution. UCLIC's strategy of marketing through financial institutions
and independent general agents allows it to avoid substantial sales management
office expense and to expand its sales efforts without significant development
expense. Because financial institutions and independent general agents usually
offer the products of several insurance companies, UCLIC must continue to
provide products with competitive terms, interest crediting rates, commissions
and service to both policyholders and the selling institutions and independent
general agents. During 1995, UCLIC continued to focus on expanding the
independent general agent share of its distribution network. Of the annuity
contracts sold during 1995, approximately 55% of the total dollar amount were
attributable to sales by independent general agents compared to 46% in 1994.
Reinsurance. UCLIC generally limits the amount of insurance risk that it
assumes with respect to any one insured to $100,000 and for larger policies
follows industry practice of reinsuring that portion of the risk in excess of
established retention limits. UCLIC, however, remains contingently liable for
insurance ceded to reinsurers and remains liable to the policyholder in the
event the reinsurer is unable to meet the obligations assumed under the
reinsurance agreement. Reinsurance is currently ceded primarily to the following
companies: First Capital Life Insurance Company of Louisiana ("First Capital")
(not affiliated with First Capital Holding Company of California), Aetna Life
Insurance Company ("Aetna") Continental Assurance Company ("Continental"),
American United Life Insurance Company ("American United") and Transamerica
Occidental Life Insurance Company ("Transamerica"). American United and
Transamerica are rated "A+" (Superior) by Best at December 31, 1995. Aetna and
Continental are rated "A" (Excellent), and First Capital is rated "B"
(Adequate). In the case of First Capital, the dollar amount of reserve credit
taken by UCLIC is held in trust for the benefit of UCLIC.
Life Insurance and Annuity Reserves. In accordance with applicable
insurance regulations, UCLIC records as liabilities in its statutory financial
statements actuarially determined reserves that are calculated to meet future
obligations under outstanding insurance. The reserves are based on statutorily
recognized methods using prescribed morbidity and mortality tables and interest
rates. Reserves include unearned premiums, premium deposits, claims that have
been reported but are not yet paid, claims that have been incurred but have not
been reported, and claims in the process of settlement. UCLIC reserves satisfy
minimum statutory requirements.
11
<PAGE> 12
The annuity reserves reflected in the Consolidated Financial Statements are
calculated based on generally accepted accounting principles ("GAAP"). As of
December 31, 1995, annuity reserves were $1.4 billion, policy benefit reserves
were $111.2 million, and unearned premium reserves related to credit insurance
were $1.8 million. These reserves are based upon UCLIC's best estimates of
mortality, persistency, expenses and investment income, with appropriate
provisions for adverse statistical deviation and the use of the net level
premium method for all non-interest sensitive products and the retrospective
deposit method for interest-sensitive products. GAAP reserves differ from
statutory reserves due to the use of different assumptions regarding mortality
and interest rates and the introduction of lapse assumptions into the GAAP
reserve calculation. See Note 1 of Notes to Consolidated Financial Statements
for additional information regarding reserve assumptions under GAAP.
Investments. The investment function of UCLIC is overseen by an investment
committee comprised of senior management, with the assistance of outside
investment advisors in the management of certain assets. UCLIC's investment
policy seeks to achieve attractive returns on a low to moderate risk portfolio
of investments. These investments, primarily bonds and mortgage loans, must be
within regulatory constraints to qualify as permitted assets, and within the
yield, risk and maturity limitations established by UCLIC as necessary for
meeting its objectives.
The investment strategy continues to focus on maintaining the percentage of
UCLIC's invested assets committed to commercial and residential mortgages and to
investment grade corporate bonds and mortgage-backed securities.
The following table sets forth, at December 31, 1995, certain information
regarding UCLIC's invested assets:
<TABLE>
<CAPTION>
AMORTIZED PERCENT
COST OF TOTAL
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed Maturity Securities(1)
U.S. Government, government agencies & authorities.................... $ 11,504 .7%
Foreign governments and other......................................... 20,819 1.3
Corporate bonds....................................................... 345,238 21.6
Mortgage-backed....................................................... 778,410 48.8
---------- -----
Total......................................................... 1,155,971 72.4
Mortgage loans on real estate........................................... 345,181 21.6
Short-term investments.................................................. 22,804 1.4
Investment in limited partnerships...................................... 25,594 1.6
Real estate -- investment properties.................................... 22,845 1.4
Policy loans............................................................ 20,291 1.3
Capitalized excess servicing income..................................... 2,469 .2
Common and preferred stocks............................................. 1,012 .1
---------- -----
Total......................................................... $1,596,167 100.0%
========== =====
</TABLE>
---------------
(1) Generally stated at amortized cost adjusted for permanent impairment in
value. Total fair value of fixed maturities at December 31, 1995 was
approximately $1.2 billion, representing net unrealized gain of $43.5
million.
12
<PAGE> 13
As reflected in the following table, the carrying value of UCLIC's
investments classified as investment grade at December 31, 1995 was $1.1 billion
or 94% of the fixed maturity portfolio:
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
AMORTIZED FAIR CARRYING CARRYING
COST VALUE VALUE VALUE
---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment Quality(1)
Aaa.................................... $ 734,721 $ 756,251 $ 756,251 62.9%
Aa..................................... 25,255 26,768 26,768 2.2
A...................................... 227,800 244,562 244,434 20.3
Baa.................................... 101,321 107,447 107,306 9.0
---------- ---------- ---------- -----
Total Investment Grade................. 1,089,097 1,135,028 1,134,759 94.4
Ba and below........................... 21,980 22,093 22,093 1.9
Not rated.............................. 44,894 42,369 44,894 3.7
---------- ---------- ---------- -----
Total Fixed Maturities......... $1,155,971 $1,199,490 $1,201,746 100.0%
========== ========== ========== =====
</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 UCLIC's investment portfolio is invested in
fixed rate, fixed maturity investments, the fair value of these investments is
sensitive to changes in market rates of interest. In a rising interest rate
environment, the fair value of these investments would be expected to decrease
in value. An unanticipated increase in policy surrenders or claims could impact
UCLIC's liquidity and require the sale of certain assets, such as bonds, prior
to their maturity at a loss.
Fixed maturity investments. As of December 31, 1995, the amortized cost of
UCLIC's fixed maturity investments totaled $1.2 billion or approximately 72.4%
of UCLIC's invested assets. The fair value of fixed maturity investments at that
date exceeded the amortized cost by approximately $43.5 million. In accordance
with the provisions of Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 115 ("SFAS 115"), the Company classifies
its securities in one of three categories: "available-for-sale",
"held-to-maturity" or "trading". Securities classified as held-to-maturity are
carried at amortized cost, whereas securities classified as trading securities
or available-for-sale are recorded at fair value. The adjustment, net of
applicable income taxes, for investments classified as available-for-sale is
recorded in "Net unrealized gain (loss) on securities" and is included in
stockholders' equity on the balance sheet and the adjustment for investments
classified as trading is recorded in "Investment income" in the statement of
income. UCLIC may for business or regulatory reasons be required to sell certain
of its investments prior to maturity, and in some cases these sales may be made
at times when the fair value is less than carrying value, thereby resulting in a
loss in the statements of income for financial and statutory reporting purposes.
At December 31, 1995, 48.8% of UCLIC's total invested assets were invested
in mortgage-backed securities. These mortgage-backed securities consist
principally of collateralized mortgage obligations and mortgage-backed
pass-through securities. Mortgage-backed securities generally are collateralized
by mortgages backed by GNMA, FNMA and FHLMC. Only GNMA mortgages are backed by
the full faith and credit of the United States Government. Certain
mortgage-backed securities are subject to significant prepayment risk. In
periods of declining interest rates, mortgages may be repaid more rapidly than
scheduled as individuals refinance higher-rate mortgages to take advantage of
lower interest rates. As a result, holders of mortgage-backed securities may
receive large prepayments on their investments that cannot be reinvested at an
interest rate comparable to the rate on the prepaid mortgage. In addition to
decreased investment yields, earnings could also be affected by capital gains or
losses realized on these prepayments since the carrying value of securities
purchased at a discount or premium may be different than the amount received
upon prepayment. UCLIC has reduced the prepayment risk associated with
mortgage-backed securities by
13
<PAGE> 14
investing in planned amortization class ("PAC") instruments. These instruments
are designed to amortize in a predictable manner by shifting the primary risk of
prepayment of the underlying collateral to other investors. PAC instruments
represented approximately 54% of UCLIC's investments in mortgage-backed
securities at December 31, 1995.
Mortgage loans on real estate. At December 31, 1995, the contractual
balance of UCLIC's portfolio of loans was comprised of $169 million in first
mortgage residential home equity loans and $170 million in first mortgage
commercial real estate loans substantially all of which were originated by the
Company's mortgage lending subsidiaries. Since 1991, UCLIC has limited its
investment in commercial real estate mortgage loans and has from time to time
refinanced commercial mortgage loans sold in commercial mortgage loan
securitization transactions in 1990. The principal balance of loans sold in
these transactions which are scheduled to mature in 1996 is $12.1 million.
During 1995, UCLIC invested approximately $21.3 million in new commercial real
estate loans originated by UCLC and refinanced $18.2 million of existing
commercial real estate mortgage loans. The mortgage loan portfolio of UCLIC is
serviced by UCLC. UCLIC has full credit recourse to UCLC with respect to
substantially all of the residential mortgage loans acquired from such
subsidiary. The servicing of the commercial loan portfolio will be transferred
from UCLC to UCLIC under the terms of the proposed sale of UCLIC by the Company.
See "Life Insurance -- Recent Developments" above.
Historically, UCLIC has purchased on an interim basis substantially all of
the first mortgage home equity loans originated by the Company's mortgage
lending subsidiaries. These loans are typically held by UCLIC for short time
periods (typically no longer than 90 days) and then sold back to the Company's
mortgage lending subsidiaries prior to their sale in securitization
transactions.
Mortgage loans are carried at amortized cost less valuation adjustments for
permanently impaired value where appropriate. Commercial mortgages range in size
up to approximately $1.9 million with an average loan size of approximately $.6
million. At origination, substantially all of the mortgages are on properties
with existing leases rather than on properties in construction or on start-up
properties. The origination of commercial mortgages is subject to underwriting
procedures, including: (i) maximum loan to value ratio of 75% of the property's
appraised value; (ii) specified debt coverage requirements; (iii) on-site
inspections; (iv) third-party appraisals; and (v) personal guarantees of
borrowers. The weighted average interest rate on UCLIC's commercial mortgage
loan portfolio was 9.83% and 10.07% at December 31, 1995 and 1994, respectively.
UCLIC's commercial mortgage portfolio is diversified by property type,
location and borrower. The following table provides information at December 31,
1995 regarding UCLIC's commercial mortgage loans on real estate by property
type, state and contractual maturity.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
-------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial Mortgage Loans by Property Type:
Retail........................................................ $ 74,321 43.9%
Office........................................................ 43,527 25.7
Office and Warehouse.......................................... 38,888 22.9
Other......................................................... 12,775 7.5
-------- -----
Total................................................. $169,511 100.0%
======== =====
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
-------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial Mortgage Loans by State:
Florida....................................................... $ 37,475 22.1%
Georgia....................................................... 32,530 19.2
Colorado...................................................... 21,428 12.6
Virginia...................................................... 13,873 8.2
Tennessee..................................................... 12,316 7.3
Texas......................................................... 9,750 5.8
All Others.................................................... 42,139 24.8
-------- -----
Total................................................. $169,511 100.0%
======== =====
Commercial Mortgage Loans by Contractual Maturity:
1996.......................................................... $ 26,316 15.5%
1997.......................................................... 17,781 10.5
1998.......................................................... 19,633 11.6
1999.......................................................... 16,387 9.7
After 1999.................................................... 89,394 52.7
-------- -----
Total................................................. $169,511 100.0%
======== =====
</TABLE>
At December 31, 1995, UCLIC owned $13.6 million of commercial properties
obtained through foreclosure. For substantially all commercial mortgages which
UCLIC has foreclosed, an independent appraisal was obtained and, if warranted,
UCLIC established a specific reserve based on its judgment as to the amount
which may not be recoverable. As of December 31, 1995, the specific reserve
amounted to $3.3 million.
The Company also establishes a general reserve for all commercial mortgages
where a specific reserve or writedown has not been established. As of December
31, 1995, the general reserve amounted to $5.1 million.
RATINGS
The ability of an insurance company to compete successfully depends in part
on its financial strength, operating performance and claims-paying ability as
rated by A.M. Best Company ("Best") and other rating agencies. UCLIC is
currently rated "A-" (Excellent) by Best. Best's 15 categories of ratings for
insurance companies currently range from "A++" (Superior) to "F" (In
Liquidation). According to Best, an "A" or "A-" rating is assigned to companies
which, in Best's opinion, have achieved excellent overall performance when
compared to the standards of the life insurance industry and generally have
demonstrated a strong ability to meet their obligations to policyholders over a
long period of time. In evaluating a company's statutory financial and operating
performance, Best reviews the company's statutory profitability, leverage and
liquidity, as well as the company's spread of risk, quality and appropriateness
of its reinsurance program, quality and diversification of assets, the adequacy
of its policy reserves and surplus, capital structure and the experience and
competency of its management. Best ratings are based upon factors of concern to
policyholders, agents and intermediaries and are not directed toward the
protection of investors.
On October 24, 1995, Duff & Phelps Credit Rating Co. ("Duff & Phelps")
placed the 'A+' (Single-A-Plus) claims paying ability rating of UCLIC on Rating
Watch -- Uncertain. This rating action is based upon the announcement by the
Company that it was evaluating strategic alternatives regarding UCLIC, including
the possible sale of UCLIC. Duff and Phelps reported that the claims paying
ability rating would remain on Rating Watch -- Uncertain until more information
becomes known about UCLIC's ultimate position within the Company's organization
or another organization. During 1995, Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., revised the rating scale used in assigning its
qualified solvency ratings of insurance companies and, as a result, revised its
rating assigned to UCLIC from "BBq" to "Aq". The Company believes that UCLIC's
present ratings will enable it to continue to compete successfully. Ratings
15
<PAGE> 16
held by UCLIC are important to maintaining public confidence in UCLIC and its
ability to market its annuity products. A lower rating could materially and
adversely affect UCLIC's ability to market its products. particularly the sale
of annuities through financial institutions and could increase the surrender of
its annuity policies. Both of these consequences could, depending upon the
extent thereof, have a materially adverse effect on the Company's liquidity and,
under certain circumstances, net income.
OTHER OPERATIONS
The Company has developed an office park that includes its home office
building, which has approximately 94,000 square feet. In addition to its home
office building completed in 1981, the Company constructed a 200,000 square foot
office building in the park in 1984 at a cost of $12.8 million. This building
was approximately 100% leased at December 31, 1995. During 1990, construction of
a 100,000 square foot office building in the office park was completed by a
partnership in which United Companies Realty and Development Co., Inc. ("UC
Realty"), a wholly-owned subsidiary of the Company, is a general partner. The
office building was 94% leased at December 31, 1995. During 1995, UC Realty
completed construction of a 60,000 square feet office building on property also
located in the office park. The Company uses approximately 30,000 square feet of
this building and leases the remainder.
The Company also engages in telecommunications business and property
management with respect to its office park and a homeowners insurance agency,
none of which are material to its operations.
DISCONTINUED OPERATIONS
For a discussion of Discontinued Operations see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
"Discontinued Operations" and Note 12 in the Notes to Consolidated Financial
Statements.
GOVERNMENT REGULATION AND LEGISLATION
General
The Company's mortgage and insurance businesses are subject to extensive
regulation, supervision and licensing by federal and state authorities.
Regulated matters include, without limitation, maximum interest rates and fees
which may be charged by the Company, disclosures in connection with loan
originations, credit reporting requirements, servicing requirements, insurance
premium rates and coverage issues, federal and state taxation, and multiple
qualification and licensing requirements for doing business in various
jurisdictions. While the Company believes that it maintains all requisite
licenses, permits and approvals and is in compliance in all material respects
with applicable federal and state regulations, there can be no assurance that
more restrictive laws or regulations will not be adopted which could make
compliance in the future more difficult and/or more expensive. Legislative and
regulatory proposals are frequently advanced which, if adopted, could adversely
affect the Company's profitability or the manner in which the Company conducts
its activities.
Mortgage
The Company's mortgage operations are subject to extensive regulation,
supervision and licensing by federal and state authorities. Regulated matters
include, without limitation, maximum interest rates and fees which may be
charged by the Company, disclosure in connection with loan originations, credit
reporting requirements, servicing requirements, federal and state taxation, and
multiple qualification and licensing requirements for doing business in various
jurisdictions.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. The
Company's activities as a lender are also subject to various federal laws
including the Truth-in-Lending Act, the Real Estate Settlement Procedures Act,
the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Fair
Credit Reporting Act.
16
<PAGE> 17
In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
There are currently proposed various laws, rules and regulations which, if
adopted, could impact the Company. There can be no assurance that these proposed
laws, rules and regulations, or other such laws, rules or regulations, will not
be adopted in the future which could make compliance much more difficult or
expensive, restrict the Company's ability to originate, broker or sell loans,
further limit or restrict the amount of commissions, interest and other charges
earned on loans originated or sold by the Company, or otherwise adversely affect
the business or prospects of the Company.
Life Insurance
General Regulation. UCLIC is subject to regulation by the State of
Louisiana, its state of domicile, and the other states in which it transacts
business. The laws of such states are designed for the protection of
policyholders rather than securityholders. UCLIC is a member of a holding
company system in Louisiana. All transactions within a holding company system
affecting insurers must be both reasonable in relation to its outstanding
liabilities and adequate for its needs. State laws also require prior notice or
regulatory agency approval of changes in control of an insurer or its holding
company and of material intercorporate transfers of assets within the holding
company structure. Generally, under insurance holding company statutes, a state
insurance authority must approve in advance the direct or indirect acquisition
of 10% or more of the voting securities of an insurance company chartered in its
state.
The laws of the various states establish regulatory agencies with broad
administrative powers to approve policy forms, grant and revoke licenses to
transact business, regulate trade practices, license agents, and prescribe the
type and amount of investments permitted. Insurance companies are required to
file detailed annual statements with the state insurance regulators in each of
the states in which they do business, and their business and accounts are
subject to examination by such agencies at any time. In addition, insurance
regulators periodically examine the insurer's financial condition, adherence to
statutory accounting practices, and compliance with insurance department rules
and regulations.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three years) of the books, records and accounts of insurance companies domiciled
in their states. Such examinations are generally conducted in cooperation with
the departments of two or three other states under guidelines promulgated by the
National Association of Insurance Commissioners ("NAIC"). UCLIC's last
examination occurred during 1994 for the three year period ended December 31,
1993. Final reports issued by the Louisiana Commissioner of Insurance did not
raise any significant issues or adjustments.
Regulation at Federal Level. Although the federal government generally does
not directly regulate the insurance business, federal initiatives often have an
impact on the business in a variety of ways. Current and proposed federal
measures that may significantly affect the insurance business include
limitations on antitrust immunity, minimum solvency requirements and the removal
of barriers restricting banks from engaging in the insurance and mutual fund
business.
Congress has from time to time in the past considered possible legislation
that would adversely affect the federal income tax treatment of certain annuity
products offered by UCLIC. There can be no assurance that future tax legislation
will not contain provisions that may result in adverse effects on UCLIC's
products.
COMPETITION
As a marketer of credit and annuity products, the Company faces intense
competition. Traditional competitors in the financial services business include
other mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Competitors in the
annuity business include an increasing number of insurance companies which have
begun to offer annuity products.
17
<PAGE> 18
Many of these competitors in the financial services and annuity business are
substantially larger and have more capital and other resources than the Company.
Competition can take many forms including convenience in obtaining a loan or
annuity, customer service, marketing and distribution channels and interest or
crediting rates. In addition, the current level of gains realized by the Company
and its existing competitors on the sale of its and their non-conventional loans
could attract additional competitors into this market with the possible effect
of lowering gains on future loan sales as the result of increased loan
origination competition.
ITEM 2. PROPERTIES
The Company's executive offices are located in its home office building in
Baton Rouge, Louisiana. The Company occupies all of its home office building
which has approximately 94,000 square feet. UCLIC and the executive offices of
the Company's mortgage lending subsidiaries are located at the Company's home
office building and adjacent investment property. At December 31, 1995, the
retail division of the Company's mortgage lending operations were conducted in
39 states from 5 locations owned by the Company in 5 cities and from 145
additional leased offices in 142 cities. The offices owned or leased range in
size from approximately 600 square feet to 3,200 square feet; leases expire from
1996 to 2001, excluding renewal options. During 1995, aggregate annual rental
expense for leased office space was approximately $3.9 million. Management
believes that the properties are adequately maintained and insured, and
satisfactorily meet the requirements of the business conducted therein.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business is such that it is routinely involved
in litigation and is a party to or subject to other items of pending or
threatened litigation. Although the outcome of certain of these matters cannot
be predicted, management of the Company believes, based upon information
currently available, that the resolution of these various matters will not
result in any material adverse effect on its consolidated financial condition.
The remaining affairs of the Company's subsidiary, Foster Mortgage
Corporation ("FMC"), a discontinued operation, are now being concluded under the
supervision of a bankruptcy court. On December 21, 1993, the institutional
lenders under FMC's primary credit facility (the "FMC Institutional Lenders")
filed a petition in the U.S. bankruptcy court to cause the remaining affairs of
FMC to be concluded under the supervision of the bankruptcy court. The FMC
Institutional Lenders filed and the bankruptcy court approved a plan of
liquidation for FMC providing for the appointment of a trustee selected by the
FMC Institutional Lenders. The FMC Institutional Lenders allege that FMC has
certain claims against the Company, including a claim with respect to the
Company's alleged failure to remit all sums due FMC regarding federal income
taxes under a tax agreement among the Company and its subsidiaries, including
FMC, estimated by the FMC Institutional Lenders to range from $2.1 million to
$29 million. FMC and the Company executed, subject to the approval of the
bankruptcy court, a settlement agreement relating to payments between FMC and
the Company in connection with the federal income tax benefits resulting from
FMC's losses and to certain prior intercompany payments between FMC and the
Company. The settlement agreement included a release by FMC in favor of the
Company of any and all claims relating to federal income taxes. The FMC
Institutional Lenders opposed the proposed settlement agreement. At the
conclusion of a hearing on the proposed settlement on August 18, 1994, the
bankruptcy court approved the portion of the settlement providing for a net
payment by the Company of $1.65 million to FMC in satisfaction of the federal
income tax benefits resulting from FMC's losses and the release of any claims
regarding federal income taxes. The bankruptcy court declined to approve the
other portion of the proposed settlement relating to payments received by the
Company from FMC within twelve months of the bankruptcy filing. If the Company
were required to refund such payments, the Company has estimated the potential
additional loss to be $1.9 million, net of tax benefits. The decision of the
bankruptcy court on the settlement was appealed by the FMC Institutional Lenders
to the U.S. District Court which affirmed the bankruptcy court's decision. The
FMC Institutional Lenders then appealed this decision to the U.S. Fifth Circuit
Court of Appeals. In a decision rendered on November 9, 1995, the U.S. Fifth
Circuit Court of Appeals reversed the district court, vacated the settlement
between FMC and the Company and remanded the matter for further proceedings. The
trustee under the plan of
18
<PAGE> 19
liquidation has filed an adversary proceeding in the bankruptcy proceedings
against the Company seeking avoidance of alleged preferential payments totaling
$3.72 million and has also instituted a suit in federal court against the
Company alleging claims under the tax agreement estimated to range from $2
million to $29 million. Management of the Company does not believe that any
additional amounts are owed by the Company to FMC or the trustee and intends to
vigorously contest the claims which have been brought against it for such
amounts by the trustee under the plan of liquidation. The Company did not
guarantee any debt of FMC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Common Stock Prices and Dividends
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System/National Stock Market ("the Nasdaq
Stock Market") under the symbol "UCFC". The following table sets forth for the
periods indicated the high and low sale prices of the Company's Common Stock as
reported on the National Stock Market and the per share cash dividends declared.
