-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IX1DQCWF/N3PCBfR+LM7zqKMJO5P0FsYlJHUYTTQkiFEhNOv43rLVoAH4LwqdT4E Y1xrUlGBULP3oC1OGiHgkA== 0000950134-96-000777.txt : 19960320 0000950134-96-000777.hdr.sgml : 19960320 ACCESSION NUMBER: 0000950134-96-000777 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960319 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED COMPANIES FINANCIAL CORP CENTRAL INDEX KEY: 0000217416 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 710430414 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17459 FILM NUMBER: 96536110 BUSINESS ADDRESS: STREET 1: 4041 ESSEN LN STREET 2: P O BOX 1591 CITY: BATON ROUGE STATE: LA ZIP: 70809 BUSINESS PHONE: 5049246007 10-K 1 FORM 10-K YEAR ENDED 12/31/95 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............. to ............... Commission file number 1-7067 UNITED COMPANIES FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Louisiana 71-0430414 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4041 Essen Lane 70809 Baton Rouge, Louisiana (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code (504) 924-6007 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ NONE 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. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as reported by the National Association of Securities Dealers Automated Quotation System/National Stock Market, as of March 11, 1996, was $589,182,237. The number of shares of $2.00 par value common stock issued and outstanding as of March 11, 1996 was 28,146,480 excluding 1,159,682 treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Management's proxy statement in connection with the Annual Meeting of Shareholders to be held May 30, 1996 is incorporated by reference in Part III. ================================================================================ 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. 2 3 Manufactured housing finance. During the fourth quarter of 1995 the Company expanded its lending operations to include additional manufactured housing loan products. The manufactured housing lending is conducted through a wholly owned subsidiary, United Companies Funding, Inc., based in Minneapolis, Minnesota, with servicing provided by UCLC. Products and Production. The Company's principal products are home equity loans with a fixed amount and term to maturity, which are secured by a first lien mortgage on the borrower's residence. Typically the proceeds of the loan will be used by the borrower to refinance an existing first mortgage in order to finance home improvements or for debt consolidation. These types of loans are commonly referred to as "B" and "C" grade loans. These loans are distinct from home equity revolving lines of credit, not offered by the Company, which are generally secured by a second mortgage and typically carry a floating interest rate. The Company offers fixed rate and adjustable rate ("ARM") home equity loan products. The following table reflects home equity loan production by distribution network by product type:
1995 1994 1993 ---------------------- -------------------- --------------------- Average Average Average Loan Loan Loan Amount Size Amount Size Amount Size ------------ --------- ---------- --------- ---------- ---------- (in thousands) Retail Fixed...............$ 740,707 37 $ 679,466 38 $ 460,164 36 ARM................. 198,369 78 11,560 90 23,037 83 Wholesale UNICOR Fixed............... 337,802 50 146,832 48 40,736 53 ARM................. 85,208 104 45,248 97 15,931 103 GINGER MAE Fixed............... 44,497 59 9,864 55 - - ARM................. 6,351 115 201 101 - - Bulk Purchase Fixed............... 7,709 50 1,739 38 - - ARM................. 120,894 156 13,911 58 - - ------------ ---------- ---------- Total Production...........$ 1,541,537 $ 908,821 $ 539,868 ============ ========== ==========
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, 3 4 originations of commercial real estate loans on behalf of UCLIC resumed with $21.3 million of such loans being originated. The servicing of the commercial loans owned by UCLIC and pass-through certificates owned by third parties and UCLIC, which are backed by commercial real estate loans originated by UCLC, will be transferred from UCLC to UCLIC under the terms of the proposed sale of UCLIC. At December 31, 1995, the principal balance of such loans and pass-through certificates was approximately $251 million. See "Life Insurance - Recent Developments" below. The Company's principal market for its home equity loans is individuals who may not otherwise qualify for conventional loans which are readily marketable to the government-sponsored mortgage agencies or conduits and available through most commercial banks and many other lending institutions. Loans to such borrowers may present a greater credit risk and therefore produce higher loan origination fees and interest rates as compared to loans to customers of banks and thrifts. The Company believes that its customers generally place a higher priority on the amount of the monthly payment and prompt credit approval than on the interest rate and origination fees associated with the loan. Management of the Company believes that any greater credit risk arising out of making loans to these borrowers is compensated by higher fees and interest rates. There are generally numerous competitors for these borrowers in each of the Company's geographic markets. Principal competitors include recognized national and regional lenders. The Company believes that prompt underwriting and response to loan applications provides a competitive advantage in loan originations. Underwriting. Regardless of the manner of origination, all home equity loans are underwritten (or, in the case of bulk purchases are re-underwritten) prior to approval and funding utilizing substantially similar underwriting guidelines. The underwriting function is centralized at the home office. Underwriting guidelines are modified from time to time. The following is a description of the current underwriting guidelines, which are not materially different from prior guidelines. The underwriting process is intended to assess primarily the prospective borrower's ability and willingness to repay the loan and secondarily the adequacy of the real property security as collateral for the loan granted. A credit package is submitted to the home office which includes a current appraisal from an independent appraiser on the Company's approved list, a property inspection, a credit report and a verification of employment. On a case-by-case basis, after review and approval by home office underwriters, home equity loans may be made which vary from the underwriting guidelines. However, variations from guidelines with respect to home equity loans primarily are approved by the home office underwriting department. The Company originates fixed-rate home equity loans which generally fully amortize over a period not to exceed: 360 months for single family, owner occupied first mortgages; 360 months for single family, non-owner occupied first mortgages; 240 months for single family, combination owner occupied/rental property first mortgages; and 180 months for single family, owner occupied second mortgages. The fixed-rate loan amounts generally do not exceed $500,000 unless a higher amount is specifically approved by the home office. The Company also originates a fixed rate loan product with an original term to maturity of 180 months and an amortization schedule of 360 months ("Balloon Loans"). Balloon loans must be secured by first liens on single family, owner occupied residential properties. Fixed-rate home equity loans secured by second mortgages generally do not exceed $150,000. Adjustable-rate home equity loans, in general, fully amortize over a period not to exceed 360 months. The maximum amount for adjustable-rate home equity loans is $500,000 unless a higher amount is specifically approved by home office. The homes used for collateral to secure the home equity loans may be owner occupied, non-owner occupied rental properties or a combination of owner occupied rental properties, which in any case are one-to-four family residences (which may be a detached or semi-detached row house, townhouse, a condominium unit or a unit in a planned unit development). In addition, fixed rate home equity loans may be secured by single-family owner occupied manufactured or mobile homes with land if the manufactured or mobile homes are permanently affixed and defined as real estate under applicable state law. Second mortgages are generally permitted only for fixed-rate home equity loans and generally are limited to one-to-four family owner occupied property. Such a loan secured by a second 4 5 mortgage typically will not be made if the first mortgage is a balloon or an individual or owner financed mortgage. In general, the value of each property proposed as security for a home equity loan is required to be determined by a current appraisal from an independent appraiser who has been approved by the home office. The originator selects the appraiser and orders the appraisal. The Company requires that the appraisal provide an adequately supported estimate of the value of the property proposed as security for the requested home equity loan and a complete, accurate description of the property. In some cases, the appraisal is subject to completion of improvements which are to be made with the proceeds of the proposed home equity loan. The property is analyzed, based on the appraisal, to determine its acceptability as security for the loan requested. Loan-to-Value. The total amount of a home equity loan generally includes origination fees, credit life insurance premium, if any, prepaid interest and other closing costs (such as the cost of an appraisal report and title insurance premiums). Loan-to-value is the percentage equal to the note amount divided by the lesser of appraised value or the purchase price of the real estate. For fixed-rate and adjustable rate home equity loans originated through the wholesale loan programs, the maximum loan-to-value is 90%, with the maximum for rural properties generally being 80%. For home equity loans originated through the branch network, an Underwriting Loan-to-Value Ratio, as described below, is utilized. The total amount of a home equity loan, net of the origination fees, credit life insurance premium, if any, prepaid tax and insurance escrow, real estate tax service fee, loan application fee and prepaid interest, is defined as the "Cash Out." The "Underwriting Loan-to-Value Ratio" for underwriting purposes is the Cash Out divided by the appraised value or purchase price of the property, whichever is less. The Cash Out with respect to fixed-rate and adjustable-rate loans originated through the branch network is limited to 90% of the lesser of the applicable appraised value or purchase price of the property. Generally, the maximum Underwriting Loan-to-Value Ratio is 80% for a loan with a second mortgage on the property. With respect to rural properties, the maximum Underwriting Loan-to-Value Ratio (utilizing only up to ten acres and the improvements thereon) is 80%. The maximum Underwriting Loan-to-Value Ratio generally applicable to non-owner occupied homes is 75% and is generally 80% for owner occupied manufactured/mobile homes with land. Because the Underwriting Loan-to-Value Ratio is based on the Cash Out rather than the actual principal balance of the related loan, the Loan-to-Value Ratio of such loan will be higher and could be substantially higher than the Underwriting Loan-to-Value Ratio. Creditworthiness. Verification of personal financial information for each applicant is required. The applicant's total monthly obligations (including principal and interest on each mortgage, tax assessments, other loans, charge accounts and all scheduled indebtedness) generally should not exceed 50% of a borrower's gross monthly income. In the case of adjustable-rate home equity loans, the debt ratio calculation is based upon the principal and interest payment amount utilizing the maximum rate on the second change date. Generally, the borrowers are required to have two years of employment with their current employer or two years of like experience. Applicants who are salaried employees must provide current employment information in addition to recent employment history. This information is verified for salaried borrowers based on written confirmation from employers, or a combination of a telephone confirmation from the employer and the most recent pay stub and the most recent W-2 tax form. A self-employed applicant is generally required to provide copies of complete federal income tax returns filed for the