All amounts have been adjusted for stock dividends.
<TABLE>
<CAPTION>
SALES PRICES
--------------------- CASH
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1995
First Quarter................................... $18.250 $11.375 $ .05
Second Quarter.................................. 23.375 11.375 .05
Third Quarter(1)................................ 36.750 22.125 .05
Fourth Quarter.................................. 37.375 25.500 .05
-------
Total................................... $ .20
=======
1994
First Quarter................................... $21.821 $17.161 $ .0455
Second Quarter.................................. 19.093 14.320 .0455
Third Quarter................................... 20.116 14.433 .0455
Fourth Quarter (2).............................. 15.911 11.000 .0455
-------
Total................................... $ .1820
=======
</TABLE>
---------------
(1) On August 23, 1995, the Company announced a 100% Common Stock dividend
payable on October 20, 1995, to stockholders of record on October 9, 1995.
(2) On October 26, 1994, the Company announced a 10% Common Stock dividend
payable on January 10, 1995, to stockholders of record on December 22, 1994.
The Company has declared and paid regular quarterly cash dividends on its
Common Stock since 1974. While the Company intends to continue to pay regular
quarterly cash dividends on its Common Stock, its ability to do so will be
subject to its earnings, financial condition, capital and regulatory
requirements, credit facility restrictions and such other factors as the
Company's Board of Directors may consider relevant. (See Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.)
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF SHAREHOLDERS
TITLE OF CLASS AS OF MARCH 12, 1996
------------------------------ ----------------------------------
<S> <C>
Common Stock, $2.00 par value 3,084
</TABLE>
20
<PAGE> 21
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)(3)
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest, charges and fees
on loans.................... $ 128,665 $ 111,994 $ 92,737 $ 89,780 $ 88,078
Loan sale gains................ 142,156 86,735 59,441 33,475 29,627
Investment income.............. 104,062 84,666 75,527 65,548 61,828
Loan servicing income.......... 14,559 19,926 13,624 13,616 11,594
Net insurance premiums......... 8,508 11,373 18,684 22,860 36,269
---------- ---------- ---------- ---------- ----------
Total revenues................. 397,950 314,694 260,013 225,279 227,396
Total expenses................. 283,186 230,620 216,952 204,664 219,580
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income
taxes....................... 114,764 84,074 43,061 20,615 7,816
Provision for income taxes..... 41,805 29,492 14,744 7,601 3,164
---------- ---------- ---------- ---------- ----------
Income from continuing
operations.................. 72,959 54,582 28,317 13,014 4,652
Income (loss) from discontinued
operations.................. (3,491) (5,048) (16,742) (2,768) 6,824
---------- ---------- ---------- ---------- ----------
Net income............. $ 69,468 $ 49,534 $ 11,575 $ 10,246 $ 11,476
========== ========== ========== ========== ==========
Per Share Data (4):
Primary:
Income from continuing
operations................ $ 2.39 $ 1.92 $ 1.26 $ .66 $ .24
Income (loss) from
discontinued operations... (.11) (.18) (.75) (.14) .34
---------- ---------- ---------- ---------- ----------
Net income............. $ 2.28 $ 1.74 $ .51 $ .52 $ .58
========== ========== ========== ========== ==========
Fully Diluted:
Income from continuing
operations................ $ 2.36 $ 1.92 $ 1.20 $ .66 $ .24
Income (loss) from
discontinued operations... (.11) (.18) (.71) (.14) .34
---------- ---------- ---------- ---------- ----------
Net income............. $ 2.25 $ 1.74 $ .49 $ .52 $ .58
========== ========== ========== ========== ==========
Weighted average shares
outstanding
Primary..................... 30,501 28,490 22,208 19,834 19,766
Fully diluted............... 30,903 28,490 23,706 19,834 19,766
Cash dividends................. $ .20 $ .1818 $ .1546 $ .1364 $ .1278
Stockholders' equity --
year end (2)................ $ 10.52 $ 5.67 $ 5.73 $ 4.85 $ 4.47
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data -- Year End:
Investment
securities -- net(2)........ $1,218,353 $1,044,842 $ 902,091 $ 759,354 $ 376,966
Loans -- net................... 413,574 369,382 517,720 502,229 604,942
Capitalized excess servicing
income...................... 283,454 179,065 113,192 72,062 53,942
Deferred policy acquisition
costs....................... 90,703 91,915 83,495 80,007 78,599
Total assets................... 2,366,886 1,978,255 1,817,153 1,627,900 1,492,816
Annuity reserves............... 1,417,803 1,425,973 1,294,983 1,147,555 1,014,649
Notes payable.................. 255,756 213,668 155,500 206,850 200,447
Total liabilities.............. 1,984,935 1,823,005 1,663,785 1,531,642 1,404,382
Stockholders' equity(2)........ 381,951 155,250 153,368 96,258 88,434
Other Data:
Mortgage
Total loan production....... $1,562,788 $ 913,319 $ 545,229 $ 321,198 $ 328,184
Home equity loan
production................ 1,541,537 908,821 539,868 301,234 253,613
Average home equity loan
size...................... 49 41 39 28 24
Home equity loans
serviced -- year end...... 2,701,481 1,683,698 1,125,139 819,448 703,922
Total loans serviced --
year end.................. 3,012,164 2,032,405 1,568,781 1,367,822 1,344,388
Average coupon on home
equity loans produced..... 11.6% 11.7% 11.8% 13.4% N/A
Loan origination fees as %
of home equity loans...... 4.4% 5.9% 7.0% 7.9% 8.2%
Weighted average interest
spread retained on home
equity loans sold......... 4.98% 4.49% 6.06% 4.56% 4.42%
Life Insurance
Annuity sales............... $ 135,534 $ 249,737 $ 207,682 $ 187,050 $ 175,796
Net interest spread on
annuities................. 2.37% 2.73% 2.20% 1.84% 1.88%
Investment grade bonds as %
of invested assets........ 68.2% 69.6% 59.6% 54.3% 25.1%
</TABLE>
---------------
(1) On April 10, 1995, the Company decided to dispose of its investment in its
wholly-owned subsidiary, United General Title Insurance Company ("UGTIC"),
and on May 1, 1995 approved a formal plan of disposal. Previously, on May 7,
1993, the Company announced its decision to dispose of the net assets and
operations of Foster Mortgage Corporation ("FMC"), a wholly-owned subsidiary
of the Company. The operations of UGTIC and FMC have been reclassified as
discontinued operations and the prior years' financial statements of the
Company included herewith have been restated accordingly.
(2) During the first quarter of 1994, the Company implemented the provisions of
FASB Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which
revised the method of accounting for certain of the Company's investments.
Prior to adoption of SFAS 115, the Company reported its investments in fixed
income investments at amortized cost, adjusted for declines in value
considered to be other than temporary. SFAS 115 requires the classification
of securities in one of three categories: "available-for-sale",
"held-to-maturity" or "trading securities". Securities classified as
held-to-maturity are carried at amortized cost, whereas securities
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
22
<PAGE> 23
applicable income taxes, for investments classified as available-for-sale
is recorded in "Net unrealized loss on securities" and is included in
Stockholders' equity on the balance sheet and the adjustment for
investments classified as trading is recorded in "Investment income" in the
statement of income. In accordance with the provisions of SFAS 115, prior
year investments were not restated.
(3) During the third quarter of 1995, the Company implemented, on a prospective
basis, the provisions of FASB Statement of Financial Accounting Standards
No. 122 ("SFAS 122") which revised the method of accounting for mortgage
servicing rights on loans originated by the Company. SFAS requires that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others that have been acquired through either the
purchase or origination of such loans. Prior to the adoption of SFAS 122,
the Company recognized late charges and other ancillary income when
collected and charged costs to service mortgage loans when incurred. Net
income for 1995 was increased by $3.9 million or $.13 per share on a fully
diluted basis as the result of the Company's implementation of SFAS 122.
The amount capitalized is included in "Other assets".
(4) All share and per share data have been adjusted to reflect stock dividends.
23
<PAGE> 24
SELECTED INCOME STATEMENT DATA BY SEGMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage
Interest, charges and fees on
loans.......................... $ 84,496 $ 63,905 $ 41,249 $ 31,998 $ 34,073
Investment income................. 7,227 2,762 1,054 696 1,137
Loan sale gains................... 142,156 86,289 59,220 29,679 15,571
Loan servicing income............. 19,219 24,645 19,116 18,289 14,209
-------- -------- -------- -------- --------
Total revenues.................... 253,098 177,601 120,639 80,662 64,990
Total expenses.................... 145,425 96,446 74,344 56,661 60,592
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes............ 107,673 81,155 46,295 24,001 4,398
-------- -------- -------- -------- --------
Life insurance
Interest, charges and fees on
loans.......................... 38,077 43,647 45,561 51,396 51,585
Investment income................. 99,327 83,614 75,594 67,287 63,285
Net insurance premiums............ 8,508 11,373 18,684 22,860 36,269
Loan sale gains................... -- -- -- 3,310 --
Loan servicing income............. (1,427) (505) 340 673 1,645
-------- -------- -------- -------- --------
Total revenues.................... 144,485 138,129 140,179 145,526 152,784
Total expenses.................... 132,386 129,049 137,544 140,061 150,707
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes............ 12,099 9,080 2,635 5,465 2,077
-------- -------- -------- -------- --------
Corporate, other operations and
eliminations
Income (loss) from continuing
operations before income
taxes.......................... (5,008) (6,161) (5,869) (8,851) 1,341
-------- -------- -------- -------- --------
Consolidated
Income from continuing operations
before income taxes............ 114,764 84,074 43,061 20,615 7,816
Provision for income taxes........ 41,805 29,492 14,744 7,601 3,164
-------- -------- -------- -------- --------
Income from continuing
operations..................... 72,959 54,582 28,317 13,014 4,652
Income (loss) from discontinued
operations..................... (3,491) (5,048) (16,742) (2,768) 6,824
-------- -------- -------- -------- --------
Net income........................ $ 69,468 $ 49,534 $ 11,575 $ 10,246 $ 11,476
======== ======== ======== ======== ========
</TABLE>
24
<PAGE> 25
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,
1995 1994 1993
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage........................................... $ 107,673 $ 81,155 $ 46,295
Life insurance..................................... 12,099 9,080 2,635
Corporate, other operations and eliminations....... (5,008) (6,161) (5,869)
---------- -------- --------
Total.................................... $ 114,764 $ 84,074 $ 43,061
========== ======== ========
Home equity loan production........................ $1,541,537 $908,821 $539,868
Home equity loans sold............................. 1,471,868 977,653 462,873
Weighted average interest spread retained on home
equity loans sold................................ 4.98% 4.49% 6.06%
</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 production (by
origination or purchase), sale and servicing of first mortgage,
non-conventional, home equity loans. In the fourth quarter of 1995, the Company
expanded its lending operations to include additional manufactured housing loan
products. Fundamental to the profitability and funding of the Company's mortgage
operations is the sale of loans with servicing rights retained. The majority of
the revenue of the mortgage segment is derived from gain recognized on the sale
of loans and the recognition of net loan fees at the time of sale of the loans.
Net loan fees on loans owned by the Company are recognized over the lives of the
loans.
Prior to 1991, the Company had either held the home equity loans it
originated in its own portfolio or sold them to financial institutions. Since
the fourth quarter of 1991, the Company has pooled and sold large numbers of
loans in mortgage-backed securitization transactions. In late 1991 and 1992,
this was accomplished primarily through private placement transactions. In 1993,
the Company began selling its loans in public securitization transactions
through its own shelf registration statement and sold publicly $1.5 billion,
$973 million and $451 million of home equity loans during 1995, 1994 and 1993,
respectively.
The Company's mortgage operations are interest rate sensitive and,
therefore, fluctuations in and the level of interest rates can have a variety of
effects on the Company's profitability. In particular, significant changes in
interest rates may impact the volume of loans produced, and will influence the
funding costs of such production and the amount of gain recognized on loans sold
in the secondary market. During periods of declining interest rates the mortgage
operations will generally experience an increase in profitability as the
interest spread should widen both on loans held by the Company as an investment
and on loans sold in the secondary market.
During 1993, the positive effect on income of the mortgage operations
resulted primarily from a wider interest margin retained on loans sold than
experienced in 1994 and 1995. The weighted average interest spread on loans sold
to third parties (the difference between the stated rate on the loan and the
rate paid to purchasers, less recurring fees) was 6.06% in 1993, declined to
4.49% in 1994 and increased to 4.98% in 1995 due to changes in the interest rate
environment. The weighted average interest spread on loans sold is determined
without regard to credit losses, which are provided for separately by the
Company. The lower interest spread on loans sold during 1994 and 1995 was
somewhat offset by an increased volume of loans produced and sold.
25
<PAGE> 26
Although historically a lower interest rate environment has not resulted in
a significant increase in the level of prepayment of loans originated and
serviced by the Company, a significant and sustained reduction in interest rates
could cause prepayments to increase, and thereby result in a contraction of the
amount of loans owned and serviced and an accelerated amortization of
capitalized excess servicing income. Increased prepayments reduce the time
period during which the Company receives excess servicing income and other
servicing income with respect to prepaid loans. Increased amortization of
capitalized excess servicing income is a current charge to earnings. Likewise,
if delinquencies or liquidations were to occur sooner in the portfolio of loans
sold by the Company and/or with greater frequency than was initially assumed,
capitalized excess servicing income amortization would occur more quickly than
originally anticipated, which would have an adverse effect on servicing income
in the period of such adjustment. In contrast, an increase in the level of
interest rates for an extended period of time could adversely affect the ability
of the Company to originate loans, as well as the profitability of the loan
origination program, by increasing the cost of funding and reducing the interest
spread on loans retained and loans sold. If actual prepayments with respect to
loans sold occur more slowly than estimated at the time of sale, total income
would exceed previously estimated amounts; however, no adjustments would be made
to capitalized excess servicing income on the Company's consolidated balance
sheet as such income would be recognized prospectively. (For further discussion
of loan sale gains and capitalized excess servicing income see Note 1.2 to Notes
to the Consolidated Financial Statements.)
LIFE INSURANCE
United Companies Life Insurance Company ("UCLIC"), the Company's
wholly-owned life insurance subsidiary, has focused its efforts on expanding its
annuity product line and its distribution network of financial institutions and
independent general agents. On February 2, 1996, the Company entered into an
agreement to sell all of the outstanding capital stock of UCLIC. The proposed
sale is subject to approval of the Company's shareholders and regulatory
authorities and the satisfaction of certain other conditions. See Note 13 to
Notes to Consolidated Financial Statements. In 1995, annuity sales were $136
million compared to $250 million in 1994. The Company believes that the decrease
in annuity sales in 1995 is due in part to the interest rate environment,
particularly the relative relationships between short term and intermediate term
interest rates, and to the focus of UCLIC's resources on development of its
variable annuity product. In addition, a financial institution which produced
approximately 10% of UCLIC's annuity sales in 1994 discontinued the sale of
annuities for UCLIC in 1995 subsequent to the merger of such financial
institution. UCLIC focused in 1994 and 1995 on expanding the independent general
agents share of its distribution network, which agents sold approximately 55% of
the total dollar amount of annuities written in 1995 compared to 46% in 1994 and
30% in 1993. As with the Company's mortgage operation, fluctuations in and the
level of interest rates also impacts the operations of UCLIC. The average spread
on the annuity business was 2.20%, 2.73% and $2.37% during 1993, 1994 and 1995,
respectively. Surrenders of annuity policies increased in 1994 and 1995 compared
to 1993 due in part to the continued reduction in interest crediting rates on
new and existing annuity contracts and to a rising interest rate environment and
an increase in the number of annuity contracts which were beyond the surrender
penalty period.
At December 31, 1995, the weighted average rating of the publicly traded
bond portfolio was "AA", the amortized cost of assets allocated to investments
in investment grade fixed maturity securities was $355.6 million or 30.8% of the
portfolio and in investment grade mortgage-backed securities was $733.5 million
or 63.5% of the portfolio. At December 31, 1995 the amortized cost of UCLIC's
holdings of non-investment grade bonds was $22.0 million or 1.9% of the
portfolio. UCLIC's invested assets also include residential and commercial real
estate mortgages originated and serviced by United Companies Lending Corporation
("UCLC"); however, the percentage of assets invested in mortgage loans in recent
years has been reduced primarily as the result of their disfavor with insurance
regulatory authorities and rating agencies.
The annuities sold by UCLIC are monetary in nature and therefore sensitive
to changes in the interest rate environment. Profitability of UCLIC is directly
affected by its ability to invest annuity premiums at yields above the interest
crediting rates on the related policy liabilities. One of the primary financial
objectives of UCLIC is to effectively manage this interest spread over time in
changing interest rate environments. This is
26
<PAGE> 27
accomplished in part by adjusting the interest crediting rate paid on its
existing and new annuity policies. During periods of declining interest rates,
the fair value of UCLIC's investments, primarily fixed maturity investments,
increases; however, yields earned on investments made during such periods
decline. In contrast, during periods of rising interest rates the fair value of
the investment portfolio declines and the risk of policy surrenders increases.
An unanticipated increase in surrenders would impact the Company's liquidity,
potentially requiring the sale of certain investments prior to their maturities,
which may be at a loss.
Reserves for annuity policies constitute the Company's primary liabilities.
The duration of these liabilities is affected by a number of factors, including
interest rates, surrender penalties, ratings, public confidence in the insurance
industry generally and in UCLIC specifically, governmental regulations and tax
laws. Since insurance commissions incurred at the origination of annuity
policies are generally deferred and recognized over the estimated life of the
policies, any unexpected increase in surrenders of annuity contracts would
require more rapid recognition of these expenses, thereby adversely impacting
profitability.
DISCONTINUED OPERATIONS
United General Title Insurance Company. On April 10, 1995, the Company made
a decision to dispose of its investment in United General Title Insurance
Company ("UGTIC"), a wholly owned subsidiary of the Company, and, on May 1,
1995, approved a formal plan of disposal. The decision to dispose of UGTIC was
independent of the consummation of the sale thereof pursuant to the definitive
stock sale agreement signed on August 11, 1995. As a result, the operations of
UGTIC have been classified as discontinued operations, and, accordingly, the
consolidated financial statements and the related notes of the Company segregate
continuing and discontinued operations. The sale was concluded on February 29,
1996.
The definitive stock sale agreement provided for the sale of 100% of the
stock of UGTIC and contains a provision making the Company liable to UGTIC for
claims from defalcations and fraud losses incurred by UGTIC which are unknown
and occur prior to closing and are discovered within 24 months thereafter. The
Company is also liable, up to $4.2 million, for policy claims paid over a ten
year period after closing that exceed certain specified levels. The Company
recorded a loss from discontinued operations (net of income tax benefit) of $3.5
million in 1995 in connection with the sale of UGTIC.
UGTIC was formed in 1983 in part to compliment the Company's mortgage
operations; however, underwriting of affiliated transactions represented only
approximately 3% of UGTIC's business in 1994 and 1995. At December 31, 1995
UGTIC was licensed in 29 states, was represented by approximately 948
independent general agents and had no direct operations. Key markets for UGTIC
are Colorado, Louisiana, Florida and California. During 1995, 1994 and 1993,
title insurance premiums were $37.0 million, $44.7 million and $24.4 million,
respectively. During 1995 and 1994, UGTIC experienced a net loss of $2.0 million
and $5.0 million, respectively, compared to net income of $.8 million in 1993.
Operations in 1994 suffered severely as the result of claims related to agency
defalcations. In addition to the incurred losses, the profitability of UGTIC in
1994 was negatively impacted by a $3.8 million increase in its reserve for
policy losses.
Foster Mortgage Corporation
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As of November 30, 1993, the servicing rights
owned by FMC, which constituted substantially all of its assets, were sold. On
December 21, 1993, the institutional lenders under FMC's primary credit facility
(the "FMC Institutional Lenders") filed a petition in the U.S. bankruptcy court
to cause the remaining affairs of FMC to be concluded under the supervision of
the bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy
court approved a plan of liquidation for FMC providing for the appointment of a
trustee selected by the FMC Institutional Lenders. The FMC Institutional Lenders
allege that FMC has certain claims against the Company, including a claim with
respect to the Company's alleged failure to remit all sums due FMC regarding
federal income taxes under a tax agreement among the Company and its
subsidiaries, including FMC, estimated by the FMC Institutional Lenders to range
from $2.1 million to $29 million. FMC and the Company executed, subject to the
approval of the bankruptcy court, a settlement agreement relating to payments
between FMC and the Company in connection with the federal income tax benefits
resulting
27
<PAGE> 28
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 bankruptcy court declined to approve the
other portion of the proposed settlement relating to payments received by the
Company from FMC within twelve months of the bankruptcy filing. If the Company
were required to refund such payments, the Company has estimated the potential
additional loss to be $1.9 million, net of tax benefits. The decision of the
bankruptcy court on the settlement was appealed by the FMC Institutional Lenders
to the U.S. District Court which affirmed the bankruptcy court's decision. The
FMC Institutional Lenders then appealed this decision to the U.S. Fifth Circuit
Court of Appeals. In a decision rendered on November 9, 1995, the U.S. Fifth
Circuit Court of Appeals reversed the district court, vacated the settlement
between FMC and the Company and remanded the matter for further proceedings. The
trustee under the plan of liquidation has filed an adversary proceeding in the
bankruptcy proceedings against the Company seeking avoidance of alleged
preferential payments totaling $3.72 million and has also instituted a suit in
federal court against the Company alleging claims under the tax agreement
estimated to range from $2 million to $29 million. Management of the Company
does not believe that any additional amounts are owed by the Company to FMC or
the trustee and intends to vigorously contest the claims which have been brought
against it for such amounts by the trustee under the plan of liquidation. The
Company did not guarantee any debt of FMC.
1995, 1994 AND 1993 RESULTS OF OPERATION
Net income for 1995 was $69.5 million ($2.25 per share based on 30.9
million weighted average shares outstanding) compared to $49.5 million for 1994
($1.74 per share based on 28.5 million weighted average shares outstanding) and
$11.6 million for 1993 ($.49 per share based on 23.7 million weighted average
shares outstanding). The increase in net income in 1995 resulted primarily from
an increase in the amount of loans sold and the gain and fees recognized in
connection therewith. As previously discussed in "Discontinued operations", net
income for 1995, 1994 and 1993 was reduced by losses of $3.5 million, $5.0
million and $16.7 million recognized in connection with the Company's decisions
to divest United General Title Insurance Company and Foster Mortgage
Corporation.
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenues...................................... $397,950 $314,694 $260,013
Total expenses...................................... 283,186 230,620 216,952
Income from continuing operations before income
taxes............................................. 114,764 84,074 43,061
Income from continuing operations................... 72,959 54,582 28,317
</TABLE>
28
<PAGE> 29
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the years ended December 31, 1995, 1994
and 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest, charges and fees on loans................. $128,665 $111,994 $ 92,737
Loan sale gains..................................... 142,156 86,735 59,441
Investment income................................... 104,062 84,666 75,527
Loan servicing income............................... 14,559 19,926 13,624
Net insurance premiums.............................. 8,508 11,373 18,684
-------- -------- --------
Total..................................... $397,950 $314,694 $260,013
======== ======== ========
</TABLE>
Interest, charges and fees on loans increased $16.7 million and $19.3
million for 1995 and 1994, respectively. This line item includes interest on
mortgage loans owned by the mortgage and insurance divisions and loan
origination fees earned by the mortgage division. Loan origination fees in
excess of direct origination costs on each loan held by the Company are
recognized over the life of the loan or earlier at the time of sale of the loan
to a third party. During 1995, 1994 and 1993, the Company sold approximately
$1.5 billion, $978 million and $463 million, respectively, in home equity loans
and recognized approximately $36.0 million, $32.5 million and $18.9 million,
respectively, in net loan origination fees (which relate primarily to fixed rate
retail production) in connection with these sales.
The following table presents the composition of interest, charges and fees
on loans for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan origination fees................................ $ 68,442 $ 56,576 $35,987
Mortgage loan interest............................... 47,185 47,996 51,763
Other loan income.................................... 13,038 7,422 4,987
-------- -------- -------
Total.............................................. $128,665 $111,994 $92,737
======== ======== =======
</TABLE>
The Company estimates that nonaccrual loans reduced mortgage loan interest
for 1995, 1994 and 1993 by approximately $13.3 million, $10.3 million and $9.5
million, respectively. During 1995 the average amount of nonaccrual loans owned
by the Company was $21.6 million compared to $25.5 million for 1994 and $31.7
million for 1993. In addition, the average balance of loans serviced for third
parties which were on a nonaccrual basis or in foreclosure was $83.1 million
during 1995, compared to $55.6 million and $43.4 million during 1994 and 1993,
respectively, representing 3.9%, 4.1% and 4.5%, respectively, of the average
amount of loans serviced for third parties. The Company is generally obligated
to advance interest on delinquent loans to the investor or holder of the
mortgage-backed security, as the case may be, at the pass-through rate until
satisfaction of the note, liquidation of the collateral or charge off of the
delinquent loan. At December 31, 1995 the Company owned approximately $7.2
million of commercial loans which were on an accrual status, but which the
Company considers as potential problem loans, compared to $7.8 million and $8.1
million at December 31, 1994 and 1993, respectively. The Company evaluates each
of these commercial loans to estimate its risk of loss in the investment and
provides for such loss through a charge to earnings.
Loan sale gains were $142.2 million, $86.7 million and $59.4 million in
1995, 1994 and 1993, respectively. Loan sale gains approximate the present value
for the estimated lives of the loans of the excess of the contractual rates on
the loans sold over the sum of the pass-through rate paid to the buyer, a normal
servicing fee, a trustee fee, a surety bond fee, if any, in mortgage-backed
securitization transactions, and an estimate of future credit losses. The
increase in the amount of loan sale gains was due primarily to a $494 million
and a $515 million increase in the amount of loans sold during 1995 and 1994,
respectively. Excess servicing income retained by the Company (i.e., the stated
interest rate on the loan less the pass-through rate and the normal
29
<PAGE> 30
servicing fee and other applicable recurring fees) decreased in 1994 compared to
1993 but increased in 1995 compared to 1994. Interest spread retained by the
Company on loans sold includes the normal servicing fee. During 1994, guidelines
were established which defined an industry accepted "normal servicing fee" as 50
basis points for servicing "B" and "C" quality home equity loans, such as those
originated by the Company. As the result of this industry data, the Company,
effective July 1, 1994, implemented a servicing fee rate in its loan
securitization transactions of 50 basis points. This resulted in an increase in
the amount of loan sale gain recognized on the home equity loans sold compared
to previous securitization transactions which included a servicing fee rate of
75 basis points. In addition, as further discussed in Note 1.11, during the
third quarter of 1995, the Company implemented a new accounting pronouncement
related to mortgage servicing rights on loans originated by the Company. The
implementation of the pronouncement increased loan sale gains by approximately
$6.0 million during 1995. Loan sale gains during 1995 were reduced by the use of
higher prepayment assumptions, primarily related to adjustable rate mortgage
loans, in calculating the gain on sale of loans compared to prior years. The
impact of the change in assumptions reduced loan sale gains by approximately
$12.4 million. In addition, loan sale gains during 1995 were reduced by
approximately $5.5 million as the result of the utilization of interest hedge
mechanisms to protect the Company against an increase in market interest rates
on the pass-through certificates sold in the second quarter of 1995
securitization transaction. The reduction in income resulted from a decline in
interest rates prior to the pricing of this securitization transaction.
The following table presents information regarding home equity loan sale
transactions for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Home equity loans sold............................. $1,471,868 $977,653 $462,873
Average coupon on home equity loans sold........... 11.67% 11.80% 12.00%
Weighted interest spread retained on home equity
loans sold....................................... 4.98% 4.49% 6.06%
Home equity loan sale gains........................ $ 142,156 $ 86,735 $ 59,220
</TABLE>
Fluctuations in and the level of market interest rates will impact the
interest spread retained by the Company on loans sold, and, potentially, the
amount of its loan sale gains. An increase in the level of market interest rates
will generally adversely affect the interest spread on loans sold, whereas such
interest spread generally widens during a declining interest rate environment.
The effect of actions which may be taken by the Company during a rising interest
rate environment to mitigate the impact on earnings of fluctuations in market
rates, such as increasing the coupon rate charged on its loan products, will
generally lag the impact of market rate fluctuations. In connection with loan
securitization transactions, the Company has used a prefunding feature which
"locks in" the pass-through rate that the Company will pay to the investor on a
predetermined amount of loans for future delivery. The Company is obligated for
the difference between the earnings on the prefunded amount and the pass-through
interest paid to the investor during the period from the date of the closing of
the securitization transaction until the date of delivery of the loans. In
connection with the home equity loan securitization transaction which closed in
the fourth quarter of 1995, approximately $3.7 million was held in a prefunding
account for purchase of the Company's home equity loans during the first quarter
of 1996. Pursuant thereto, home equity loans with a remaining principal balance
of approximately $3.7 million were delivered on January 10, 1996.
Investment income totaled $104.1 million for 1995 compared to investment
income of $84.7 million and $75.5 million during 1994 and 1993, respectively.
Investment income during 1995 was positively affected by a $4.8 million increase
in income, compared to 1994, related to the Company's investment in a limited
partnership. In addition, interest earned on temporary investments reserve
accounts totaled $7.2 million in 1995 compared to $2.7 million and $1.1 million
during 1994 and 1993, respectively. Investment income for 1995, 1994 and 1993
also includes investment gains of $.5 million, $.2 million and $.6 million,
respectively. At December 31, 1995 the amortized cost of the fixed income
portfolio totaled $1.1 billion and was comprised principally of $734 million in
investment grade mortgage-backed securities and $345 million in investment
30
<PAGE> 31
grade bonds. At December 31, 1995, the weighted average rating of the publicly
traded bond portfolio according to nationally recognized statistical rating
agencies was "AA". At December 31, 1995 the carrying value of investments in the
Company's trading account, which is comprised of investments in common stocks,
was $752,000 reflecting a $207,000 unrealized gain which is included in
investment income for 1995.
Loan servicing income was $14.6 million, $19.9 million and $13.6 million
for 1995, 1994 and 1993, respectively. Loan servicing income in 1995 was
negatively affected by a $6.3 million increase in the amortization of
capitalized excess servicing income as the result of an adjustment in the
estimated prepayment assumptions of certain mortgage loans serviced by the
Company, primarily adjustable rate mortgage loans. This adjustment offset the
impact of an increase of approximately $800 million in the average amount of
home equity loans serviced by the Company for third parties during 1995 compared
to the same period of 1994. As discussed above, the industry accepted "normal
servicing fee" was defined during the second quarter of 1994 as 50 basis points.
Effective July 1, 1994, the Company reduced its estimate of normal servicing fee
and began using 50 basis points in computing loan sale gains. The reduction in
the normal servicing fee for home equity loans from 75 to 50 basis points has
the impact of increasing current revenues (loan sale gains) while reducing
future revenues (loan servicing income). The following table reflects the
components of loan servicing income for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing fees earned............................... $ 87,278 $ 60,181 $ 35,168
Amortization of capitalized excess servicing
income............................................ (72,719) (40,255) (21,544)
-------- -------- --------
Total..................................... $ 14,559 $ 19,926 $ 13,624
======== ======== ========
</TABLE>
Net insurance premiums were $8.5 million, $11.4 million and $18.7 million
for 1995, 1994 and 1993, respectively. Net insurance premiums reflect revenues
associated primarily with credit insurance underwritten by UCLIC. The decrease
in premium income is primarily the result of the impact of UCLIC's decision to
discontinue sales of credit insurance products.
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on annuity policies........................ $ 79,086 $ 73,065 $ 76,086
Personnel........................................... 76,022 57,380 40,784
Interest............................................ 28,308 14,563 10,158
Loan loss provision................................. 16,025 13,457 17,343
Insurance commissions............................... 13,630 14,264 13,920
Insurance benefits.................................. 9,930 12,654 18,200
Other operating..................................... 60,185 45,237 40,461
-------- -------- --------
Total..................................... $283,186 $230,620 $216,952
======== ======== ========
</TABLE>
Interest on annuity policies increased $6.0 million during 1995 compared to
1994, primarily as the result of a $70 million increase in average annuity
reserves. The decline in interest on annuity policies of $3.0 million in 1994
compared to 1993 resulted primarily from a reduction in the average interest
crediting rate on the Company's annuity policies. Average annuity reserves were
$1.4 billion during 1995 and 1994 and $1.2 billion during 1993.
Personnel expenses were $76.0 million, $57.4 million and $40.8 million in
1995, 1994 and 1993, respectively. The increase in personnel costs are primarily
associated with the expansion of the Company's mortgage operations, including
start-up costs for the manufactured housing lending program, loan production
related incentives and an increase in the cost of the Company's employee benefit
and incentive plans.
31
<PAGE> 32
Insurance commissions for 1995, 1994 and 1993 were $13.6 million, $14.3
million and $13.9 million, respectively. Commissions paid on issuance of the
Company's deferred annuity products are generally capitalized as deferred policy
acquisition costs ("DPAC") and amortized over the estimated life of the policy.
During 1995 and 1994, the Company capitalized approximately $11.9 million and
$20.7 million, respectively, in commissions paid on sales of annuities compared
to $13.7 million during 1993. Amortization of commission expense on annuities
capitalized in prior periods was $11.0 million and $9.5 million during 1995 and
1994, respectively, compared to $5.6 million during 1993.
Insurance benefits were $9.9 million, $12.7 million and $18.2 million for
1995, 1994 and 1993, respectively. The declining trend of insurance benefits
resulted from a reduction in benefits associated with ordinary life and credit
insurance products.
The Company's loan loss provision was $16.0 million, $13.5 million and
$17.3 million for 1995, 1994 and 1993, respectively. The fluctuation in the
level of the Company's provision for loan losses is attributed in part to
increases and decreases in the amount of loans owned by the Company during the
respective periods. During 1994, the amount of loans owned by the Company
declined by approximately $151 million compared to 1993. The amount of loans
owned during 1995 increased $57 million compared to 1994.
Interest expense for 1995 increased approximately $13.7 million compared to
1994 primarily as the result of an increase in the weighted average interest
rate charged on debt and an increase in the average amount of debt outstanding.
The $4.4 million increase in interest expense from 1993 to 1994 was likewise
attributed to an increase in the weighted average interest rate charged on debt.
Other operating expenses increased approximately $14.9 million and $4.8
million during 1995 and 1994, respectively, primarily as the result of costs
associated with the expansion of the Company's mortgage operations. During 1995,
1994 and 1993, advertising expense totaled $9.0 million, $3.1 million and $.8
million and occupancy and equipment expenses were $10.9 million, $8.0 million
and $6.8 million, respectively. Other operating expenses in 1993 included a $2.3
million accrual for the estimated cost of a legal settlement and $1.4 million in
estimated losses in connection with termination of a third party administrative
contract for credit insurance.
32
<PAGE> 33
FINANCIAL INFORMATION ON BUSINESS SEGMENTS
The following tables reflect income from continuing operations before
income taxes for each of the Company's business segments for the years ended
December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
CORPORATE,
LIFE OTHER OPERATIONS
MORTGAGE INSURANCE & ELIMINATIONS TOTAL
-------- --------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Interest, charges and fees on loans.......... $ 84,496 $ 38,077 $ 6,092 $128,665
Loan sale gains.............................. 142,156 -- -- 142,156
Investment income............................ 7,227 99,327 (2,492) 104,062
Net insurance premiums....................... -- 8,508 -- 8,508
Loan servicing income........................ 19,219 (1,427) (3,233) 14,559
-------- --------- -------- --------
Total................................ 253,098 144,485 367 397,950
-------- --------- -------- --------
Expenses:
Interest on annuity policies................. -- 79,086 -- 79,086
Personnel.................................... 62,677 5,260 8,085 76,022
Insurance commissions........................ -- 13,427 203 13,630
Insurance benefits........................... -- 9,930 -- 9,930
Loan loss provision.......................... 11,974 4,051 -- 16,025
Interest..................................... 20,566 3,417 4,325 28,308
Other operating.............................. 50,208 17,215 (7,238) 60,185
-------- --------- -------- --------
Total................................ 145,425 132,386 5,375 283,186
-------- --------- -------- --------
Income (loss) from continuing operations before
income taxes................................. $107,673 $ 12,099 $ (5,008) $114,764
======== ========= ======== ========
</TABLE>
<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.......... $ 63,905 $ 43,647 $ 4,442 $111,994
Loan sale gains.............................. 86,289 -- 446 86,735
Investment income............................ 2,762 83,614 (1,710) 84,666
Net insurance premiums....................... -- 11,373 -- 11,373
Loan servicing income........................ 24,645 (505) (4,214) 19,926
-------- --------- -------- --------
Total................................ 177,601 138,129 (1,036) 314,694
-------- --------- -------- --------
Expenses:
Interest on annuity policies................. -- 73,065 -- 73,065
Personnel.................................... 46,356 4,959 6,065 57,380
Insurance commissions........................ -- 13,710 554 14,264
Insurance benefits........................... -- 12,654 -- 12,654
Loan loss provision.......................... 8,398 5,059 -- 13,457
Interest..................................... 6,496 1,979 6,088 14,563
Other operating.............................. 35,196 17,623 (7,582) 45,237
-------- --------- -------- --------
Total................................ 96,446 129,049 5,125 230,620
-------- --------- -------- --------
Income (loss) from continuing operations before
income taxes................................. $ 81,155 $ 9,080 $ (6,161) $ 84,074
======== ========= ======== ========
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-----------------------------------------------------
CORPORATE,
LIFE OTHER OPERATIONS
MORTGAGE INSURANCE & ELIMINATIONS TOTAL
-------- --------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Interest, charges and fees on loans.......... $ 41,250 $ 45,561 $ 5,926 $ 92,737
Investment income............................ 1,054 75,594 (1,121) 75,527
Loan sale gains.............................. 59,220 -- 221 59,441
Net insurance premiums....................... -- 18,684 -- 18,684
Loan servicing income........................ 19,115 340 (5,831) 13,624
-------- --------- -------- --------
Total................................ 120,639 140,179 (805) 260,013
-------- --------- -------- --------
Expenses:
Interest on annuity policies................. -- 76,086 -- 76,086
Personnel.................................... 31,987 3,878 4,919 40,784
Insurance commissions........................ -- 13,185 735 13,920
Insurance benefits........................... -- 18,200 -- 18,200
Loan loss provision.......................... 12,349 4,994 -- 17,343
Interest..................................... 4,315 628 5,215 10,158
Other operating.............................. 25,693 20,573 (5,805) 40,461
-------- --------- -------- --------
Total................................ 74,344 137,544 5,064 216,952
-------- --------- -------- --------
Income (loss) from continuing operations before
income taxes................................. $ 46,295 $ 2,635 $ (5,869) $ 43,061
======== ========= ======== ========
</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 produced
through the Company's branch (i.e., retail) network or wholesale loan programs.
In connection with its origination of home equity loans, the Company relies on
specified underwriting and credit review procedures, a mortgage on the
borrower's residence and, in some cases, other security, and, in its retail
origination program, contact with borrowers through its branch office system to
manage credit risk on its loans. In addition to servicing the loans owned by the
Company, the mortgage division serviced approximately $2.6 billion in loans for
third parties at December 31, 1995, $2.5 billion of which are home equity loans.
Substantially all of the home equity loans serviced for third parties were
publicly sold as mortgage backed securities ("pass-through certificates"). The
purchasers of the pass-through certificates receive a credit enhanced security
which is achieved in part through a guaranty provided by a third party insurer
and by subordinating the excess interest spread retained by the Company to the
payment of scheduled principal and interest on the certificates. The Company
has, from time to time, used the Financial Guaranty Insurance Company ("FGIC")
and MBIA Insurance Corporation ("MBIA") as third party insurers. The
subordination of the excess interest spread retained by the Company relates to
credit losses which may occur after the sale of the loans and continues until
the earlier of the payment in full of the loans or termination of the agreement
pursuant to which the loans were sold. If cumulative payment defaults exceed the
amount subordinated, the third party insurer is obligated to pay any further
losses experienced by the owners of the pass-through certificates.
The Company is also obligated to cure, repurchase or replace loans which
may be determined after the sale to violate representations and warranties
relating to them and which are made by the Company at the
34
<PAGE> 35
time of the sale. The Company regularly evaluates the quality of the loan
portfolio and estimates its risk of loss based upon historical loss experience,
prevailing economic conditions, estimated collateral value and such other
factors which, in management's judgment, are relevant in estimating the credit
risk in owned and/or serviced loans. Estimated losses on the owned portfolio are
provided for by an increase in the allowance for loan losses through a charge to
current operating income. At December 31, 1995, the Company's allowance for loan
losses was $14.9 million. For loans sold, the Company reduces the amount of gain
recognized on the sale by the estimated amount of credit losses, and records
such amount on its balance sheet in the allowance for loss on loans serviced. At
December 31, 1995, the allowance for loss on loans serviced was $45.0 million.
The maximum recourse associated with sales of home equity loans according to
terms of the loan sale agreements totaled approximately $475 million, of which
amount approximately $466 million relates to the subordinated cash and excess
interest spread. Should credit losses on loans sold materially exceed the
Company's estimates for such losses, such consequence will have a material
adverse impact on the Company's financial statements.
At December 31, 1995, the contractual balance of loans serviced was
approximately $3.0 billion comprised of approximately $409 million serviced for
the Company and approximately $2.6 billion serviced for investors. The portfolio
is geographically diversified. Although the Company services loans in 48 states,
at December 31, 1995 a substantial portion of the loans serviced were originated
in Florida (10.5%), Ohio (10.0%) and Louisiana (8.8%), respectively, and no
other state accounted for more than 7.5% of the serviced portfolio. Included in
the serviced portfolio are commercial loans originated by the Company, a
substantial portion of which were originated in Florida (25.9%), Georgia (19.4%)
and Colorado (10.9%) and no other state accounted for more than 8.0% of the
commercial loans serviced. The risk inherent in such concentrations is dependent
not only upon regional and general economic stability which affects property
values, but also the financial well-being and creditworthiness of the borrower.
The following table provides a summary of loans owned and/or serviced which are
past due 30 days or more, foreclosed properties and loans charged off as of the
dates indicated.
<TABLE>
<CAPTION>
FORECLOSED PROPERTIES
-----------------------
CONTRACTUAL DELINQUENCIES % OF OWNED SERVICED FOR NET LOANS % OF
BALANCE CONTRACTUAL CONTRACTUAL BY THE THIRD PARTY CHARGED AVERAGE
YEAR ENDED OF LOANS BALANCE BALANCE COMPANY INVESTORS OFF LOANS
------------------------------ ----------- ------------ ----------- ------- ------------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995
Home equity................. $2,701,481 $220,145 8.15% $8,469 $ 21,604 $12,221 0.56%
Commercial.................. 251,241 4,518 1.80% 16,547 5,325 4,416 1.68%
Conventional................ 58,554 2,734 4.67% -- -- 132 0.20%
Manufactured housing........ 888 -- -- -- -- -- --
---------- -------- ------- ------- -------
Total................. $3,012,164 $227,397 7.55% $25,016 $ 26,929 $16,769
========== ======== ======= ======= =======
December 31, 1994
Home equity................. $1,683,698 $129,203 7.67% $8,791 $ 11,837 $11,694 0.84%
Commercial.................. 274,413 5,377 1.96% 22,131 8,784 5,658 1.83%
Conventional................ 74,294 2,672 3.60% 35 -- 100 0.16%
---------- -------- ------- ------- -------
Total................. $2,032,405 $137,252 6.75% $30,957 $ 20,621 $17,452
========== ======== ======= ======= =======
December 31, 1993
Home equity................. $1,125,139 $ 92,974 8.26% $17,014 $ 8,355 $ 8,548 0.88%
Commercial.................. 345,365 19,292 5.59% 20,871 9,275 3,579 0.95%
Conventional................ 98,277 3,747 3.81% 148 -- 77 0.09%
---------- -------- ------- ------- -------
Total................. $1,568,781 $116,013 7.40% $38,033 $ 17,630 $12,204
========== ======== ======= ======= =======
</TABLE>
Management continues to focus on reducing the level of non-earning assets
owned and/or serviced by expediting the foreclosure process. The balance of
foreclosed home equity loans owned and/or serviced as a percentage of the home
equity loans owned and/or serviced was 1.1%, 1.2% and 2.3% at December 31, 1995,
1994 and 1993, respectively.
The above delinquency and loan loss experience represents the Company's
recent experience. However, the delinquency, foreclosure and net loss
percentages may be affected by the increase in the size and relative
35
<PAGE> 36
lack of seasoning of a substantial portion of the portfolio. In addition, the
Company can neither quantify the impact of property value declines, if any, on
the home equity loans nor predict whether to what extent or how long such
declines may exist. In a period of such declines, the rates of delinquencies,
foreclosures and losses on the home equity loans could be higher than those
theretofore experienced in the mortgage lending industry in general. Adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the home equity loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses. As a result, the information in the
above tables should not be considered as a basis for assessing the likelihood,
amount or severity of delinquencies or losses in the future on home equity loans
and no assurance can be given that the delinquency and loss experience presented
in the tables will be indicative of such experience on home equity loans.
A summary analysis of the changes in the Company's allowance for loan
losses and the allowance for loss on loans serviced is shown in Note 3.3 of the
Notes to the Consolidated Financial Statements.
Investment securities. The Company's investment portfolio consists
primarily of mortgage backed securities and corporate bonds, comprising 65.7%
and 29.3% of the portfolio at December 31, 1995, respectively. At December 31,
1995, approximately 93.6% of the Company's portfolio of investment securities
were classified in an available-for-sale category and the carrying value
adjusted to fair value by means of an adjustment to stockholders' equity. The
remainder of the portfolio consists primarily of private placements made either
directly or through an investment partnership and are classified as
held-to-maturity and valued at cost. At December 31, 1995, the Company owned $.8
million in equity securities classified as trading securities. The net
unrealized gain in the debt securities portfolio (fair value over amortized
cost) at December 31, 1995 was $43.8 million compared to a net unrealized loss
of $73.9 million at December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding loan
production in its mortgage operations and the payment of policyholder claims and
surrenders incurred in its insurance operations. The Company's mortgage
operations require continued access to short and long-term sources of debt
financing and the sale of loans and asset-backed securities. The liquidity
requirements for the Company's insurance operations are generally met by funds
provided from the sale of annuities and cash flow from its investments in fixed
income securities and mortgage loans.
Prior to 1994, the Company's primary debt facility was a revolving credit
facility (the "Bank Facility") dated as of October 11, 1988. On November 2, 1994
the Company publicly sold $125 million of its senior unsecured notes and used
the net proceeds from the sale of the senior notes to repay a portion of the
principal amount of the indebtedness outstanding under the Bank Facility. During
1995, the Company publicly sold $100 million of its senior unsecured notes and
used a portion of the net proceeds from the sale of the senior notes to repay
the remaining balance outstanding under the Bank Facility, which was scheduled
to mature on December 31, 1996. The remainder of the proceeds were used for
general corporate purposes. The Company terminated the Bank Facility effective
July 25, 1995. In addition, the Company maintains short-term credit facilities
with various financial institutions. As of December 31, 1995, $65 million in
such credit facilities were available to the Company and no amounts were
outstanding thereunder.
During 1995, the Company sold 1,955,000 shares of its Preferred Redeemable
Increased Dividend Equity Securities(SM), 6 3/4% PRIDES, Convertible Preferred
Stock ("PRIDES ") at a price per share of $44.00. Net proceeds to the Company
were approximately $83.3 million. The net proceeds from the sale of the shares
of PRIDES were used for general corporate purposes.
At December 31, 1995, the Company had secured warehouse facilities
available from (i) a syndicate of commercial banks (the "Commercial Bank
Warehouse") and (ii) the investment bank that acted as lead underwriter for the
Company's fourth quarter securitization (the "Investment Bank Warehouse"). The
Commercial Bank Warehouse permits certain of the Company's mortgage lending
subsidiaries to borrow up to $150 million on a revolving basis secured by home
equity loans eligible thereunder. Loans under this facility are subject to the
satisfaction of certain borrowing conditions, including a minimum borrowing base
and will
36
<PAGE> 37
bear interest at a floating rate. Borrowings under this facility are required to
be repaid from the proceeds of the sale or other disposition of the home equity
loan collateral. The lenders' commitment under this facility is scheduled to
terminate on May 23, 1997. At December 31, 1995, $19.3 million was outstanding
under the Commercial Bank Warehouse.
The Investment Bank Warehouse was directly related to the 1995 fourth
quarter securitization and initially provided funding for up to $250 million of
eligible home equity loans for such securitization and terminated with the
closing of the last delivery of loans under the prefunding accounts relative to
this securitization. As of December 31, 1995, $75 million was available and no
amounts were outstanding under the Investment Bank Warehouse. The Company
expects to have facilities similar to the Investment Bank Warehouse available in
conjunction with its future securitizations.
The following discussion reflects the primary sources of liquidity and
capital for each of the Company's primary operating divisions.
Mortgage. The principal cash requirements of the Company's mortgage
operations arise from loan production, deposits to reserve accounts, repayments
of intercompany debt borrowed under the Company's senior notes, payments of
operating and interest expenses, and income taxes related to loan sale
transactions. Loan production is funded principally through proceeds from the
issuance of the Company's senior notes, short-term bank facilities and warehouse
facilities pending loan sales.
Substantially all of the loans originated or acquired by the Company are
sold. Net cash used by operating activities of the Company in 1995 and 1994,
respectively, reflects approximately $1.6 billion and $949 million,
respectively, in cash used for loan originations and acquisitions. The primary
source of funding for loan originations is derived from the reinvestment of
proceeds from the ultimate sale of loans in the secondary market which totaled
approximately $1.5 billion and $978 million in 1995 and 1994, respectively. In
connection with the loan sale transactions in the secondary market, third-party
surety bonds and cash deposits by the Company as credit enhancements were
provided. The loan sale transactions required the subordination of certain cash
flows payable to UCLC and its subsidiaries to the payment of principal and
interest due to certificate holders. In connection with these transactions, UCLC
has been required, in some instances, to fund an initial deposit, and
thereafter, in each transaction, a portion of the amounts receivable by UCLC and
its subsidiaries from the excess interest spread has been required to be placed
and maintained in a reserve account to the extent of the subordination
requirements. The subordination requirements generally provide that the excess
interest spread is payable to a reserve account until a specified level of cash,
which is less than the maximum subordination amount, is accumulated therein. The
capitalized excess servicing income of the Company is subject to being utilized
first to replenish cash paid from the reserve account to fund shortfalls in
collections from borrowers who default on the payment of principal or interest
on the loans underlying the pass-through certificates issued until the total of
the Company's deposits into the reserve account equal the maximum subordination
amount. In connection with the issuance and sale of approximately $3.2 billion
of pass-through certificates through December 31, 1995, the subordination
amounts aggregate approximately $466 million. After the Company's deposits into
the reserve account equal the maximum subordination amount for a transaction,
the subordination of the related excess interest spread (including the guarantee
fee payable therefrom) for these purposes is terminated. The excess interest
spread required to be deposited and maintained in the respective reserve
accounts will not be available to support the cash flow requirements of the
Company until such amount exceeds the maximum subordinated amount (other than
amounts, if any, in excess of the specified levels required to be maintained in
the reserve accounts, which may be distributed periodically to the Company). At
December 31, 1995, the amounts on deposit in such reserve accounts totaled $155
million.
Life insurance. The principal cash requirement of UCLIC consists of
contractual obligations to policyholders, principally through policy claims and
surrenders. The primary sources of funding these obligations, in addition to
cash flow from investments, are the sale of annuities. Net cash flow from
annuity operations is used to build an investment portfolio, which in turn
produces future cash flows from investment income and provides a secondary
source of liquidity for this division. Net cash provided by operating activities
of the insurance division (which excludes annuity sales and surrenders) in 1995
and 1994 was approximately
37
<PAGE> 38
$87 million and $64 million, respectively, resulting primarily from cash
earnings on investments. The Company monitors available cash and cash
equivalents to maintain adequate balances for current payments while maximizing
cash available for longer term investment activities. The Company's financing
activities during 1995 and 1994 reflect approximately $136 million and $250
million, respectively, in cash received primarily from sales by UCLIC of its
annuity products. The Company believes that the decrease in annuity sales is due
in part to the interest rate environment, particularly the relative relationship
between short term and intermediate term interest rates, and to the focus by
UCLIC on development of its variable annuity product. In addition, a financial
institution which produced approximately 10% of UCLIC's annuity sales in 1994
discontinued the sale of annuities for UCLIC in 1995 subsequent to the merger of
such financial institution. As reflected in the net cash used by investing
activities during the same periods, investment purchases were approximately $137
million and $300 million, respectively, reflecting the investment of these funds
and the reinvestment of proceeds from maturities of investments. Cash used by
financing activities during these twelve month periods also reflects payments of
$223 million and $192 million primarily on annuity products resulting from
policyholder surrenders and claims. The increase in annuity surrenders during
1995 was expected, due in part to an increase in the amount of annuity policies
which were beyond the surrender penalty period. Should annuity surrenders
continue to exceed annuity sales, such consequence will decrease the liquidity
of UCLIC and potentially result in the sale of certain assets, such as bonds and
loans, prior to their maturity, which may be at a loss. UCLIC's investments at
December 31, 1995, included approximately $345 million in residential and
commercial mortgage loans, and the amortized cost of its bond portfolio included
$378 million in corporate and government bonds and private debt placements and
$778 million in mortgage-backed securities.
As a Louisiana domiciled insurance company, UCLIC is subject to certain
regulatory restrictions on the payment of dividends. UCLIC had the capacity at
December 31, 1995 to pay dividends of $9.2 million. UCLIC did not pay any
dividends to the Company during 1993, 1994 or 1995 in order to retain capital in
UCLIC.
PENDING SALE OF UCLIC
On February 2, 1996, the Company signed a Stock Purchase Agreement (the
"Agreement") dated as of January 30, 1996, for the sale of all of the
outstanding capital stock of UCLIC to UC Life Holding Corp., a new Delaware
corporation formed by Knightsbridge Capital Fund I, L.P. for an aggregate amount
of $164 million plus earnings of UCLIC from January 1, 1996, to closing of the
transaction. Knightsbridge, which is a private investment partnership with
institutional partners, was formed in 1995 to make equity investments in
companies engaged primarily in the life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash
currently estimated to be $109 million and UCLIC real estate and other assets to
be distributed to the Company prior to the closing. The real estate to be
distributed includes portions of the United Plaza office park, including the
Company's home office. In addition, the Company will purchase a convertible
promissory note from an affiliate of the purchaser for $15 million in cash. The
note matures in 11 years and bears interest at a rate of 8% per annum payable at
maturity. The Company does not expect the sale of UCLIC to have a material
effect on net income.
The purchaser also agreed that UCLIC would continue to be an investor in
first lien home equity loans originated by the Company's lending operations and
that UCLIC's home office operations would be maintained in its present location
in Baton Rouge, Louisiana following the closing for at least two years. The
agreement is subject to approval by UCFC's shareholders and regulatory
authorities and the satisfaction of other conditions, and provides that the
closing will occur on or before July 31, 1996.
RATINGS
The Company. During 1994, the Company sold publicly $125 million of its
unsecured and unsubordinated 9.35% senior notes due November 1, 1999. Duff and
Phelps Credit Rating Co. ("D&P") rated the issue BBB, Standard and Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"), rated the
38
<PAGE> 39
notes BBB- and Moody's Investor Services, Inc. ("Moody's") rated the notes Ba2,
respectively. D&P previously assigned a rating of BBB to the Bank Facility.
On July 25, 1995 the Company issued $100 million of its unsecured and
unsubordinated 7% senior notes due July 15, 1998. The notes received ratings of
"BBB" from D&P, "BBB-" from S&P and "Ba2" from Moody's.
Life insurance subsidiary. During 1995, A.M. Best Company ("Best")
reaffirmed its "A-" (Excellent) rating of UCLIC. Best's ratings depend in part
on its analysis of an insurance company's financial strength, operating
performance and claims paying ability. In addition, in 1995, S&P revised the
rating scale used in assigning its qualified solvency ratings of insurance
companies and, as a result, revised its rating assigned to UCLIC from "BBq" to
"Aq".
On October 24, 1995, D&P placed the 'A+' (Single-A-Plus) claims paying
ability rating of UCLIC on Rating Watch -- Uncertain. This rating action is
based upon the announcement by the Company that it was evaluating strategic
alternatives regarding UCLIC, including the possible sale of UCLIC. D&P reported
that the claims paying ability rating would remain on Rating Watch -- Uncertain
until more information becomes known about UCLIC's ultimate position within the
Company's organization or another organization.
39
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
United Companies Financial Corporation:
We have audited the accompanying consolidated balance sheets of United
Companies Financial Corporation and its subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. Our audits also included the financial statement schedules listed in the
Index at Item 14. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of United Companies Financial
Corporation and its subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 1.11 of the Notes to the Consolidated Financial
Statements, in 1995 the Company changed its method of accounting for mortgage
servicing rights to conform with Statement of Financial Accounting Standards No.
122.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
February 29, 1996
40
<PAGE> 41
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................ $ 28,087 $ 56,359
Temporary investments -- reserve accounts............................ 155,254 81,980
Investment securities
Trading............................................................ 752 679
Available-for-sale................................................. 1,140,421 960,100
Held-to-maturity................................................... 51,586 57,391
Other.............................................................. 25,594 26,672
Loans -- net......................................................... 413,574 369,382
Capitalized excess servicing income.................................. 283,454 179,065
Deferred policy acquisition costs.................................... 90,703 91,915
Accrued interest receivable.......................................... 53,265 37,200
Property -- net...................................................... 38,659 30,565
Deferred income tax benefit.......................................... -- 7,420
Net assets of discontinued operations................................ 6,245 9,736
Other assets......................................................... 79,292 69,791
---------- ----------
Total assets............................................... $2,366,886 $1,978,255
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Annuity reserves..................................................... $1,417,803 $1,425,973
Notes payable........................................................ 255,756 213,668
Insurance reserves................................................... 113,002 120,992
Deferred income taxes payable........................................ 64,461 --
Allowance for loss on loans serviced................................. 44,970 26,822
Repurchase agreements................................................ 40,857 --
Other liabilities.................................................... 48,086 35,550
---------- ----------
Total liabilities.......................................... 1,984,935 1,823,005
---------- ----------
Stockholders' equity:
Preferred stock, $2 par value;
Authorized -- 20,000,000 shares; Issued -- 1,955,000 shares of
6 3/4% PRIDES(SM) ($44 per share liquidation preference)....... 3,910 --
Common stock, $2 par value;
Authorized -- 100,000,000 shares; Issued -- 29,302,246 and
28,541,154 shares.............................................. 58,604 57,082
Additional paid-in capital......................................... 179,848 94,129
Net unrealized gain (loss) on securities........................... 29,514 (46,858)
Retained earnings.................................................. 122,816 62,025
Treasury stock and ESOP debt....................................... (12,741) (11,128)
---------- ----------
Total stockholders' equity................................. 381,951 155,250
---------- ----------
Total liabilities and stockholders' equity............... $2,366,886 $1,978,255
========== ==========
</TABLE>
See notes to consolidated financial statements.
41
<PAGE> 42
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues:
Interest, charges and fees on loans...................... $128,665 $111,994 $ 92,737
Loan sale gains.......................................... 142,156 86,735 59,441
Investment income........................................ 104,062 84,666 75,527
Loan servicing income.................................... 14,559 19,926 13,624
Net insurance premiums................................... 8,508 11,373 18,684
-------- -------- --------
Total............................................ 397,950 314,694 260,013
-------- -------- --------
Expenses:
Interest on annuity policies............................. 79,086 73,065 76,086
Personnel................................................ 76,022 57,380 40,784
Interest................................................. 28,308 14,563 10,158
Loan loss provision...................................... 16,025 13,457 17,343
Insurance commissions.................................... 13,630 14,264 13,920
Insurance benefits....................................... 9,930 12,654 18,200
Other operating.......................................... 60,185 45,237 40,461
-------- -------- --------
Total............................................ 283,186 230,620 216,952
-------- -------- --------
Income from continuing operations before income taxes...... 114,764 84,074 43,061
Provision for income taxes................................. 41,805 29,492 14,744
-------- -------- --------
Income from continuing operations.......................... 72,959 54,582 28,317
Loss from discontinued operations:
Loss from discontinued operations, net of income tax
expense benefit of $1,084, $2,702 and $314,
respectively.......................................... (2,014) (5,048) (676)
Loss on disposal, net of income tax benefit of $794 and
$8,326, respectively.................................. (1,477) -- (16,066)
-------- -------- --------
Total............................................ (3,491) (5,048) (16,742)
-------- -------- --------
Net income................................................. $ 69,468 $ 49,534 $ 11,575
======== ======== ========
Per share data:
Income from continuing operations........................ $ 2.36 $ 1.92 $ 1.20
Loss from discontinued operations........................ (.11) (.18) (.71)
-------- -------- --------
Net income............................................... $ 2.25 $ 1.74 $ .49
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 43
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Income from continuing operations.................................... $ 72,959 $ 54,582 $ 28,317
Adjustments to reconcile income from continuing operations to net
cash provided by continuing operating activities:
Decrease (increase) in deferred policy acquisition costs.......... 1,212 (8,420) (3,488)
Increase in accrued interest receivable........................... (16,065) (7,033) (3,401)
Decrease (increase) in other assets............................... 2,044 (8,155) 595
Decrease in insurance reserves.................................... (7,990) (12,596) (8,727)
Increase (decrease) in other liabilities.......................... (5,911) (2,829) 18,241
Loan sale gains................................................... (164,112) (94,673) (62,896)
Amortization of capitalized excess servicing income............... 72,719 40,255 21,544
Investment gains.................................................. (325) (219) (595)
Interest on annuity policies...................................... 79,086 73,065 76,086
Loan loss provision............................................... 16,025 13,457 17,343
Amortization and depreciation..................................... 4,462 3,387 3,624
Deferred income taxes............................................. 30,758 12,301 (3,532)
Proceeds from sales and principal collections of loans held for
sale............................................................. 1,507,514 1,000,970 478,213
Originations and purchases of loans held for sale................. (1,600,213) (949,448) (595,893)
Net cash flows from trading investment securities................. (73) (687) --
----------- ---------- ---------
Net cash provided (used) by continuing operating
activities................................................. (7,910) 113,957 (34,569)
----------- ---------- ---------
Cash flows from discontinued operating activities...................... -- (2,889) (5,612)
----------- ---------- ---------
Cash flows from investing activities:
Principal collected on loans held for investment..................... 77,182 94,588 95,755
Proceeds from sales of loans held for investment..................... -- -- 593
Originations and acquisition of loans held for investment............ (39,547) (8,798) (4,560)
Increase in reserve accounts......................................... (73,274) (54,308) (20,046)
Proceeds from sales of investment securities......................... 27,047 9,459 25,475
Proceeds from maturities or calls of investment securities........... 53,914 76,978 117,117
Purchase of held-to-maturity securities.............................. -- -- (283,853)
Purchases of available-for-sale securities........................... (136,579) (300,384) --
Capital expenditures................................................. (10,885) (4,693) (893)
----------- ---------- ---------
Net cash used by investing activities........................ (102,142) (187,158) (70,412)
----------- ---------- ---------
Cash flows from financing activities:
Payments on mortgage loan............................................ -- -- (15,750)
Proceeds from senior debt and mortgage loan.......................... 103,219 125,192 --
Decrease in revolving credit debt.................................... (72,163) (82,838) (35,000)
Increase (decrease) in repurchase agreement.......................... 40,857 (30,000) 30,000
Increase (decrease) in debt with maturities of three months or
less.............................................................. (14,750) 14,250 (600)
Increase in warehouse loan facility.................................. 19,321 -- --
Proceeds from ESOP debt.............................................. 6,283 -- --
Payments on ESOP debt................................................ (321) -- --
Deposits received from annuities..................................... 135,534 249,737 207,682
Payments on annuities................................................ (222,791) (191,811) (136,340)
Cash dividends paid.................................................. (8,677) (5,050) (3,624)
Increase in managed cash overdraft................................... 11,241 10,374 2,409
Proceeds from issuance of stock...................................... 83,254 4,545 48,714
Increase in unearned ESOP compensation............................... (2,313) (2,434) --
Proceeds from exercise of stock options and warrants................. 3,086 542 298
----------- ---------- ---------
Net cash provided by financing activities.................... 81,780 92,507 97,789
----------- ---------- ---------
Increase (decrease) in cash and cash equivalents....................... (28,272) 16,417 (12,804)
Cash and cash equivalents at beginning of period....................... 56,359 39,942 52,746
----------- ---------- ---------
Cash and cash equivalents at end of period............................. $ 28,087 $ 56,359 $ 39,942
=========== ========== =========
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 44
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED TREASURY
ADDITIONAL GAIN (LOSS) STOCK AND TOTAL
COMMON PREFERRED PAID-IN ON SECURITIES RETAINED ESOP STOCKHOLDERS'
STOCK STOCK CAPITAL -------------- EARNINGS DEBT EQUITY
------- --------- ---------- (IN THOUSANDS) --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992, as
previously reported......... $18,730 $ 31,461 $ 52,037 $ (5,970) $ 96,258
Effect of 1995 stock split.... 18,730 (18,730) --
------- -------- -------- -------- --------
Balance, December 31, 1992, as
restated.................... 37,460 12,731 52,037 (5,970) 96,258
Net income.................... 11,575 11,575
Dividends paid................ (3,624) (3,624)
Decrease in ESOP debt......... 147 147
Common stock options
exercised................... 1,476 1,301 2,777
Treasury shares acquired...... (2,479) (2,479)
Preferred stock issued........ $ 20,000 (1,239) 18,761
Preferred stock converted into
common stock................ 7,804 (20,000) 12,196 --
Common stock issued........... 4,000 25,953 29,953
------- -------- -------- -------- -------- --------
Balance, December 31, 1993.... 50,740 -- 50,942 59,988 (8,302) 153,368
Net income.................... 49,534 49,534
Dividends paid................ 5,184 37,263 (47,497) (5,050)
Increase in ESOP debt......... (2,222) (2,222)
Common stock options
exercised................... 398 1,749 2,147
Treasury shares acquired...... (604) (604)
Common stock issued........... 600 3,945 4,545
Common stock warrants
exercised................... 160 230 390
Mark-to-market adjustment on
investments................. $(46,858) (46,858)
------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1994.... 57,082 -- 94,129 (46,858) 62,025 (11,128) 155,250
Net income.................... 69,468 69,468
Dividends paid................ (8,677) (8,677)
Increase in ESOP debt......... (1,613) (1,613)
Common stock warrants
exercised................... 704 696 1,400
Common stock options
exercised................... 818 5,386 6,204
Preferred stock issued........ 3,910 79,344 83,254
Release of ESOP shares........ 293 293
Mark-to-market adjustment on
investments................. 76,372 76,372
------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995.... $58,604 $ 3,910 $ 179,848 $ 29,514 $ 122,816 $ (12,741) $ 381,951
======= ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 45
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ACCOUNTING POLICIES
1.1 Principles of Consolidation. The consolidated financial statements
include United Companies Financial Corporation (the "Company" or "United
Companies") and subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
1.2 Loan Accounting. The Company originates loans for its own portfolio
and for sale and/or securitization in the secondary market. Loans held for sale
are carried at lower of cost or market.
1.2(a) Loan Sales. The Company sells substantially all loans which it
originates and generally retains the servicing rights on loans sold. At the time
of sale, the Company recognizes a gain on loans sold in an amount equal to the
present value of the difference between the interest spread retained by the
Company and a normal servicing fee and other expenses over the estimated life of
the loan. Under the sales/servicing agreements, the buyer receives the principal
collected on the loan and an agreed upon rate of return on the outstanding
principal balance; the Company retains the excess of the interest at the
contractual rate over the sum of the rate paid to the buyer (the "pass-through"
rate) and, where applicable, the trustee fee and surety bond fee. Generally,
this interest spread retained by the Company differs significantly from a normal
servicing fee and is reflected on the Company's balance sheet as a receivable,
capitalized excess servicing income. Capitalized excess servicing income is
calculated using prepayment, default and interest rate assumptions that the
Company believes market participants would use for similar financial instruments
at the time of the sale but is not reduced for estimated credit losses under
recourse provisions of the sale. Such estimated credit losses are shown
separately as a liability on the Company's balance sheet as allowance for loss
on loans serviced. The Company has developed its assumptions based on experience
with its own loan portfolio and available market data. For fixed rate loans the
Company uses prepayment assumptions based on the prepayment experience of its
owned and serviced loan portfolio. Prepayment rates for adjustable rate loans
are derived from available market data and prepayment experience of the
Company's owned and serviced portfolio. The weighted average discount rate used
by the Company to determine the present value of expected cash flows from excess
servicing arising from loan sale transactions occurring in 1995, 1994 and 1993
was 10%. Gains from partial sales of loans are adjusted based on fair value on
the date that the loan was acquired or, if not practicable, the date of the
sale. The Company believes that the capitalized excess servicing income
recognized at the time of sale does not exceed the amount that would have been
received if it were sold in the marketplace.
In calculating loan sale gains, the Company considers current economic and
market conditions at the date of sale. In subsequent periods, the Company
reviews as of each balance sheet date its prepayment assumptions in relation to
current rate of prepayment and, if necessary, revises its estimates using the
original discount rate. Any losses arising from adverse prepayment experience
are recognized immediately. Favorable experience is recognized prospectively.
1.2(b) Nonrefundable Loan Fees. Loan origination fees and incremental
direct costs associated with loan originations are deferred and recognized over
the lives of the loans as an adjustment to yield, using the interest method.
Unamortized costs and fees are recognized upon sale of the loan or related
mortgage-backed securities to third parties.
1.2(c) Loan Servicing. The Company generally retains the right to service
loans it originates and subsequently sells or securitizes in the secondary
market. Fees for servicing loans and mortgage-backed securities relating to
loans originated by the Company and sold with servicing rights retained are
generally based on a stipulated percentage of the outstanding principal balance
of such loans and are recognized when earned. Interest received on loans sold,
less amounts paid to investors, is reported as loan servicing income.
Capitalized excess servicing income is amortized systematically to reduce loan
servicing income to an amount representing normal servicing income and the
present value discount. Prior to the adoption of Statement of
45
<PAGE> 46
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights", the Company recognized late charges and other ancillary
income when collected and charged costs to service mortgage loans when incurred.
As further discussed in Note 1.11, the Company implemented the provisions of
SFAS 122 in the third quarter of 1995 and, in connection therewith, changed its
method of accounting for mortgage servicing rights to recognize as separate
assets rights to service mortgage loans for others that have been acquired
through either the purchase or origination of such loans.
1.2(d) Allowance for Loan Losses. The Company provides for estimated loan
losses on loans owned by the Company by establishing an allowance for loan
losses through a charge to earnings. The Company conducts periodic reviews of
the quality of the loan portfolio and estimates the risk of loss based upon
historical loss experience, prevailing economic conditions, estimated collateral
value and such other factors which, in management's judgment, are relevant in
estimating the adequacy of the Company's allowance for loan losses. While
management uses the best information available in conducting its evaluation,
future adjustments to the allowance may be necessary if there are significant
changes in economic conditions, collateral value or other elements used in
conducting the review.
1.2(e) Allowance for Loss on Loans Serviced. The Company's loan sale
agreements generally provide for the subordination of cash and excess interest
spread relating to the loans sold. Such subordination relates to credit losses
which may occur after the sale of the loans and continues until the earlier of
the payment in full of the loans or the termination of the agreement pursuant to
which the loans were sold. In connection with the securitization and sale of
home equity pass-through certificates, the interest retained by the Company is
subordinated to a limited extent to the sold certificates and will be used to
fund a reserve account, thereby providing a credit enhancement to the holders of
the certificates. On certain loan sale transactions prior to 1991, the loan sale
agreements provided limited recourse against the Company for credit losses. The
Company has funded a portion of such recourse through the pledge of certificates
of deposit. Regardless of the structure of the loan sale transaction, the
Company estimates the amount of future losses under the loan sale agreements and
provides a reserve for such loss in determining the amount of gain recorded on
the sale.
1.2(f) Other. Loans are placed on a nonaccrual status when they are past
due 150 days.
1.2(g) Property Acquired in Satisfaction of Debt. The Company records
properties received in settlement of loans ("foreclosed property") at the lower
of their market value less estimated costs to sell ("market") or the outstanding
loan amount plus accrued interest ("cost"). The Company accomplishes this by
providing a specific reserve, on a property by property basis, for the
difference between market and cost. Market value is determined by property
appraisals performed either by Company personnel or independent appraisers. The
related adjustments are included in the Company's provision for loan losses.
1.3 Insurance Accounting.
1.3(a) Life and Annuity Contracts. Income on short duration single premium
contracts, primarily credit insurance products, is recognized over the contract
period. Premiums on other insurance contracts, principally traditional life
insurance and limited payment life insurance policies, are recognized as revenue
when due.
Policy benefit reserves for traditional life insurance policies have been
provided on a net level premium method including assumptions as to investment
yield, mortality and withdrawals based on the Company's experience and industry
standards with provisions for possible adverse deviation. Investment yield
assumptions range from 5.5% to 8.5% per annum. Policy benefit reserves include
certain deferred profits on limited payment policies. These profits are being
recognized in income over the policy term.
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.
46
<PAGE> 47
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commissions and other costs related to the production of new and renewal
business have been deferred. The deferred costs related to traditional life
insurance are amortized over the premium payment period using assumptions
consistent with those used in computing policy benefit reserves. Deferred costs
related to annuities and interest sensitive products are amortized over the
estimated life of the policy in relation to the present value of estimated gross
profits on the contract. The Company periodically reviews the appropriateness of
assumptions used in calculating the estimated gross profits on annuity
contracts. Any change required in these assumptions may result in an adjustment
to deferred policy acquisition costs which would affect income.
Participating business, primarily related to the Company's pre-need funeral
policy, represented 8.2%, 7.2%, and 6.3% of the life insurance in force as of
December 31, 1995, 1994 and 1993, respectively. The amount of dividends paid on
participating policies is based on published dividend scales and totaled $1.2
million, $1.0 million and $1.5 million for the years ended December 31, 1995,
1994 and 1993, respectively.
1.3(b) Reinsurance.
Life insurance. UCLIC generally reinsures with other insurance companies
the portion of any one risk which exceeds $100,000. On certain types of policies
this limit is $25,000. UCLIC is contingently liable for insurance ceded to
reinsurers. Premiums ceded under reinsurance agreements were $1.7 million, $2.1
million, and $3.6 million in 1995, 1994 and 1993, respectively. Reserve credit
taken under reinsurance agreements totaled $32.9 million, $34.0 million and
$35.2 million at December 31, 1995, 1994 and 1993, respectively.
UCLIC has assumed the following reinsurance from other insurers:
<TABLE>
<CAPTION>
INSURANCE
IN FORCE PREMIUMS
---------- -------
(IN THOUSANDS)
<S> <C> <C>
1995.......................................... $ 992,979 $2,589
1994.......................................... 1,106,148 2,966
1993.......................................... 1,106,721 3,039
</TABLE>
UCLIC has a receivable at December 31, 1995 of approximately $33.9 million
from one reinsurer; however, the funds supporting the receivable are escrowed in
a separate trust account for the benefit of UCLIC by the reinsurer.
The following table reflects the effect of reinsurance agreements on
premiums and the amounts earned for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums................................... $ 7,659 $10,537 $19,294
Reinsurance assumed............................... 2,589 2,966 3,039
Reinsurance ceded................................. (1,740) (2,130) (3,649)
------- ------- -------
Net insurance premiums.................. $ 8,508 $11,373 $18,684
======= ======= =======
</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 require-
47
<PAGE> 48
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ments, distributions are made to the Company, and, at the termination of the
transaction, any remaining amounts on deposit will be distributed to the
Company.
1.5 Investment securities. In accordance with the provisions of Statement
of Financial Accounting Standards No. 115 ("SFAS 115"), the Company classifies
securities in one of three categories: "available-for-sale", "held-to-maturity"
or "trading". Securities classified as held-to-maturity are carried at amortized
cost, whereas securities classified as trading securities or available-for-sale
are recorded at fair value. The adjustment, net of applicable income taxes, for
investments classified as available-for-sale is recorded in "Net unrealized gain
(loss) on securities" and is included in Stockholders' equity on the balance
sheet and the adjustment for investments classified as trading is recorded in
"Investment income" in the statement of income.
1.6 Property. Property is stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line and accelerated methods over the
estimated useful lives of the assets.
1.7 Income Taxes. The Company and its subsidiaries file a consolidated
federal income tax return. The Company allocates to its subsidiaries their
proportionate share of the consolidated tax liability under a tax allocation
agreement whereby each affiliate's federal income tax provision is computed on a
separate return basis. Deferred income taxes are provided for the effect of
revenues and expenses which are reported in different periods for financial
reporting purposes than for tax purposes. Such differences result primarily from
deferring policy acquisition costs, providing for bond and loan losses,
differences in the methods of computing reserves, loan income, loan sale gains
and depreciation.
1.8 Cash Equivalents. For purposes of the Statements of Cash Flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At December 31, 1995,
cash equivalents totaled $28.1 million bearing interest rates ranging from 5.25%
to 5.61% per annum.
1.9 Repurchase agreements. At December 31, 1995, UCLIC had a liability of
approximately $40.9 million incurred pursuant to securities sold under
agreements to repurchase ("repurchase agreements"). The securities sold under
these agreements are classified as "Available-for-sale" investment securities
and are carried at their aggregate market value of $42.2 million at December 31,
1995. The repurchase agreements bear interest at 5.70% and 5.74% and matured in
January, 1996.
1.10 Financial instruments. The Company from time to time enters into
interest rate hedge mechanisms to manage its exposure to interest rate changes
in connection with the securitization and sale of its home equity loans. The
Company closes out the hedge position to coincide with the related loan sale and
recognizes the results of the hedge transaction in determining the amount of the
related loan sale gain. The Company did not have any open hedge positions at
December 31, 1994 or 1995.
1.11 Accounting Standards. In May 1993 and in October 1994, the FASB
issued Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"
and "SFAS 118") which address the accounting by creditors for impairment of
loans and specify how allowances for credit losses related to certain loans
should be determined. The statements also address the accounting by creditors
for all loans that are restructured in a troubled debt restructuring involving
modification of terms of a receivable. The implementation of the provisions of
SFAS 114 and SFAS 118 in the first quarter of 1995 did not have a material
effect on the financial statements of the Company.
On May 12, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS No. 122"). SFAS No. 122 requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others that have been acquired through either the purchase or origination of
such loans. With respect to loans originated, this is accomplished by allocating
total costs incurred between the loan and the servicing rights based on their
48
<PAGE> 49
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relative fair values. The estimated fair value of the servicing rights is
determined by discounting expected future cash flows using a discount rate
commensurate with the risk involved. Prior to the adoption of SFAS No. 122, the
Company recognized late charges and other ancillary income when collected and
charged costs to service mortgage loans when incurred. The Company elected to
implement the provisions of this statement on a prospective basis during the
third quarter of 1995. The assumptions used by the Company included estimates of
the cost of servicing the loans, the discount rate, float value, inflation rate,
ancillary income per loan, prepayment speeds and default rates. The amount
capitalized at December 31, 1995 was $5.8 million and is included in "other
assets". Net income for 1995 was increased by $3.9 million, or $.13 per share,
respectively, on a fully diluted basis as a result of the Company's
implementation of SFAS No. 122.
On October 23, 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 encourages, but does not require, the recognition of compensation expense
for grants of stock, stock options and other equity instruments to employees
based on a fair value method of accounting. Companies are permitted to continue
to apply the existing accounting rules contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"); however,
companies that choose to retain this method of accounting will be required to
provide expanded disclosures of pro forma net income and earnings per share in
the notes to financial statements as if the new fair value method of accounting
had been adopted. The provisions of SFAS 123 are effective for fiscal years
beginning after December 15, 1995. The Company has elected to continue to apply
the accounting rules contained in APB 25 and to comply with the additional
disclosure requirements as set forth in SFAS 123.
1.12 Reclassifications. Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications had no
effect on net income.
1.13 Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
49
<PAGE> 50
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES -- NET
The Company's portfolio of investment securities as of December 31, 1995
consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Trading
Common stock.................................. $ 545 $ 215 $ 8 $ 752
========== ======== ======== ==========
Available-for-sale
Debt securities
Corporate.................................. $ 328,546 $ 22,452 $ 679 $ 350,319
U.S. Treasury.............................. 11,504 409 -- 11,913
Mortgage-backed............................ 733,516 22,258 602 755,172
Foreign governments........................ 20,394 1,916 -- 22,310
Other...................................... 425 21 -- 446
---------- -------- -------- ----------
Total................................. 1,094,385 47,056 1,281 1,140,160
---------- -------- -------- ----------
Equity securities............................. 629 78 446 261
---------- -------- -------- ----------
Total................................. $1,095,014 $ 47,134 $ 1,727 $1,140,421
========== ======== ======== ==========
Held-to-maturity
Debt securities
Corporate.................................. $ 6,692 $ 550 $ -- $ 7,242
Mortgage-backed............................ 44,894 1,414 3,939 42,369
---------- -------- -------- ----------
Total................................. $ 51,586 $ 1,964 $ 3,939 $ 49,611
========== ======== ======== ==========
Other
Investment in limited partnerships............ $ 25,594 $ 25,594
========== ==========
</TABLE>
50
<PAGE> 51
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 partnerships............ $ 26,672 $ 26,672
========== ==========
</TABLE>
The cost and estimated fair value of debt securities at December 31, 1995,
by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because certain issues may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- --------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1 year or less........................ $ 6,601 $ 6,513 $ - $ -
Over 1 year through 5 years........... 80,080 84,349 2,286 2,361
Over 5 years through 10 years......... 266,238 285,826 4,406 4,881
After 10 years........................ 7,950 8,300 -- --
Mortgage-backed securities............ 733,516 755,172 44,894 42,369
---------- ---------- ------- -------
Total....................... $1,094,385 $1,140,160 $51,586 $49,611
========== ========== ======= =======
</TABLE>
Net unrealized gains (losses) on available-for-sale securities included in
Stockholders' equity at December 31, 1995 and 1994 are presented net of deferred
income taxes (benefit) of $15.9 million and ($25.2) million, respectively.
Proceeds from the sales of investments during 1995 totaled $27.0 million
and resulted in realized investment gains of $.3 million. Net investment gains
for the years ended December 31, 1995, 1994 and 1993 were $.5 million, $.2
million and $.6 million, respectively, and are included in investment income. At
51
<PAGE> 52
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, securities with a cost of $9.4 million were on deposit with
insurance regulatory authorities.
3. LOANS -- NET
3.1 Loans Owned. The following schedule sets forth the components of Loans
owned by the Company at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Home equity.................................................. $236,987 $202,551
Commercial................................................... 169,990 155,271
Conventional................................................. 1,340 1,106
Foreclosed properties........................................ 25,017 31,073
Nonrefundable loan fees...................................... (4,950) (4,538)
Consumer and other........................................... 732 1,536
-------- --------
Total.............................................. $429,116 $386,999
======== ========
</TABLE>
Included in owned loans at December 31, 1995 and 1994 were nonaccrual loans
totaling $20.8 million and $21.7 million, respectively.
The following schedule summarizes the composition of Loans -- net at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans........................................................ $429,116 $386,999
Allowance for loan losses.................................... (14,891) (16,508)
Unearned discount............................................ (651) (1,109)
-------- --------
Loans -- net................................................. $413,574 $369,382
======== ========
</TABLE>
3.2 Loans Serviced. The following table sets forth the loans serviced by
the Company for third parties at December 31, 1995 and 1994, by type of loan.
The right to service these loans was retained upon their sale in the secondary
market. Substantially all of these loans were originated by the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Home equity.................................................. $2,464,495 $1,480,047
Commercial................................................... 81,251 126,691
Conventional................................................. 57,198 73,136
---------- ----------
Total.............................................. $2,602,944 $1,679,874
========== ==========
</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.
52
<PAGE> 53
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary analysis of the changes in the Company's Allowance for Loan
Losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period....................... $ 16,508 $ 21,017 $ 15,842
Loans charged to allowance
Home equity........................................ (13,818) (12,745) (9,114)
Commercial......................................... (4,416) (5,767) (3,579)
Conventional....................................... (178) (149) (142)
-------- -------- --------
Total...................................... (18,412) (18,661) (12,835)
Recoveries on loans previously charged to
allowance....................................... 1,643 1,209 631
-------- -------- --------
Net loans charged off.............................. (16,769) (17,452) (12,204)
Loan loss provision................................ 16,025 13,457 17,343
Reserve reclassification........................... (873) (514) 36
-------- -------- --------
Balance at end of year............................. $ 14,891 $ 16,508 $ 21,017
======== ======== ========
Specific reserves.................................. $ 5,445 $ 6,571 $ 8,500
Unallocated reserves............................... 9,446 9,937 12,517
-------- -------- --------
Total reserves............................. $ 14,891 $ 16,508 $ 21,017
======== ======== ========
</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, 1995, the Company
owned $25.0 million of property acquired in settlement of loans, excluding the
specific reserves attributed to these properties. These balances are included in
the loans owned by the Company. The specific reserve in the table above is
provided to reduce the carrying value of these properties to their estimated
market value.
A summary of the allowances for future credit losses on loans and
foreclosed properties owned by the Company and loans sold with recourse is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses (applicable to loans and
foreclosed properties owned by the Company)........... $14,891 $16,508 $21,017
Allowance for loss on loans serviced (applicable to
loans sold with recourse)............................. 44,970 26,822 12,938
------- ------- -------
Total......................................... $59,861 $43,330 $33,955
======= ======= =======
</TABLE>
As of December 31, 1995, approximately $2.5 billion of home equity loans
sold were serviced under agreements substantially all of which provide for the
subordination of cash and excess interest spread owned by the Company for credit
losses ("loans sold with recourse"). The maximum recourse associated with sales
of home equity loans according to terms of the loan sales agreements was
approximately $475 million at December 31, 1995, of which $466 million relates
to the subordinated cash and excess interest spread. The Company's estimate of
its losses, based on historical loan loss experience, was approximately $45.0
million at
53
<PAGE> 54
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995 and is recorded in the Company's allowance for loss on loans
serviced. Should credit losses on loans sold with limited recourse, or
subordination of cash and excess interest spread owned by the Company,
materially exceed the Company's estimate for such losses, such consequence will
have a material adverse impact on the Company's operations.
3.4 Concentration of Credit Risk. The Company's serviced portfolio is
geographically diversified. Although the Company services mortgage loans in 48
states, at December 31, 1995, a substantial portion of loans serviced were
originated in Florida (10.5%), Ohio (10.0%) and Louisiana (8.8%) , respectively,
and no other state accounted for more than 7.5% of the serviced portfolio.
Included in the serviced portfolio are commercial loans originated by the
Company, a substantial portion of which were originated in Florida (25.9%),
Georgia (19.4%) and Colorado (10.9%) and no other state accounted for more than
8.0% of the commercial loans serviced. The risk inherent in such concentrations
is dependent not only upon regional and general economic stability which affects
property values, but also the financial well-being and creditworthiness of the
borrower.
3.5 Commitments. The Company uses a prefunding feature in connection with
loan securitization transactions. At December 31, 1995 approximately $3.7
million was held in a prefunding account for the purchase of the Company's home
equity loans during the first quarter of 1996. Pursuant to this commitment, home
equity loans with a remaining principal balance of approximately $3.7 million
were delivered January 10, 1996.
4. PROPERTY -- NET
Property is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings.............................................. $ 41,796 $ 34,716
Furniture, fixtures and equipment............................... 21,751 18,943
------- --------
Total................................................. 63,547 53,659
Less accumulated depreciation................................... (24,888) (23,094)
------- --------
Total................................................. $ 38,659 $ 30,565
======= ========
</TABLE>
Rental expense on operating leases, including real estate, computer
equipment and automobiles, totaled $6.4 million, $5.3 million and $3.3 million
during 1995, 1994 and 1993, respectively. Minimum annual commitments at December
31, 1995 under noncancellable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................ $ 5,652
1997................................................ 3,686
1998................................................ 1,544
1999................................................ 386
2000................................................ 108
Thereafter.......................................... 4
-------
Total..................................... $11,380
=======
</TABLE>
5. OTHER ASSETS AND OTHER LIABILITIES
At December 31, 1995, Other assets included amounts due from reinsurers of
$33.6 million and Policy loans of $20.3 million compared to $35.0 million and
$20.2 million, respectively, at December 31, 1994. In addition, included in
Other assets at December 31, 1994 was a federal income tax receivable of $6.2
million.
54
<PAGE> 55
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other liabilities at December 31, 1995 and 1994 included a $24.0 million
and $12.8 million managed cash overdraft, respectively.
6. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
9.35% Senior unsecured notes due 11/1/99........................ $125,000 $125,000
7% Senior unsecured notes due 7/15/98........................... 100,000 --
Revolving credit agreement...................................... -- 72,163
Mortgage loan................................................... 5,473 1,755
Warehouse facility.............................................. 19,321 --
ESOP debt....................................................... 5,962 --
Short-term borrowings........................................... -- 14,750
-------- --------
Total................................................. $255,756 $213,668
======== ========
</TABLE>
On July 25, 1995 and on November 2, 1994, the Company publicly sold $100
million and $125 million, respectively, of its senior unsecured notes. The notes
provide for interest payable semi-annually and are not redeemable prior to
maturity. The notes rank on a parity with other unsecured and unsubordinated
indebtedness of the Company. The net proceeds from the sale of the notes were
used primarily to repay the principal amount of indebtedness outstanding under
the Company's existing revolving credit facility with a group of banks.
At December 31, 1995, the Company had available a secured warehouse
facility provided by the investment bank that acted as lead underwriter of the
Company's fourth quarter public loan securitization transaction. The warehouse
facility was directly related to the public securitization and initially
provided funding for up to $250 million of eligible home equity loans for such
securitization and matured on January 10, 1996 with the closing of the last
delivery of loans for the securitization. In addition, the mortgage lending
subsidiaries of the Company entered into a credit agreement dated as of May 23,
1995 with First Union National Bank of North Carolina and certain other lenders
signatory thereto. Under this facility, the mortgage lending subsidiaries may
borrow up to $150 million on a revolving basis secured by home equity loans
eligible thereunder. Loans under this facility are subject to the satisfaction
of certain borrowing conditions, including a minimum borrowing base and bear
interest at a floating rate. Borrowings under this warehouse facility are
required to be repaid from the proceeds of the sale or other disposition of the
home equity loan collateral. The lenders' commitment under this facility is
scheduled to terminate on May 23, 1997. As of December 31, 1995, approximately
$19.3 million was outstanding under this warehouse facility.
The Company also has arrangements with banks providing for short-term
unsecured borrowings of up to $65 million, none of which was outstanding at
December 31, 1995. Borrowings under these lines of credit bear interest at
market or prime rates. Notes payable at December 31, 1995 include a $5.5 million
mortgage loan for the construction of an office building adjacent to the
Company's home office building and is secured by a mortgage on the property.
The Company made payments for interest of $25.7 million, $13.0 million and
$9.5 million during the years ended December 31, 1995, 1994 and 1993,
respectively.
55
<PAGE> 56
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The provision for income taxes attributable to continuing operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current................................................ $11,047 $17,191 $18,276
Deferred............................................... 30,758 12,301 (3,532)
------- ------- -------
Total........................................ $41,805 $29,492 $14,744
======= ======= =======
</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,
-------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax at statutory rate................... $40,168 $29,426 $15,072
Differences resulting from:
Reversal of timing differences at prior tax rates.... -- -- 15
State income taxes................................... 511 (72) 75
Other................................................ 1,126 138 (418)
------- ------- -------
Reported income tax provisions......................... $41,805 $29,492 $14,744
======= ======= =======
</TABLE>
The significant components of the Company's net deferred income tax
(benefit) liability at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses....................................... $ 904 $ 1,011
Nonrefundable loan fees......................................... 1,732 1,588
Policy reserves................................................. 21,530 21,464
Mark-to-market adjustment....................................... -- 25,231
Investment securities........................................... 3,377 1,924
Other........................................................... 840 913
------- -------
28,383 52,131
------- -------
Deferred income tax liabilities:
Loan income..................................................... 41,022 10,910
Mark-to-market adjustment....................................... 15,892 --
Mortgage servicing rights....................................... 2,034 --
Real estate..................................................... 4,421 4,175
Deferred policy acquisition costs............................... 29,475 29,626
------- -------
92,844 44,711
------- -------
Net deferred income tax (benefit) liability....................... $64,461 $(7,420)
======= =======
</TABLE>
Payments made for income taxes during the years ended December 31, 1995,
1994 and 1993 were $7.8 million, $28.3 million and $5.4 million, respectively.
56
<PAGE> 57
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated retained earnings at December 31, 1995 include approximately
$5.2 million of "Policyholders' Surplus" on which no federal income tax payment
will be required unless it is distributed as a dividend or exceeds the limits
prescribed by tax laws applicable to life insurance companies. A deferred income
tax liability has not been recognized for this amount. The maximum federal
income tax provision possibly required based on the current federal income tax
rate would be $1.8 million.
At December 31, 1995 and 1994, the Company had a current income tax
receivable of $11.2 million and $6.2 million, respectively, which is included in
"Other assets".
8. CAPITAL STOCK
The Company has authorization to issue up to 100,000,000 shares of its
$2.00 par value common stock. There were 28,142,564 and 27,381,472 shares
outstanding at December 31, 1995 and 1994, respectively, excluding 1,159,682
treasury shares. The Company also has authorization to issue 20,000,000 shares
of preferred stock of which 1,955,000 shares are currently issued (see
discussion of "PRIDES(SM)" below). Included in the authorized preferred stock
are 1,000,000 shares of Series A Junior Participating preferred stock and
800,000 shares of Cumulative Convertible preferred stock, none of which is
outstanding.
On June 16, 1995, the Company concluded the sale of 1,955,000 shares of its
Preferred Redeemable Increased Dividend Equity Securities(SM), 6 3/4%
PRIDES(SM), Convertible Preferred Stock, par value $2.00 per share
("PRIDES(SM)"), at a price per share of $44.00. Dividends on the PRIDES(SM) are
cumulative and are payable quarterly in arrears on each January 1, April 1, July
1 and October 1. Net proceeds to the Company were approximately $83.3 million.
The net proceeds from the sale of shares of PRIDES(SM) were used for general
corporate purposes.
The PRIDES(SM) rank prior to the Company's common stock as to payment of
dividends and distribution of assets upon liquidation. The shares of PRIDES(SM)
mandatorily convert into shares of common stock on July 1, 2000 (the "Mandatory
Conversion Date") on a two share to one share basis (as adjusted for the 100%
common stock dividend paid October 20, 1995), and the shares of PRIDES(SM) are
convertible into shares of common stock at the option of the holder at any time
prior to the Mandatory Conversion Date on the basis of 1.652 of a share of
common stock for each share of PRIDES(SM), in each case subject to adjustment in
certain events. In addition, the Company has the option to convert the shares of
PRIDES(SM), in whole or in part, on or after July 1, 1998 until the Mandatory
Conversion Date, into shares of its common stock according to a formula.
On October 26, 1994, the Company's Board of Directors declared a 10% common
stock dividend payable to shareholders of record on December 22, 1994. The
additional shares were distributed on January 10, 1995. On August 23, 1995, the
Company's Board of Directors declared a two-for-one common stock split effected
in the form of a 100% stock dividend on outstanding stock which was distributed
October 20, 1995, to stockholders of record on October 9, 1995. All per share
amounts, numbers of shares and related amounts for all periods presented in the
accompanying financial statements and notes thereto have been retroactively
adjusted to reflect these transactions. During 1995 and 1994, the Company paid
cash dividends on its common stock in the amount of $5.5 million and $5.1
million, or $.20 and $.182 per share, respectively. In addition, during 1995,
the Company paid cash dividends on its PRIDES(SM) in the amount of $3.1 million
or $1.61 per share. See Note 10 for a discussion of dividend restrictions on
retained earnings.
On July 27, 1994, the Board of Directors authorized the redemption of the
rights under the rights plan of the Company adopted in 1989 (the "1989 Rights
Plan") and approved a new rights plan (the "1994 Rights Plan"). In connection
with the redemption, the rights under the 1989 Rights Plan (the "1989 Rights")
were redeemed at a price of $.0039526 per 1989 Right with the aggregate
redemption price payable to each holder of the 1989 Rights to be rounded up to
the nearest $.01. In approving the 1994 Rights Plan, the Board of Directors
declared a dividend distribution of one preferred share purchase right for each
outstanding share of
57
<PAGE> 58
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's Common Stock. The rights under the 1994 Rights Plan will become
exercisable only upon the occurrence of certain events as specified therein
(primarily certain changes in ownership of the Company).
At December 31, 1995 and 1994, 1,159,682 shares of the Company's common
stock, or 4% of the issued common stock, were held as treasury stock at a cost
of $6.8 million.
9. EMPLOYEE BENEFIT PLANS
9.1 Employee Stock Ownership Plan. All employees who meet minimum age and
service requirements participate in the Company's Employee Stock Ownership Plan
("ESOP"). The Company makes annual tax deductible contributions to the ESOP
which are used to purchase additional shares of the Company's common stock or to
pay debt service on shares acquired with the proceeds of loans ("leveraged
shares"). The ESOP's leveraged shares are initially pledged as collateral for
the debt incurred in connection with the acquisition of such shares. As the debt
is repaid, the shares are released from collateral and allocated to plan
participants. Contributions are allocated among participants based on years of
service and compensations. Upon retirement, death or disability, the employee or
a beneficiary receives the designated common stock.
The Company's cash contributions to the ESOP were $2.3 million, $2.2
million and $.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Shares held by the ESOP at December 31, 1995, 1994 and 1993 were
approximately 4.0 million, 4.7 million and 4.3 million, respectively. At
December 31, 1994, the ESOP had borrowed $4.3 million from the Company bearing
interest at rates ranging from 7.85% to 9.50%. During 1995, the ESOP was granted
a $10 million line of credit from a financial institution. During 1995, the ESOP
borrowed $1.6 million under this line of credit and refinanced the amounts
previously borrowed from the Company. At December 31, 1995 the ESOP had notes
payable with a balance of $6.0 million under this line of credit. Because the
source of the loan payments is primarily contributions received by the ESOP from
the Company, such debt is included in the Company's notes payable with a
corresponding reduction of stockholder's equity. In accordance with Statement of
Position 93-6 ("SOP 93-6"), leveraged shares purchased subsequent to December
31, 1992 are, upon release, reflected as compensation expense based on the then
current market price of the shares. Shares which have not been committed to be
released are not considered outstanding for purposes of the computation of
earnings per share. During 1995, 165,000 shares of the Company's common stock
which were considered outstanding for earnings per share purposes in prior
periods were not considered outstanding. At December 31, 1995, approximately
8,000 shares of common stock were committed to be released resulting in
additional compensation expense of approximately $.2 million during 1995. At
December 31, 1995, the ESOP had approximately 800,000 leveraged shares, of which
approximately 288,000 were accounted for under the provisions of SOP 93-6. The
fair value of the 288,000 leveraged shares accounted for under the provisions of
SOP 93-6 was $7.6 million at December 31, 1995.
58
<PAGE> 59
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9.2 Stock Option Plans. The following is a summary of options granted,
exercised or canceled during 1993, 1994 and 1995.
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
--------- -----------------
<S> <C> <C>
January 1, 1993.......................................... 1,871,050 $ 2.77 to $ 4.55
Granted................................................ 847,880 $ 4.12 to $ 6.42
Exercised.............................................. (811,652) $ 2.77 to $ 4.13
Canceled............................................... (97,432)
---------
December 31, 1993........................................ 1,809,846 $ 2.77 to $ 6.42
Granted................................................ 138,596 $15.46 to $19.21
Exercised.............................................. (219,174) $ 2.77 to $ 4.13
Canceled............................................... (29,822)
---------
December 31, 1994........................................ 1,699,446 $ 2.77 to $19.21
Granted................................................ 670,600 $16.00 to $22.38
Exercised.............................................. (409,092) $ 2.77 to $ 6.42
Canceled............................................... (40,734)
---------
December 31, 1995........................................ 1,920,220
=========
</TABLE>
At December 31, 1995 options for 522,084 of the Company's common stock were
exercisable and 914,396 shares were available for the granting of options.
During 1995 and 1994, the Company recognized a $4.4 million and a $1.4 million
federal income tax benefit, respectively, as a result of the exercise of non-
qualified stock options. This benefit resulted in a decrease in current income
taxes payable and an increase in additional paid-in capital.
9.3 Employees' Savings Plan and Trust. The United Companies Financial
Corporation Employees' Savings Plan and Trust is designed to be a qualified plan
under Sections 401(a) and 401(k) of the Internal Revenue Code. Under the plan,
employees are allowed to defer income on a pre-tax basis through contributions
to the plan and the Company matches a portion of such contributions. The
Company's matching contributions totaled $1.3 million, $1.0 million and $.4
million during 1995, 1994 and 1993, respectively. Employees have five investment
options, one of which is to invest in the Company's common stock. The plan held
567,971 and 558,386 shares of the Company's common stock at December 31, 1995
and 1994, respectively.
9.4 Deferred Compensation Plans. Postretirement benefits are provided to
eligible executive and senior officers of the Company under a deferred
compensation plan. The cost of this plan during 1995 and 1994 was $.2 million
and $.3 million, respectively. The Company calculated its postretirement benefit
obligation as of December 31, 1995 using a weighted average discount rate of
6.5%. A reconciliation of the funded status of the deferred compensation plan as
of December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 NET CHANGE DECEMBER 31, 1994
----------------- ---------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit
obligation............................. $(1,912) $ (90) $(1,822)
Plan assets.............................. -- -- --
------- ------ -------
Funded status............................ (1,912) (90) (1,822)
Unrecognized transition obligation....... 1,138 (66) 1,204
------- ------ -------
Accrued postretirement benefit cost...... $ (774) $ (156) $ (618)
======= ====== =======
</TABLE>
59
<PAGE> 60
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. REGULATORY ACCOUNTING
Accounting records of UCLIC are also maintained in accordance with
practices prescribed or authorized by insurance regulatory authorities.
Prescribed statutory accounting principles include a variety of publications of
the National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. UCLIC's capital
and surplus pursuant to the regulatory accounting basis as of December 31, 1995
and 1994 was $99.9 million and $90.0 million, respectively. UCLIC's regulatory
accounting basis net gain from operations for the years ended December 31, 1995,
1994 and 1993 was $12.8 million, $9.7 million and $13.0 million, respectively.
Net income (loss) of UCLIC on a regulatory accounting basis, which includes
realized capital gains and losses, was $10.0 million, $5.8 million and $(1.7)
million for the years ended December 31, 1995, 1994 and 1993, respectively. As a
Louisiana domiciled insurance company, UCLIC is subject to certain regulatory
restrictions on the payment of dividends. UCLIC has the capacity at December 31,
1995 to pay dividends of $9.2 million without prior regulatory approval. UCLIC
did not pay any dividends to the Company during 1993, 1994 or 1995 in order to
retain capital in UCLIC. At December 31, 1995, UCLIC has $186.5 million of net
assets for financial reporting purposes.
UCLIC received written approval from the Louisiana Department of Insurance
to invest in first lien residential mortgage loans originated by the Company on
a short-term basis without recording the assignment of the mortgage loans to
UCLIC, which differs from prescribed statutory accounting practices. Statutory
accounting practices prescribed by the State of Louisiana require that
investments in mortgage loans be secured by unrestricted first liens on the
underlying property. As of December 31, 1995, statutory surplus was increased by
approximately $53.7 million as a result of this permitted practice.
11. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107") requires
that the Company disclose the estimated fair values of its financial
instruments, both assets and liabilities recognized and not recognized in its
financial statements.
SFAS 107 defines financial instruments as cash and contractual rights and
obligations that require settlement in cash or by exchange of financial
instruments. Fair value is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties other than in a
forced or liquidation sale.
60
<PAGE> 61
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying value and fair value of the Company's financial assets and
liabilities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.......... $ 28,087 $ 28,087 $ 56,359 $ 56,359
Temporary investments -- reserve
accounts........................ 155,254 155,254 81,980 81,980
Loans -- net....................... 394,002 396,923 344,880 343,121
Capitalized excess servicing
income.......................... 283,454 283,454 179,065 179,065
Investment securities:
Trading......................... 752 752 679 679
Available-for-sale.............. 1,140,421 1,140,421 960,100 960,100
Held-to-maturity................ 51,586 49,611 57,391 55,084
Other assets....................... 70,916 71,628 61,430 61,430
Financial liabilities:
Annuity reserves................... 1,417,803 1,350,626 1,425,973 1,354,944
Notes payable...................... 255,756 270,558 213,668 212,314
Allowance for loss on loans
serviced........................ 44,970 44,970 26,822 26,822
Repurchase agreements.............. 40,857 40,857 -- --
Other liabilities.................. 29,528 29,528 15,679 15,679
</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 approximate the remaining principal balance which is
believed to represent an estimate of market discount from similar loans
identified for sale. The fair value of delinquent loans was estimated by using
the Company's historical
61
<PAGE> 62
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recoverable amount on defaulted loans. Foreclosed property is excluded from this
disclosure because it is not considered a financial instrument.
Capitalized excess servicing income. The value of capitalized excess
servicing, which relates to the excess interest retained on loans sold, was
estimated by discounting the future cash flows, adjusted for prepayments and
estimated losses on loans sold with recourse. The carrying value is considered
to be a reasonable estimate of fair value.
Investment securities. The estimated fair value for the Company's
investment security portfolio was generally determined from quoted market prices
for publicly traded securities. Certain of the securities owned by the Company
may trade infrequently or not at all; therefore, fair value for these securities
was determined by management by evaluating the relationship between quoted
market values and carrying value and assigning a liquidity factor to this
segment of the investment portfolio.
Allowance for loss on loans serviced. In estimating the fair value of the
allowance for loss on loans serviced with recourse, the Company estimated the
timing of cash flows and discounted these cash flows using a risk-free interest
rate.
Repurchase agreement. The repurchase agreements mature in less than 60
days; therefore, the carrying amount of the repurchase agreements are considered
to be a reasonable estimate of fair value.
Other assets and other liabilities. Other assets include primarily due from
reinsurers, policy loans and mortgage servicing rights. Other liabilities are
comprised primarily of managed cash overdraft, amounts due investors, escrow
accounts and accrued interest payable. In estimating the fair value of these
assets and liabilities, the Company scheduled the timing of their estimated cash
flows and discounted these cash flows based on a market rate of interest.
Annuity reserves. The Company's annuity contracts generally do not have a
defined maturity and are considered as deposits under SFAS 97. SFAS 107 states
that the fair value to be disclosed for deposit liabilities with no defined
maturities is the amount payable on demand at the reporting date. Accordingly,
the Company has estimated the fair value of its annuity reserves as the cash
surrender value of these contracts at December 31, 1995.
Notes payable. Notes payable consists primarily of amounts payable for the
Company's senior unsecured notes. The fair value of the senior unsecured notes
is based upon the estimated current rate offered to the Company for debt of the
same remaining maturity.
The fair values presented herein are based on pertinent information
available to management as of December 31, 1995. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
12. DISCONTINUED OPERATIONS
United General Title Insurance Company. On April 10, 1995, the Company made
a decision to dispose of its investment in United General Title Insurance
Company ("UGTIC"), a wholly owned subsidiary of the Company, and, on May 1,
1995, approved a formal plan of disposal. The decision to dispose of UGTIC was
independent of the consummation of the sale thereof pursuant to the definitive
stock sale agreement signed on August 11, 1995. As a result, the operations of
UGTIC have been classified as discontinued operations, and, accordingly, the
consolidated financial statements and the related notes of the Company segregate
continuing and discontinued operations. The sale was concluded on February 29,
1996 at a sales price of approximately $5.1 million.
62
<PAGE> 63
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The definitive stock sale agreement provided for the sale of 100% of the
stock of UGTIC and contains a provision making the Company liable to UGTIC for
claims from defalcations and fraud losses incurred by UGTIC which are unknown
and occur prior to closing and are discovered within 24 months thereafter. The
Company is also liable, up to $4.2 million, for policy claims paid over a ten
year period after closing that exceed certain specified levels. The Company
recorded a loss from discontinued operations (net of income tax benefit) of $3.5
million in 1995 in connection with the sale of UGTIC.
Revenues for UGTIC for the years ended December 31, 1995, 1994 and 1993
were $37.8 million, $45.5 million and $25.1 million, respectively. At December
31, 1995, total assets and total liabilities of UGTIC were $16.8 million and
$8.3 million, respectively.
Foster Mortgage Corporation. On May 7, 1993, the Company decided to divest
its subsidiary Foster Mortgage Corporation ("FMC"). As of November 30, 1993, the
servicing rights owned by FMC, which constituted substantially all of its
assets, were sold. On December 21, 1993, the institutional lenders under FMC's
primary credit facility (the "FMC Institutional Lenders") filed a petition in
the U.S. bankruptcy court to cause the remaining affairs of FMC to be concluded
under the supervision of the bankruptcy court. The FMC Institutional Lenders
filed and the bankruptcy court approved a plan of liquidation for FMC providing
for the appointment of a trustee selected by the FMC Institutional Lenders. The
FMC Institutional Lenders allege that FMC has certain claims against the
Company, including a claim with respect to the Company's alleged failure to
remit all sums due FMC regarding federal income taxes under a tax agreement
among the Company and its subsidiaries, including FMC, estimated by the FMC
Institutional Lenders to range from $2.1 million to $29 million. FMC and the
Company executed, subject to the approval of the bankruptcy court, a settlement
agreement relating to payments between FMC and the Company in connection with
the federal income tax benefits resulting from FMC's losses and to certain prior
intercompany payments between FMC and the Company. The settlement agreement
included a release by FMC in favor of the Company of any and all claims relating
to federal income taxes. The FMC Institutional Lenders opposed the proposed
settlement agreement. At the conclusion of a hearing on the proposed settlement
on August 18, 1994, the bankruptcy court approved the portion of the settlement
providing for a net payment by the Company of $1.65 million to FMC in
satisfaction of the federal income tax benefits resulting from FMC's losses and
the release of any claims regarding federal income taxes. The bankruptcy court
declined to approve the other portion of the proposed settlement relating to
payments received by the Company from FMC within twelve months of the bankruptcy
filing. If the Company were required to refund such payments, the Company has
estimated the potential additional loss to be $1.9 million, net of tax benefits.
The decision of the bankruptcy court on the settlement was appealed by the FMC
Institutional Lenders to the U.S. District Court which affirmed the bankruptcy
court's decision. The FMC Institutional Lenders then appealed this decision to
the U.S. Fifth Circuit Court of Appeals. In a decision rendered on November 9,
1995, the U.S. Fifth Circuit Court of Appeals reversed the district court,
vacated the settlement between FMC and the Company and remanded the matter for
further proceedings. The trustee under the plan of liquidation has filed an
adversary proceeding in the bankruptcy proceedings against the Company seeking
avoidance of alleged preferential payments totaling $3.72 million and has also
instituted a suit in federal court against the Company alleging claims under the
tax agreement estimated to range from $2 million to $29 million. Management of
the Company does not believe that any additional amounts are owed by the Company
to FMC or the trustee and intends to vigorously contest the claims which have
been brought against it for such amounts by the trustee under the plan of
liquidation. The Company did not guarantee any debt of FMC.
13. SUBSEQUENT EVENT.
On February 2, 1996, the Company signed a stock purchase agreement dated as
of January 30, 1996, for the sale of all of the stock of UCLIC to UC Life
Holding Corp., a new Delaware corporation formed by Knightsbridge Capital Fund
I, L.P. for an aggregate amount of $164 million plus earnings of UCLIC from
January 1, 1996, to closing of the transaction. Knightsbridge, which is a
private investment partnership with
63
<PAGE> 64
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
institutional partners, was formed in 1995 to make equity investments in
companies engaged primarily in the life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash,
currently estimated to be $109 million and UCLIC real estate and other assets to
be distributed to the Company prior to the closing. The real estate to be
distributed includes portions of the United Plaza office park, including the
Company's home office. In addition, the Company will purchase a convertible
promissory note from an affiliate of the purchaser for $15 million in cash. The
note matures in 11 years and bears interest at 8% per annum payable at maturity.
The Company does not expect the sale to have a material effect on net income.
The purchaser also agreed that UCLIC would continue to be an investor in
first lien home equity loans originated by the Company's lending operations and
that UCLIC's home office operations would be maintained in its present location
in Baton Rouge, Louisiana following the closing for at least two years. The
agreement is subject to approval by UCFC's shareholders and regulatory
authorities and the satisfaction of other conditions, and provides that the
closing will occur on or before July 31, 1996.
14. SEGMENT INFORMATION
The following table sets forth the Company's revenues, income from
continuing operations before income taxes and assets for each of its business
segments for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Mortgage....................................... $ 253,098 $ 177,601 $ 120,639
Life insurance................................. 144,485 138,129 140,179
Corporate, other operations, and
eliminations................................ 367 (1,036) (805)
---------- ---------- ----------
Total.................................. $ 397,950 $ 314,694 $ 260,013
========== ========== ==========
Income from continuing operations before income
taxes
Mortgage....................................... $ 107,673 $ 81,155 $ 46,295
Life insurance................................. 12,099 9,080 2,635
Corporate, other operations, and
eliminations................................ (5,008) (6,161) (5,869)
---------- ---------- ----------
Total.................................. $ 114,764 $ 84,074 $ 43,061
========== ========== ==========
Assets -- Year-end
Mortgage....................................... $ 533,952 $ 301,330 $ 182,672
Life Insurance................................. 1,789,608 1,641,026 1,622,879
Corporate, other operations, and
eliminations................................ 43,326 35,899 11,602
---------- ---------- ----------
Total.................................. $2,366,886 $1,978,255 $1,817,153
========== ========== ==========
</TABLE>
15. CONTINGENCIES
As discussed in Note 12 above, the Company, in February, 1996, concluded
the sale of its investment in UGTIC. In connection therewith, the stock sale
agreement includes a provision making the Company liable to UGTIC for claims
from defalcations and fraud losses incurred by UGTIC which are unknown and occur
prior to closing and are discovered within 24 months thereafter. The Company is
also liable, up to $4.2 million, for policy claims paid over a ten year period
after closing that exceed certain specified levels.
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<PAGE> 65
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As also discussed in Note 12 above, the U.S. Fifth Circuit Court of Appeals
reversed the lower court decision approving the settlement agreement between FMC
and the Company, vacated the settlement between FMC and the Company and remanded
the matter for further proceedings. The trustee under the plan of liquidation
has filed an adversary proceeding in the bankruptcy proceedings against the
Company seeking avoidance of alleged preferential payments totaling $3.72
million and has also instituted a suit in federal court against the Company
alleging claims under the tax agreement estimated to range from $2 million to
$29 million. Management of the Company does not believe that any additional
amounts are owed by the Company to FMC or the trustee and intends to vigorously
contest the claims which have been brought against it for such amounts by the
trustee under the plan of liquidation. The Company did not guarantee any debt of
FMC.
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>
1995
Total revenues................................... $86,835 $101,876 $106,109 $103,130
Income from continuing operations before
income taxes.................................. 19,549 30,379 34,070 30,766
Net income....................................... 12,696 16,426 21,248 19,099
Per share data -- net income:
Primary:
Income from continuing operations........... $ .46 $ .66 $ .68 $ .61
Income (loss) from discontinued
operations............................... (.01 ) (.09) (.01) (.01)
------- -------- -------- --------
Total.................................... $ .45 $ .57 $ .67 $ .60
======= ======== ======== ========
Fully Diluted:
Income from continuing operations........... $ .46 $ .66 $ .66 $ .60
Income (loss) from discontinued
operations............................... (.01 ) (.10) (.01) (.01)
------- -------- -------- --------
Total.................................... $ .45 $ .56 $ .65 $ .59
======= ======== ======== ========
1994
Total revenues................................... $74,816 $ 78,175 $ 82,054 $ 79,649
Income from continuing operations before
income taxes.................................. 20,832 22,751 23,290 17,201
Net income....................................... 13,710 14,699 15,253 5,872
Per share data -- net income:
Primary:
Income from continuing operations........... $ .47 $ .52 $ .53 $ .39
Income (loss) from discontinued
operations............................... .01 (.01) -- (.18)
------- -------- -------- --------
Total.................................... $ .48 $ .51 $ .53 $ .21
======= ======== ======== ========
Fully Diluted:
Income from continuing operations........... $ .47 $ .52 $ .53 $ .39
Income (loss) from discontinued
operations............................... .01 (.01) -- (.18)
------- -------- -------- --------
Total.................................... $ .48 $ .51 $ .53 $ .21
======= ======== ======== ========
</TABLE>
65
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BIOGRAPHICAL INFORMATION
The name and age, principal occupation or employment, and other data
regarding each director and executive officer of the Company, based upon
information received from such directors and executive officers are set forth
below:
JAMES J. BAILEY, III
Mr. Bailey, age 54, has served as a director of the Company since 1987. Mr.
Bailey is managing partner of Bailey Family Investments and Chairman of Tri-Star
Investments, and he is a member of the Board of Directors of First Commerce
Corporation, City National Bank of Baton Rouge and St. Mary Bank and Trust,
Franklin, Louisiana.
ROBERT H. BARROW, GENERAL (RETIRED)
General Barrow, age 74, has served as a director of the Company since 1983.
He retired as Commandant of the United States Marine Corps in July, 1983.
General Barrow is a member of the Board of Advisors, Baton Rouge Region, Premier
Bank, National Association.
J. TERRELL BROWN
Mr. Brown, age 56, is Chairman of the Board of Directors and Chief
Executive Officer of the Company and Chief Executive Officer of each of the
subsidiaries of the Company. He has served as a director and executive officer
since 1972 and was named Chief Executive Officer in 1985. Mr. Brown is also a
director of Hibernia Corporation and Sizeler Property Investors, Inc.
RICHARD A. CAMPBELL
Mr. Campbell, age 64, has served as a director of the Company since 1987.
For the past five years, Mr. Campbell has been an independent oil and gas
exploration geologist in Lafayette, Louisiana, and has co-invested with Camex
Operating Company and/or Camex, Inc. in oil and gas exploration activities.
HARRIS J. CHUSTZ, JR.
Mr. Chustz, age 45, has served as the Manager of Finance and Accounting
with Florida Keys Electric Cooperative since 1976. Mr. Chustz is the son of the
Company's former Chairman of the Board, Harris J. Chustz.
JOHN D. DIENES
Mr. Dienes, age 54, serves as President and Chief Operating Officer of the
Company and is an executive officer of each Subsidiary of the Company. At the
time Mr. Dienes joined the Company in February 1994, he had over 30 years of
experience in the financial industry. Prior to his employment with the Company,
Mr. Dienes served as Executive Vice President and Director of Western Corporate
Banking for NationsBank Corporation, Dallas, Texas, his employer since 1988.
C. GERON HARGON
Mr. Hargon, age 50, serves as Executive Vice President of the Company and
President of United Companies Lending Group, Inc. ("UCLG"), United Companies
Lending Corporation ("UCLC"), Pelican Mortgage Company, Inc., United Companies
Mortgage of Tennessee, Inc. and Adobe, Inc., wholly-owned subsidiaries of the
Company. Mr. Hargon joined the Company on September 1, 1995. Mr. Hargon has
nearly 25 years experience in the financial services industry, most recently
serving as Chairman of Hibernia National
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<PAGE> 68
Bank's South Central Region. During his 19 years with Hibernia, Mr. Hargon
served as Chief Operating Officer and also managed its Baton Rouge and Texas
commercial banking operations.
ROY G. KADAIR, M.D.
Dr. Kadair, age 50, is a practicing physician (Internal Medicine) and has
been associated with the Baton Rouge Clinic for over 18 years. He is a director
and member of the executive committee of General Health System, and serves on
the board of directors of Baton Rouge General Hospital and Gulf South Health
Plans.
ROBERT D. KILPATRICK
Mr. Kilpatrick, age 72, has served as a director of the Company since 1989.
Mr. Kilpatrick serves as a director of Kuhlman Corporation and is an advisory
director of Boardroom Consultants, Inc. Prior to retirement in 1989, Mr.
Kilpatrick served as Chairman of the Board and Chief Executive Officer of CIGNA
Corporation and served as a director of CIGNA Corporation until 1994.
O. MILES POLLARD, JR.
Mr. Pollard, age 58, has served as a director of the Company since 1990. He
is engaged in private investments and serves as President of Cadogan Properties,
Inc. and Secretary of Randall Management Services, Inc. He is a director of
First Commerce Corporation and City National Bank of Baton Rouge.
DALE E. REDMAN
Mr. Redman, age 48, is Executive Vice-President, Chief Financial Officer
and Assistant Secretary of the Company and Vice Chairman of each of the
subsidiaries of the Company. Prior to his appointment as Chief Financial Officer
and Executive Vice President in 1988, Mr. Redman served as Secretary and
Treasurer of the Company. He has served as a director since 1983. Mr. Redman is
also a director of Picadilly Cafeterias, Inc.
ROBERT B. THOMAS, JR.
Mr. Thomas, age 49, serves as Executive Vice President of the Company and
Chairman and President of UCLIC, a wholly-owned subsidiary of the Company. Mr.
Thomas joined UCLIC in February of 1993. Prior to his employment with UCLIC, Mr.
Thomas served as a principal of Lewis and Ellis, Inc., a Dallas, Texas actuarial
consulting firm and, through Lewis and Ellis, served as consulting actuary to
UCLIC for approximately 15 years.
WILLIAM H. WRIGHT, JR.
Mr. Wright, age 69, has served as a director of the Company since 1972. He
serves as Chairman of the Board and Chief Executive Officer of Wright Insurance
Agency, Inc. and is a director of City National Bank of Baton Rouge.
COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT
Based solely upon a review of the copies of the forms furnished to the
Company, or written representations from certain reporting persons that no Form
5 reports were required to be filed, the Company believes that, during 1995, all
of its directors and pertinent officers complied with all applicable filing
requirements under Section 16(a) of the Securities Exchange Act of 1934, as
amended.
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<PAGE> 69
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth certain information on the annual and
long-term compensation for the Chief Executive Officer and each of the five most
highly compensated executive officers of the Company (collectively, the Chief
Executive Officer and such other executive officers shall be referred to herein
as the "Named Executive Officers") for the years ended December 31, 1995, 1994
and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ----------------------
AWARDS
----------------------
OTHER RESTRICTED ALL OTHER
ANNUAL STOCK OPTIONS COMPEN-
NAME AND BONUS COMPENSATION AWARDS (4)/ SATION
PRINCIPAL POSITION YEAR SALARY($) ($)(1) ($)(2) ($)(3) SARS(#) ($)(5)
------------------------------------- ---- --------- -------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Terrell Brown 1995 $393,750 $833,616 -- $304,000 50,000 $35,442
Chairman and 1994 378,304 297,205 -- -- -- 41,240
Chief Executive Officer 1993 375,625 76,395 -- -- 110,000 32,114
W. Roger Clark(7) 1995 135,106 -- -- 160,000 20,000 16,565
Executive Vice President and 1994 168,702 136,094 -- -- -- 23,164
President, UCLC 1993 155,269 39,027 -- -- 44,000 12,382
John D. Dienes, 1995 266,250 475,699 -- 208,000 24,000 16,499
President and 1994 220,864 241,805(6) -- -- 54,998 --
Chief Operating Officer 1993 -- -- -- -- -- --
C. Geron Hargon(8) 1995 66,668 359,025 -- 437,500 30,000 --
Executive Vice President and 1994 -- -- -- -- -- --
President, UCLC 1993 -- -- -- -- -- --
Dale E. Redman, 1995 246,095 445,298 -- 208,000 24,000 17,723
Executive Vice President and 1994 236,014 189,131 -- -- -- 23,711
Chief Financial Officer 1993 218,333 55,793 -- -- 44,000 14,218
Robert B. Thomas, Jr. 1995 219,625 395,818 -- 160,000 -- 16,499
Executive Vice President and 1994 209,366 168,116 -- -- -- 21,882
Chairman and President, UCLIC 1993 175,269 49,732 -- -- 44,000 --
</TABLE>
---------------
(1) Amounts awarded under the Company's Management Incentive Plan for the
respective fiscal years, even if deferred. Included in the amounts awarded
to J. Terrell Brown in 1995, 1994 and 1993 were $16,562, $16,729, and
$16,998, respectively, which were deferred pursuant to an unfunded salary
deferral agreement entered into between the Company and Mr. Brown in 1989.
The aggregate amount payable by the Company to Mr. Brown at February 29,
1996 was $136,023.
(2) No personal benefits, which are non-cash compensation, are disclosed in the
"Other Annual Compensation" column since they did not exceed the lesser of
either $50,000 or 10% of the total annual salary and bonus for any of the
named executive officers.
(3) Reflects the value of the shares of restricted stock based upon the closing
price of the Company's Common Stock reported on the National Association of
Securities Dealers Quotations National Stock Market (the "Nasdaq Stock
Market") on the date of award. The shares of the restricted stock vest in
50% increments on the anniversary date of the award in each of the two
years thereafter, except the shares awarded to Mr. Hargon, which vest in
25% increments on each of November 1, 1996, 1997, 1998 and 1999. The awards
are also subject to certain performance-based conditions. During the
restriction period for the shares of restricted stock, the named executive
officer is entitled to receive dividends and exercise voting privileges on
such restricted shares. At December 29, 1995, the shares of restricted
stock held by Messrs. Brown, Clark, Dienes, Hargon, Redman and Thomas had a
fair market value of $501,125, $263,750, $342,875, $369,250, $342,875 and
$263,750, respectively.
(4) Represents options granted under the Company's stock option plans for
employees after giving effect to stock dividends. All options have been
granted at an exercise price equal to 100% of the fair market value
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<PAGE> 70
of the Common Stock on the date of the grant. For additional information
regarding options granted during the last fiscal year, see "Option Grants
in Last Fiscal Year," and for information regarding current holdings of
options, see "Options Exercised and Year-End Values of Unexercised
Options."
(5) Amounts reported include amounts contributed or accrued for 1995, 1994 and
1993 for the named officers under the Company's Employee Stock Ownership
Plan ("ESOP") and Employees' Savings Plan and Trust. Amounts for J. Terrell
Brown for 1995, 1994 and 1993 also include $16,729, $16,998 and $17,134,
respectively, in loans to Mr. Brown for payment of a portion of the premium
on a life insurance policy. The loans were made without interest and are
secured by an assignment of the policy. See "Transactions with Management
and Others."
(6) Includes $41,667 paid to Mr. Dienes in the form of a bonus upon
commencement of his employment with the Company.
(7) Information regarding the compensation of Mr. Clark is included in this
table and those that follow because he served as an executive officer
during 1995, even though he retired effective as of August 31, 1995.
(8) Information regarding the compensation of Mr. Hargon is included in this
table and those that follow because he served as an executive officer
during 1995, even though he did not join the Company until September 1,
1995.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information regarding the options granted
during the year ended December 31, 1995, to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR OPTION
OPTIONS EMPLOYEES EXERCISE TERM
GRANTED IN FISCAL PRICE EXPIRATION -----------------------
NAME (#)(1) YEAR ($/SH)(1) DATE 5%($) 10%($)
------------------------------------ --------- ---------- --------- ------------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Terrell Brown.................... 50,000 7.5 22.375 June 14, 2005 $703,576 $1,782,999
W. Roger Clark...................... 20,000 3.0 22.375 June 14, 2005 281,430 713,200
John D. Dienes...................... 24,000 3.6 22.375 June 14, 2005 337,716 855,840
C. Geron Hargon..................... 30,000 4.5 31.25 September 1, 2005 589,589 1,494,134
Dale E. Redman...................... 24,000 3.6 22.375 June 14, 2005 337,716 855,840
</TABLE>
---------------
(1) The options granted to the Named Executive Officer were awarded under the
Company's 1993 Stock Incentive Plan (the "1993 Plan"). The options granted
under the 1993 Plan are not exercisable, except in limited circumstances,
until three years have elapsed from the date such options are granted. The
exercise price of the options, which can be no less than 100% of the fair
market value of a share of Common Stock on the date of grant, has been
adjusted to reflect a 100% stock dividend paid by the Company on October 20,
1995. The number of shares underlying the above options have also been
adjusted to reflect such stock dividend. The options will expire ten years
from the date of grant.
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<PAGE> 71
OPTIONS EXERCISED AND YEAR-END VALUES OF UNEXERCISED OPTIONS
The following table sets forth information, as of December 31, 1995,
regarding the number of shares received and the value realized upon exercise of
stock options, and the number and value of exercisable and unexercisable options
to purchase Common Stock of the Company held by any of the Named Executive
Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END 1995 OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL AT FISCAL
SHARES YEAR-END(#) YEAR-END($)(1)(2)(3)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Terrell Brown............... -- -- 153,824 160,000 $3,534,794 $ 2,394,995
W. Roger Clark................. 69,060 $1,598,962 -- 64,000 -- 957,998
John D. Dienes................. -- -- -- 78,998 -- 534,109
Dale E. Redman................. -- -- 103,488 68,000 2,383,065 973,998
C. Geron Hargon................ -- -- -- 30,000 -- --
Robert B. Thomas, Jr........... -- -- 22,000 22,000 489,625 438,999
</TABLE>
---------------
(1) All options were awarded at the fair market value of the shares of Common
Stock on the date of the grant.
(2) Values in each column are based on the closing price, as reported on the
Nasdaq Stock Market, of the Company's Common Stock on December 29, 1995
($26.375).
(3) The exercise prices of the reported options range from $2.77 to $31.25 per
share (as adjusted for stock dividends) with a weighted average exercise
price of $9.91 per share.
COMPENSATION OF DIRECTORS
Directors who are full-time employees of the Company receive no additional
compensation for services as a director. The Company has entered into employment
agreements and has executed change of control contracts with each of its
officer-directors as described below under "Employment Agreements and Change of
Control Arrangements". Each non-employee director received $1,000 per Board
meeting and $500 per Committee meeting attended during 1995. Each Committee
Chairman received an annual retainer of $1,000. Each director who is not an
employee of the Company also received during 1995 an annual retainer of $4,800,
paid in quarterly increments.
Each director who is not an employee of the Company is entitled to
participate in the Company's 1993 Non-Employee Director Stock Option Plan (the
"1993 Director Plan"). The 1993 Director Plan provides for the automatic grant
of stock options to purchase 4,000 shares of the Company's Common Stock to each
non-employee director each year upon his or her election or reelection to the
Board of Directors. In 1993, 1994 and 1995, each non-employee director has been
awarded options to purchase 17,600, 8,800 and 8,000 shares of Common Stock,
respectively (after an adjustment for a 100% common stock dividend paid on
October 18, 1993, a 10% common stock dividend paid on January 10, 1995 and a
100% common stock dividend paid on October 20, 1995), under the 1993 Director
Plan. The Company also has another option plan for non-employee directors, the
1989 Non-Employee Director Stock Option Plan (the "1989 Director Plan"). All
shares reserved for issuance under the 1989 Director Plan, however, have been
awarded pursuant to options. The exercise prices of options awarded under the
1993 and 1989 Director Plans are based upon 100% of the fair market value of the
Common Stock on the date of the grants. As of February 1, 1996, options to
purchase 380,360 shares of Common Stock at an average exercise price of $9.76
per share are outstanding under the Company's 1989 and 1993 Director Plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors during
1995 were Richard A. Campbell, Harris J. Chustz, Jr., Robert D. Kilpatrick and
O. Miles Pollard, Jr. No member of the
71
<PAGE> 72
Compensation Committee was an officer or employee of the Company or any of its
subsidiaries during 1995. No executive officer of the Company served during 1995
as a director or as a member of the compensation committee of another entity,
one of whose executive officers served as a director or on the Compensation
Committee of the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL
The compensation program for executives and key employees of the Company is
administered by the Compensation Committee (the "Committee") of the Company's
Board of Directors. During 1995, the Committee was comprised of the following
members, each of whom were outside, independent directors of the Company:
Richard A. Campbell, Chairman, Harris J. Chustz, Jr., Robert D. Kilpatrick and
O. Miles Pollard, Jr. In accordance with the rules and regulations of the
Securities and Exchange Commission, the Committee offers the following report on
the compensation policies for the executive officers and key employees of the
Company. This report outlines the duties of the Committee with respect to
executive compensation, the components of the Company's executive officer
compensation program and the basis on which 1995 compensation was determined for
the executive officers of the Company, with particular focus on the 1995
compensation for the Company's Chief Executive Officer (the "CEO").
Duties of the Committee include establishing the compensation program for
the CEO, consulting with the CEO and approving compensation for other executive
officers, administering the Company's Management Incentive Plan including the
approval of annual amounts to be distributed as bonuses thereunder, and
administering the Company's stock option plans for employees. In performing
these duties, the Committee focuses upon: (i) providing a competitive
compensation program that enables the Company to attract, retain and motivate a
high-quality executive management team focused on enhancing shareholder value;
(ii) coordinating compensation programs with the Company's annual and long-term
objectives and strategies; and (iii) providing compensation opportunities that
are based on the performance of the Company.
The Committee's overall philosophy on executive compensation, of course, is
to link compensation to the value and level of performance of the executive. To
achieve this, various pay delivery systems are utilized, including principally
base salary, cash bonuses, and equity-based incentives, which include the award
of stock options and restricted stock. The compensation decisions of the
Committee relative to the Company's executive officers and key employees are
described below as to each pay delivery system.
MANAGEMENT COMPENSATION
Base Salary. The salary levels of the Company's executive officers are
reviewed by the Committee annually. In determining appropriate base-salary
levels, the Committee considers such factors as duties and responsibilities
inherent in the position in question, initiative, performance, tenure and pay
practices for executives of other companies in the financial services industry,
as well as business conditions generally prevailing in the mortgage and
insurance industries.
While the Company achieved record earnings in 1994, the base salary levels
of executives were not increased substantially for 1995. Rather, for year-end
1995, executives received cash bonuses that were significantly higher than in
prior years as a result of Company performance.
Cash Bonuses. Annual awards are made to executives and key employees of
cash compensation pursuant to the Company's Management Incentive Plan. The cash
bonuses are based upon the attainment by the Company of financial objectives
based on return on equity during the prior year. Awards are made from a bonus
pool determined as a percentage of the Company's prior year net income as
specified by the Committee; however, funding of the bonus pool is capped at 10%
of after tax net income. Plan participants are assigned to one of five
eligibility levels based on the participant's contribution to and impact upon
the success of the Company. Bonuses are not paid unless a specified threshold
level of financial performance is achieved by the Company, which is presently
set at a minimum of a 10% return on equity. Accordingly, compensation of
executive officers and key employees is generally higher during years in which
Company performance meets or
72
<PAGE> 73
exceeds the specified goals. Net income for the year ended December 31, 1995,
totaled $69.5 million compared to $49.5 million during 1994. As a result, total
cash bonuses paid to 145 individuals participating in the Management Incentive
Plan during 1995 was approximately $5.2 million, compared to cash bonuses of
approximately $2.6 million paid to 102 individuals participating in the plan
during 1994. An amendment to the Management Incentive Plan approved at the 1995
Annual Meeting of Shareholders allows a participant to submit an advance written
election to the Committee requesting that all or part of the award otherwise
payable thereunder in cash, be paid in shares of the Company's Common Stock. The
Committee believes that this election mechanism further facilitates a tie
between employee compensation and the Company's performance as reflected in the
value of its Common Stock.
Equity-Based Incentives. The Company maintains stock incentive plans to
provide officers, supervisory personnel, other key employees and consultants
with additional incentive to promote the financial success of the Company
through the award of stock options and shares of restricted stock. Options
granted under the Company's 1993 Stock Incentive Plan ("the 1993 Plan") have
generally been long-term (10 years) and vest three years after the date of
grant. With such features, the Company considers stock options as a way of
aligning the interests of management with the long-term interests of the
Company's shareholders and inducing such executives to remain with the Company
on a long-term basis. During 1995, options (as adjusted for the 100% common
stock dividend paid on October 20, 1995) to purchase the Company's Common Stock
were awarded as follows: Mr. Brown, 50,000 shares; Mr. Clark, 20,000; Mr.
Dienes, 24,000; Mr. Hargon, 30,000; and Mr. Redman, 24,000. The exercise price
of such options is $22.375 per share, the fair market value of the shares of
Common Stock on the date of grant (as adjusted for stock dividends), except for
the options awarded to Mr. Hargon, which have an exercise price of $31.25 per
share (as adjusted), the fair market value on the date of award, the effective
date of Mr. Hargon's employment. As of December 31, 1995, options to purchase in
the aggregate approximately 1.5 million shares of the Company's Common Stock
were held by 323 employees under the Company's stock option plans for employees.
Included in this amount as of December 31, 1995, were options to purchase
702,310 shares of the Company's Common Stock at an average exercise price of
$9.91 per share held by the executive officers named in the Summary Compensation
Table. On February 23, 1995, the Committee and the Board of Directors authorized
an amendment to the 1993 Plan to allow the award of restricted stock thereunder,
and the Company's shareholders approved such amendment at the 1995 Annual
Meeting of Shareholders. The Committee has made the following awards of
restricted stock (as adjusted to reflect a 100% Common Stock dividend paid by
the Company on October 20, 1995) under the 1993 Plan: Mr. Brown, 19,000 shares;
Mr. Clark, 10,000 shares; Mr. Dienes, 13,000 shares; Mr. Hargon, 14,000 shares;
Mr. Redman, 13,000 shares; and Mr. Thomas, 10,000 shares. With the exception of
the award to Mr. Hargon, each of the awards to the foregoing executives vest in
50% increments on the first and second anniversary date of the award, if (i) the
executive is still in the employ of the Company on each date and (ii) the
Company reaches certain performance levels established by the Committee which,
for the awards above, is a 10% annual return on equity for each year ending
December 31. Mr. Hargon's award vests in 25% increments on each of November 1,
1996, 1997, 1998 and 1999, if (i) Mr. Hargon is still employed by the Company on
such date; and (ii) the Company attains a 10% return on equity for the twelve
month period ending on each of September 30, 1996, 1997, 1998 and 1999. On
February 23, 1996, a restriction period lapsed, and because the Company reached
the performance level established for the year ended December 31, 1995, 50% of
the shares of restricted stock awarded to Messrs. Brown, Clark, Dienes, Redman
and Thomas vested. If the Proposed Sale is consummated, the Committee has
decided to waive the restriction period and performance goal condition for the
remaining restricted shares of Mr. Thomas.
As noted above, an amendment to the Management Incentive Plan allows
participants to elect to receive shares of Common Stock in lieu of cash
thereunder. This amendment allows employees of the Company to increase their
equity interests in the Company at no cost to the employee, and concomitantly
reduces the cash necessary for the Company to pay bonuses. Further, the Company
considers this amendment as well as the amendment to the Company's 1993 Plan,
which allows the award of restricted stock thereunder, as additional means of
(i) providing compensation through equity-based incentives; and (ii) linking the
interests of management with the long-term interests of the Company and its
shareholders.
73
<PAGE> 74
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In establishing the compensation for Mr. Brown, the Committee observes the
same guidelines as set forth for executive officers generally. No specific
weighting is assigned to these guidelines, or factors, in determining the CEO's
compensation. During 1995, the base salary of Mr. Brown was increased by 5%
pursuant to the guaranteed increase in base salary under his employment contract
with the Company, which is discussed in greater detail below. The most
significant increase in total compensation of Mr. Brown for 1995 resulted from
his participation in the Management Incentive Plan, which is based upon the
performance of the Company as discussed above.
POLICY WITH RESPECT TO QUALIFYING COMPENSATION FOR DEDUCTIBILITY
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the
deduction allowable to the Company for compensation paid to the Chief Executive
Officer and each of the four other most highly compensated executive officers to
$1 million. Qualified performance-based compensation is excluded from this
limitation if certain requirements are met. The Company's policy is generally to
preserve the Federal income tax deductibility of compensation paid, to the
extent feasible. The Committee believes that awards under the Company's
Management Incentive Plan and its awards of options made under stock option
plans for employees will qualify as performance-based compensation and thereby
be excluded from the $1 million limitation. Notwithstanding the Company's policy
to preserve the Federal income tax deductibility of compensation payments, under
certain circumstances, the Committee, in its discretion, may authorize payments,
such as salary, bonuses or otherwise that may cause an executive officer's
income to exceed the deductible limits.
Richard A. Campbell, Chairman
Harris J. Chustz, Jr.
Robert D. Kilpatrick
O. Miles Pollard, Jr.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company has employment contracts with key management employees,
including Messrs. Brown and Redman. An employment contract between the Company
and Mr. Dienes expired in February 1996. The term of the contracts with Messrs.
Brown and Redman extends to June 1, 1997. The contracts with Messrs. Brown and
Redman, which were originally executed in 1981, generally require payment of a
minimum base salary with a 5% guaranteed annual increase for the term of the
contracts. The Company plans to execute, during 1996, an employment contract
with Mr. Hargon that will provide for a minimum base salary with a guaranteed
award increase for the term of the contract.
The Company also has in effect deferred compensation agreements with
Messrs. Brown and Redman pursuant to which, upon retirement at or after age 55,
the employee will receive deferred compensation payments in monthly payments for
10 years. The deferred compensation amount increases based on the number of
years of service after age 55, with a cap at age 70. For Messrs. Brown and
Redman, should they elect to exercise this agreement at age 55, they will
receive $35,000 per annum for the 10 year period. Should they wait until age 65
to exercise this agreement, they will receive $200,000 and $135,000 per annum,
respectively, for the 10 year period. The Company has purchased life insurance
on the lives of Messrs. Brown and Redman to fund its obligations under these
deferred compensation agreements. Under a separate split dollar agreement, the
beneficiaries of Messrs. Brown and Redman will receive a death benefit equal to
the policy value, $1,365,000 and $1,120,000, respectively, minus the lesser of
the cash value of the policy or premiums paid and any policy indebtedness to the
insurer. Under an additional unfunded salary deferral agreement entered into in
1989, a specified amount of compensation otherwise payable to Mr. Brown is
credited to an account to be paid to Mr. Brown or beneficiaries designated by
him on the earlier of Mr. Brown's death or termination of employment. During
1995 Mr. Brown's compensation, as reflected in the Bonus section of the Summary
Compensation Table, includes $16,562 which was deferred pursuant to this
agreement.
74
<PAGE> 75
In addition, the Company has supplemental retirement agreements with
Messrs. Clark, Dienes and Thomas pursuant to which, upon retirement, the
employee will receive monthly payments for 15 years. The annual amounts payable
under such agreements are as follows: Mr. Clark, $60,000; Mr. Dienes, $84,000;
and Mr. Thomas, $60,000. The Company has purchased life insurance on the lives
of Messrs. Clark, Dienes and Thomas to fund its obligations under these
agreements.
Although not the purpose of these employment, deferred compensation and
supplemental retirement agreements, a possible effect of such contracts may be
to discourage or deter a potential tender offer for the Company.
During 1995, the Company entered into change of control contracts with
Messrs. Brown, Dienes, Hargon and Redman. The contracts provide, in general,
that each executive will be entitled to a lump sum payment of two years salary
and bonus plus the continuation of certain benefits if the executive is
terminated without cause or his duties or responsibilities are diminished within
24 months after a change of control of the Company. The Company believes that
these contracts are important in retaining qualified management through a
transition in ownership, if a change were to occur, by providing such executives
with a certain comfort level during such transition so that they can focus on
what is in the best interests of the shareholders rather than on their position
with the Company.
STOCK PERFORMANCE GRAPH
The following line graph provides a comparison of the total shareholder
return on the Company's Common Stock with the return of the NASDAQ Index for
U.S. Companies and the NASDAQ Index of Financial Stocks for the period
commencing January 1, 1991 and ending December 29, 1995. All amounts have been
calculated as if all dividends were reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE
TOTAL RETURN OF THE COMPANY, NASDAQ (U.S. COMPANIES)
AND NASDAQ FINANCIAL STOCKS
[GRAPH]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
United Companies Financial Corporation 100.0 146.1 129.3 580.6 443.3 869.3
Nasdaq Stock Market (U.S. Companies) 100.0 160.5 186.9 214.5 209.7 296.5
Nasdaq Stock Market Financial Stocks 100.0 154.7 221.3 257.2 257.8 375.6
</TABLE>
75
<PAGE> 76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the amount and percent of shares of Common
Stock (as adjusted to reflect a 100% Common Stock dividend paid by the Company
on October 20, 1995) and the amount and percent of shares of PRIDES which, as of
February 29, 1996, are deemed under the rules of the Securities and Exchange
Commission (the "SEC") to be "beneficially owned" by each director of the
Company, by each executive officer of the Company, by all directors and
executive officers of the Company as a group, and by any person or "group" (as
that term is used in the Securities Exchange Act of 1934, as amended) known to
the Company as of that date to be a "beneficial owner" of more than 5% of the
outstanding shares of Common Stock or PRIDES:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE
TITLE OF BENEFICIAL OF
DIRECTORS AND EXECUTIVE OFFICERS CLASS OWNERSHIP(1)(2) CLASS(3)
------------------------------------------ -------------- --------------- ----------
<S> <C> <C> <C>
James J. Bailey, III Common Stock 177,860(4)(5) --
General Robert H. Barrow (retired) Common Stock 61,274(4) --
J. Terrell Brown Common Stock 917,449(5)(6)(7) 3.223%
Richard A. Campbell Common Stock 166,703(4) --
PRIDES 9,000 --
Harris J. Chustz, Jr. Common Stock 123,027(5) --
John D. Dienes Common Stock 115,489(6)(7) --
C. Geron Hargon Common Stock 45,170(6)(7) --
Roy G. Kadair, M.D. Common Stock 25,800(4) --
Robert D. Kilpatrick Common Stock 45,026(4) --
O. Miles Pollard, Jr. Common Stock 72,900(4) --
Dale E. Redman Common Stock 245,013(6)(7) --
Robert B. Thomas, Jr. Common Stock 58,576(6)(7) --
William H. Wright, Jr. Common Stock 396,790(4)(5) 1.407%
All directors and executive officers as a group Common Stock 2,525,962 8.648%
(13 persons) PRIDES 9,000 --
OTHER PERSONS
United Companies Financial Corporation
Employee Stock Ownership Plan and Trust
515 South Flower Street, Suite 2700 Common Stock 4,003,494(8) 14.224%
Los Angeles, CA 90071-2291
AIM Management Group, Inc.
AIM Advisors, Inc.
AIM Capital Management, Inc.
11 Greenway Plaza, Suite 1919
Houston, TX 77046 Common Stock 1,680,399(9) 6.0%
Highbridge Capital Corporation
Highbridge Capital Management, Inc.
Dubin & Swieca Capital Management, Inc.
c/o Highbridge Capital Corporation
The Residence, Unit #2, South Church Street
Grand Cayman, Cayman Islands
British West Indies PRIDES 306,550(10) 15.68%
</TABLE>
76
<PAGE> 77
---------------
(1) Under rules promulgated by the SEC, "beneficial ownership" includes having
or sharing with others the power to vote or direct the investment of
securities. Accordingly, a person having or sharing the power to vote or
direct the investment of securities is deemed to "beneficially own" the
securities even if such person has no right to receive any part of the
dividends on or the proceeds from the sale of these securities. Also,
because "beneficial ownership" extends to persons, such as co-trustees
under a trust, who share power to vote or control the disposition of the
securities, the very same securities may be deemed "beneficially owned" by
two or more persons shown in the table. Information with respect to
"beneficial ownership" shown in the table above is based upon information
supplied by the directors and executive officers of the Company and filings
made with the SEC or furnished to the Company by any shareholder.
(2) Includes pro rata shares, where applicable, that have been allocated to an
individual's account in the Company's Employee Stock Ownership Plan and
Trust (the "ESOP") and in the Company's Employees' Savings Plan and Trust
(the "401(k) Plan").
(3) Less than 1% except as otherwise indicated.
(4) Includes shares which the named holder as of February 29, 1996, was
entitled to acquire upon the exercise of options granted (whether or not
such options are vested) under the Company's 1993 and 1989 Non-Employee
Director Stock Option Plans.
(5) Includes shares held by family members and controlled affiliates.
(6) Includes shares which the following named holders as of February 29, 1996,
were entitled to acquire upon exercise of options granted (whether or not
such options are vested) under the Company's 1993 and 1989 Stock Incentive
Plans: Mr. Brown, 313,824; Mr. Dienes, 78,998; Mr. Hargon, 30,000; Mr.
Redman, 171,488; and Mr. Thomas, 44,000; all executive officers as a group
(5 persons), 638,310; and all directors, executive officers and senior vice
presidents as a group (27 persons), 774,368.
(7) Includes shares of restricted stock awarded to the named holder under the
Company's 1993 Stock Incentive Plan: Mr. Brown, 19,000 shares; Mr. Dienes,
13,000 shares; Mr. Hargon, 14,000 shares; Mr. Redman, 13,000 shares; and
Mr. Thomas, 10,000 shares. On February 23, 1996, a restriction lapsed and
because a performance goal of the Company was met as of December 31, 1995,
50% of the restricted shares awarded to Messrs. Brown, Dienes, Redman and
Thomas became fully vested.
(8) Held by U.S. Trust Company of California as trustee. An ESOP participant
exercises voting rights over shares of Common Stock allocated to the
participant's account, whether or not vested. Voting rights for any
unallocated shares of Common Stock held by the ESOP are voted by the
trustee in proportion to the voting of allocated shares by the ESOP
participants. At February 29, 1996, there were approximately 815,000
unallocated shares held by the ESOP. The Plan Administrator, a committee
composed of five officers and directors of the Company, may, in certain
circumstances, direct the trustee to purchase, sell, resell or otherwise
dispose of shares of Common Stock.
(9) This information is based solely upon a Schedule 13G for the year ended
December 31, 1995. However, in correspondence to the Company accompanying
the Schedule 13G, this group of shareholders indicated that they owned
shares of PRIDES which they included in the number of shares of Common
Stock set forth in the Schedule 13G (which is the number of shares set
forth in the table above). While the shareholder group did not provide to
UCFC the number of PRIDES they beneficially owned, they did indicate that
the PRIDES had been converted, as of December 31, 1995, into shares of
Common Stock and added into the total number disclosed in the Schedule 13G.
Without such conversion, the group of shareholders provided that their
ownership percentage in the Common Stock would be only 4.9%.
(10) This information is based solely upon a Schedule 13G for the year ended
December 31, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and its subsidiaries have, from time to time, made loans to
certain of its executive officers and directors and/or to entities in which such
persons have a material interest. Each of these loans were
77
<PAGE> 78
secured by a first mortgage on the residence, and/or commercial or other real
estate. There were no such loans outstanding during 1995 or through March 15,
1996.
Since 1989, the Company has made loans to Mr. Brown without interest,
secured by an assignment of a life insurance policy owned by Mr. Brown. The
loans were incurred to pay a portion of the premium on the assigned life
insurance policy. The Company has agreed to make annual loans of comparable
amounts for payment of a portion of these insurance premiums through the earlier
of the date of termination of Mr. Brown's employment or 2004. As of March 1,
1996, the aggregate principal and interest owed by Mr. Brown on such loans was
$136,023.
In the ordinary course of business, the Company and its subsidiaries have
purchased liability, worker's compensation, fidelity bond and various property
and other insurance coverage from the Wright Insurance Agency, Inc., of which
Mr. Wright is the majority owner. Premiums paid by the Company and its
subsidiaries for this insurance coverage were approximately $1.9 million for the
year ended December 31, 1995. The Company and its subsidiaries expect to
purchase additional insurance coverage in the future from the Wright Insurance
Agency, Inc. The Company believes that the premiums paid to the Wright Insurance
Agency, Inc. for the above-described coverage are comparable to those premiums
that would be charged by an unaffiliated third party for insurance of similar
coverage.
At December 31, 1995, the Company guaranteed loans to the ESOP made by a
financial institution with an aggregate principal balance outstanding of $6.0
million. The loans are to be repaid with interest at rates which range from 7.5%
to 7.7% per annum. The proceeds of the loans were used by the ESOP for purchases
of the Company's Common Stock.
78
<PAGE> 79
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
Included in Part II of this report:
<TABLE>
<S> <C>
Independent Auditors' Report........................................... Page 40
December 31, 1995 and 1994
Consolidated Balance Sheets.......................................... Page 41
For the three years ended December 31, 1995
Consolidated Statements of Income.................................... Page 42
Consolidated Statements of Cash Flows................................ Page 43
Consolidated Statements of Stockholders' Equity...................... Page 44
Notes to Consolidated Financial Statements............................. Pages 45-65
</TABLE>
Financial Statement Schedules
Included in Part IV of this report:
Individual financial statements of the registrant have been omitted because
consolidated financial statements of the registrant and its subsidiaries
required by Item 8 have been included in Part II of this report and, as of
December 31, 1995, the registrant was primarily an operating company and all
subsidiaries are wholly owned.
<TABLE>
<S> <C> <C>
Schedule II -- Valuation and Qualifying Accounts, for the three years Page 83
ended December 31, 1995.
Schedule V* -- Supplementary Insurance Information, for the three years Page 84
ended December 31, 1995.
Schedule VI* -- Reinsurance, for the three years ended December 31, Page 85
1995.
</TABLE>
---------------
* Filed in compliance with Article 7 of Regulation S-X.
Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
-------------------- ------------------------------------------------------------------------
<S> <C>
2(1) -- Stock Purchase Agreement dated as of January 30, 1996 by and between
the Company and UC Life Holding Corporation
3.1(2) -- Articles of Incorporation, as amended
3.1A(3) -- Amendment to Articles of Incorporation effective April 28, 1994
3.1B(4) -- Amendment to Articles of Incorporation effective June 19, 1995
3.2(5) -- By-Laws, as amended
4.1(6) -- Senior Indenture
4.2(6) -- Subordinated Indenture
4.3(6) -- First Supplemental Indenture with respect to 9.35% Senior Notes due
November 1, 1999
4.4(6) -- Form of certificate for shares of Preferred Redeemable Increased
Dividend Equity Securities 6 3/4% PRIDES(SM), Convertible Preferred
Stock, par value $2.00 per share
4.5(7) -- Second Supplemental Indenture for 7% Senior Notes due July 15, 1998
</TABLE>
79
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
-------------------- ------------------------------------------------------------------------
<C> <S>
4.6(8) -- Series A Junior Participating Preferred Stock Purchase Rights
10.1(2) -- 1986 Employee Incentive Stock Option Plan
10.2(2) -- Employee Stock Ownership Plan and Trust
10.3(2) -- Management and compensatory contracts with executive officers and
directors
10.4(2) -- Deferred compensation agreements
10.5(9) -- Management Incentive Plan, as amended
10.6(2) -- Employees' Savings Plan and Trust
10.7(2) -- Agreement for termination of employee agreement
10.8(2) -- Agreement for termination of employment agreement
10.9(2) -- Unfunded Salary Deferral Agreement dated April 1, 1989 with executive
officer
10.10(2) -- Split-Dollar Insurance Agreement dated April 1, 1989 with executive
officer
10.11(2) -- 1989 Stock Incentive Plan
10.12(2) -- 1989 Non-Employee Director Stock Option Plan
10.13(2) -- 1992 Form 11-K, Employees' Savings Plan and Trust
10.14(10) -- Stock Purchase Warrant dated as of July 1, 1993
10.15(2) -- 1993 Form 11-K, Employees' Savings Plan and Trust
10.16(9) -- 1993 Stock Incentive Plan
10.17(9) -- 1993 Non-Employee Director Plan
10.19(2) -- 1994 Form 11-K, Employees' Savings Plan and Trust
10.20(11) -- 1995 Form 11-K, Employee Savings Plan
10.21(5) -- Indemnification agreements
10.22(12) -- Change of Control Agreement
10.23(12) -- Supplemental Retirement Agreement
10.24(12) -- Split Dollar Agreement
11.1(12) -- Statement regarding computation of per share earnings
21.1(12) -- List of Subsidiaries of the Company
23.1(13) -- Consent of Deloitte & Touche LLP
</TABLE>
---------------
(1) Incorporated herein by reference to the designated Exhibit on the Company's
Current Report on Form 8-K filed on February 9, 1996.
(2) Incorporated herein by reference to the designated Exhibit of the Company's
Annual Report on Form 10-K dated December 31, 1994.
(3) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated June 30, 1994.
(4) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated June 30, 1995.
(5) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated March 31, 1995.
(6) Incorporated by reference to the designated Exhibits of the Company's
Current Report on Form 8-K filed on June 16, 1995.
(7) Incorporated herein by reference to the designated Exhibit to the Company's
Current Report on Form 8-K filed July 26, 1995.
(8) Incorporated by reference to the designated Exhibit of the Company's Form
8-A dated August 5, 1994.
80
<PAGE> 81
(9) Incorporated by reference from the designated Exhibit of the Company's
Registration Statement on Form S-8 filed September 29, 1995.
(10) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-3 (SEC File No. 33-52739).
(11) To be filed as Amendment to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995
(12) Incorporated herein by reference to the designated Exhibit on the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 filed March
19, 1996.
(13) Filed herewith
REPORTS ON FORM 8-K
On October 31, 1995, the Company filed a Current Report on Form 8-K
announcing that it was reviewing strategic alternatives with respect to its life
insurance subsidiary, United Companies Life Insurance Company ("UCLIC"),
including the possible sale of such subsidiary. On February 9, 1996, the Company
filed a Current Report on Form 8-K to report that it had signed a definitive
agreement with respect to the sale of all of the outstanding capital stock of
UCLIC.
81
<PAGE> 82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K/A-2,
Amendment to Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: May 15, 1996
UNITED COMPANIES FINANCIAL CORPORATION
By: /s/ Sherry E. Anderson
-----------------------------------------
Sherry E. Anderson
Senior Vice President and Secretary
82
<PAGE> 83
SCHEDULE II
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E(3)
ADDITIONS DEDUCTIONS(2)
BALANCE CHARGED
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, 1995
Allowance for loan losses............ $16,508 $16,025 $(873) $16,769 $14,891
Allowance for bond losses............ -- -- -- -- --
Unearned loan charges................ 1,109 -- -- 458 651
------- ------- ----- ------- -------
Total.......................... $17,617 $16,025 $(873) $17,227 $15,542
======= ======= ===== ======= =======
December 31, 1994
Allowance for loan losses............ $21,017 $13,457 $(514) $17,452 $16,508
Allowance for bond losses............ 500 -- -- 500 --
Unearned loan charges................ 1,982 -- -- 873 1,109
------- ------- ----- ------- -------
Total.......................... $23,499 $13,457 $(514) $18,825 $17,617
======= ======= ===== ======= =======
December 31, 1993
Allowance for loan losses............ $15,842 $17,343 $ 36 $12,204 $21,017
Allowance for bond losses............ -- 500 -- -- 500
Unearned loan charges................ 3,260 -- -- 1,278 1,982
------- ------- ----- ------- -------
Total.......................... $19,102 $17,843 $ 36 $13,482 $23,499
======= ======= ===== ======= =======
</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> 84
SCHEDULE V
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J
DEFERRED
POLICY
ACQUISITION
COST
DEFERRED BENEFITS, AMORTIZATION
POLICY FUTURE NET CLAIMS, AND OTHER
ACQUISITIO POLICY UNEARNED PREMIUM INVESTMENT LOSSES, OPERATING
COSTS BENEFITS(1) PREMIUMS REVENUE(3 INCOME ETC. EXPENSES(4)
-------- ---------- -------- -------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995....... $90,703 $1,529,012 $ 1,793 $ 8,508 $136,037 $9,930.. $ 31,971
Year ended December 31, 1994....... $91,915 $1,542,474 $ 4,491 $11,373 $126,108 $12,654.. $ 32,960
Year ended December 31, 1993....... $83,495 $1,418,310 $10,260 $18,684 $109,728 $18,200.. $ 24,967
</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> 85
SCHEDULE VI
UNITED COMPANIES FINANCIAL CORPORATION
AND SUBSIDIARIES
REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
PERCENTAGE
OF
AMOUNT
ASSUMED
CEDED TO ASSUMED TO
DIRECT OTHER FROM OTHER NET NET
AMOUNT COMPANIES COMPANIES AMOUNT AMOUNT
-------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1995
Life insurance in force..................... $554,131 $149,080 $ 992,979 $1,398,030 71.0%
======== ======== ========== ==========
Premiums
Life insurance........................... $ 6,016 $ 1,625 $ 2,588 $ 6,979 37.1%
Accident and health insurance............ 1,643 115 1 1,529 --
-------- -------- ---------- ----------
Total premiums...................... $ 7,659 $ 1,740 $ 2,589 $ 8,508 30.4%
======== ======== ========== ==========
December 31, 1994
Life insurance in force..................... $709,883 $177,585 $1,106,148 $1,638,446 67.5%
======== ======== ========== ==========
Premiums
Life insurance........................... $ 7,467 $ 1,931 $ 2,959 $ 8,495 34.8%
Accident and health insurance............ 3,070 199 7 2,878 --
-------- -------- ---------- ----------
Total premiums...................... $ 10,537 $ 2,130 $ 2,966 $ 11,373 26.1%
======== ======== ========== ==========
December 31, 1993
Life insurance in force..................... $956,788 $215,918 $1,106,721 $1,847,591 59.9%
======== ======== ========== ==========
Premiums
Life insurance........................... $ 12,657 $ 3,196 $ 3,020 $ 12,481 24.2%
Accident and health insurance............ 6,637 453 19 6,203 --
-------- -------- ---------- ----------
Total premiums...................... $ 19,294 $ 3,649 $ 3,039 $ 18,684 16.3%
======== ======== ========== ==========
</TABLE>
85
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
-------------------- ------------------------------------------------------------------------
<C> <S>
2(1) -- Stock Purchase Agreement dated as of January 30, 1996 by and between
the Company and UC Life Holding Corporation
3.1(2) -- Articles of Incorporation, as amended
3.1A(3) -- Amendment to Articles of Incorporation effective April 28, 1994
3.1B(4) -- Amendment to Articles of Incorporation effective June 19, 1995
3.2(5) -- By-Laws, as amended
4.1(6) -- Senior Indenture
4.2(6) -- Subordinated Indenture
4.3(6) -- First Supplemental Indenture with respect to 9.35% Senior Notes due
November 1, 1999
4.4(6) -- Form of certificate for shares of Preferred Redeemable Increased
Dividend Equity Securities 6 3/4% PRIDES(SM), Convertible Preferred
Stock, par value $2.00 per share
4.5(7) -- Second Supplemental Indenture for 7% Senior Notes due July 15, 1998
4.6(8) -- Series A Junior Participating Preferred Stock Purchase Rights
10.1(2) -- 1986 Employee Incentive Stock Option Plan
10.2(2) -- Employee Stock Ownership Plan and Trust
10.3(2) -- Management and compensatory contracts with executive officers and
directors
10.4(2) -- Deferred compensation agreements
10.5(9) -- Management Incentive Plan, as amended
10.6(2) -- Employees' Savings Plan and Trust
10.7(2) -- Agreement for termination of employee agreement
10.8(2) -- Agreement for termination of employment agreement
10.9(2) -- Unfunded Salary Deferral Agreement dated April 1, 1989 with executive
officer
10.10(2) -- Split-Dollar Insurance Agreement dated April 1, 1989 with executive
officer
10.11(2) -- 1989 Stock Incentive Plan
10.12(2) -- 1989 Non-Employee Director Stock Option Plan
10.13(2) -- 1992 Form 11-K, Employees' Savings Plan and Trust
10.14(10) -- Stock Purchase Warrant dated as of July 1, 1993
10.15(2) -- 1993 Form 11-K, Employees' Savings Plan and Trust
10.16(9) -- 1993 Stock Incentive Plan
10.17(9) -- 1993 Non-Employee Director Plan
10.19(2) -- 1994 Form 11-K, Employees' Savings Plan and Trust
10.20(11) -- 1995 Form 11-K, Employee Savings Plan
10.21(5) -- Indemnification agreements
10.22(12) -- Change of Control Agreement
10.23(12) -- Supplemental Retirement Agreement
10.24(12) -- Split Dollar Agreement
11.1(12) -- Statement regarding computation of per share earnings
21.1(12) -- List of Subsidiaries of the Company
23.1(13) -- Consent of Deloitte & Touche LLP
</TABLE>
86
<PAGE> 87
---------------
(1) Incorporated herein by reference to the designated Exhibit on the Company's
Current Report on Form 8-K filed on February 9, 1996.
(2) Incorporated herein by reference to the designated Exhibit of the Company's
Annual Report on Form 10-K dated December 31, 1994.
(3) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated June 30, 1994.
(4) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated June 30, 1995.
(5) Incorporated herein by reference to the designated Exhibit of the Company's
Quarterly Report on Form 10-Q dated March 31, 1995.
(6) Incorporated by reference to the designated Exhibits of the Company's
Current Report on Form 8-K filed on June 16, 1995.
(7) Incorporated herein by reference to the designated Exhibit to the Company's
Current Report on Form 8-K filed July 26, 1995.
(8) Incorporated by reference to the designated Exhibit of the Company's Form
8-A dated August 5, 1994.
(9) Incorporated by reference from the designated Exhibit of the Company's
Registration Statement on Form S-8 filed September 29, 1995.
(10) Incorporated herein by reference to the designated Exhibit of the Company's
Registration Statement on Form S-3 (SEC File No. 33-52739).
(11) To be filed as Amendment to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(12) Incorporated herein by reference to the designated Exhibit on the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 filed March
19, 1996.
(13) Filed herewith.
87
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our opinion dated February
29, 1996 appearing in this Annual Report on Form 10-K/A-2 of United Companies
Financial Corporation for the year ended December 31, 1995 in the following:
Registration Statement No. 33-15326 on Form S-8 pertaining to the United
Companies Financial Corporation 1986 Employee Incentive Stock Option Plan,
Registration Statement No. 33-17366 on Form S-8 pertaining to the United
Companies Financial Corporation Employees' Savings Plan and Trust, Registration
Statement No. 33-29994 on Form S-8 pertaining to the 1989 Stock Incentive Plan
and the 1989 Non-Employee Director Stock Option Plan, Registration Statement No.
33-54955 on Form S-8 pertaining to the 1993 Stock Incentive Plan and the 1993
Non-Employee Director Stock Option Plan, Registration Statement No. 33-68626 on
Form S-3 pertaining to the registration of 1,951,204 shares of United Companies
Financial Corporation Common Stock, Registration Statement No. 33-60367 on Form
S-3 pertaining to the registration of $200 million of United Companies Financial
Corporation Debt Securities and Preferred Stock, 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 and Registration Statement No.
33-63069 on Form S-8 pertaining to the United Companies Financial Corporation
Management Incentive Plan.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
May 15, 1996
88