most recent two years. Reverification of the foregoing information is generally not undertaken for home equity loans purchased through the bulk purchase program of the Company. A credit report by an independent, nationally recognized credit reporting agency reflecting the applicant's credit history is required. The credit report should reflect all delinquencies of 30 days or more, repossessions, judgments, foreclosures, garnishments, bankruptcies and similar instances of adverse credit that can be discovered by a search of public records. Verification is required to be obtained of the first mortgage balance, if any, its status and whether local taxes, interest, insurance and assessments are included in the applicant's monthly payment. All taxes and assessments not included in the payment are required to be verified as current. A borrower's mortgage payment history should generally reflect no more than three payments 5 6 over 30 days delinquent in the last twelve months; however, in some cases, a borrower is permitted to have no more than five payments over 30 days delinquent in the last twelve months and one payment over 60 days delinquent in the last twelve months. Credit analysis is subjective and subject to interpretation in the underwriting process. Certain laws protect loan applicants by offering them a timeframe after loan documents are signed, called the "rescission period," during which the applicant has the right to cancel the loan. The rescission period must have expired prior to funding a loan and may not be waived by the applicant except as permitted by law. The Company generally requires title insurance coverage on each home equity loan it originates. The Company and its assignees are generally named as the insured on the title insurance policies and the addressee of the title opinion. The borrower is required to obtain property insurance in an amount sufficient to cover, in the case of a first mortgage, the new loan and in the case of a fixed-rate second mortgage, the new loan and any prior mortgage. If the sum of an outstanding first mortgage, if any, and the fixed-rate home equity loan exceeds the lesser of replacement or insurable value, insurance equal to the lesser of replacement or insurable value may be accepted. The Company requires that its name and address are properly added to the "mortgagee clause" of the insurance policy. In the event the policy does not provide for written notice of policy changes or cancellation, an endorsement adding such provision is required. The borrower is required to obtain flood insurance to the extent such insurance is available under the Flood Disaster Protection Act of 1973, as amended. After a loan is underwritten, approved and funded, the mortgage loan packages are reviewed by home office loan review personnel. A random sample of the mortgage loan packages are subsequently subjected to a quality control audit. Loan sales and securitizations. Substantially all of the loans originated or purchased by the Company are sold. Since 1985, the Company has sold loans originated by it in the secondary market, initially in transactions with government-sponsored mortgage agencies or conduits, later in private placement transactions with financial institutions and, since the second quarter of 1993, through a shelf registration statement filed with the Securities and Exchange Commission by a subsidiary of the Company. Approximately $2.9 billion of mortgage-backed pass-through certificates backed primarily by first mortgage home equity loans originated directly or through correspondents or mortgage brokers, or purchased and re-underwritten have been registered under the registration statement and publicly sold since 1993. The Company intends to continue to effect securitization transactions on a quarterly basis, but the amount and timing of sales of securities under the shelf registration statement will depend upon market and other conditions affecting the operations of the Company. The following table reflects certain information regarding home equity loan production, sales and securitizations during the indicated periods:
1995 1994 1993 -------------- -------------- -------------- 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%
6 7 The weighted average interest spread on loans sold (the difference between the stated rate on the loan and the rate paid to purchasers, less certain recurring fees) is determined without regard to expected credit losses. Servicing rights are retained on substantially all loans sold. The Company's securitization transactions are credit enhanced and the certificates issued pursuant thereto have received ratings of "Aaa" from Moody's Investors Service, Inc. and "AAA" (or "AAAr" in the case of variable rate certificates) from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. Credit enhancement is achieved in part through a guaranty provided by a third party insurer and by subordinating an amount (the "Subordinated Amount") of the excess interest spread retained by the Company to the payment of scheduled principal and interest on the certificates should there be a shortfall in collections from borrowers in the form of monthly mortgage payments during any given period. If cumulative payment defaults exceed the Subordinated Amount, the third party insurer is obligated to pay any further losses experienced by the owners of the pass-through certificates. The Company has, from time to time, used the Financial Guaranty Insurance Company ("FGIC") and MBIA Insurance Corporation ("MBIA") as third party insurers. In connection with the issuance of approximately $2.9 billion in pass-through certificates discussed above, the Subordinated Amounts aggregate approximately $426 million. Each pooling and servicing agreement that governs the distribution of cash flows from the pooled loans requires the establishment of an account (the "Reserve Account") that may require an initial deposit by the Company. Thereafter, a portion of the excess interest is deposited in the Reserve Account. There are no events that will require the aggregate deposits to the Reserve Account to exceed the related Subordinated Amount. To the extent that losses are incurred on the loans underlying the pass-through certificates issued in a securitization transaction, such losses are paid out of the related Reserve Account to the extent that funds are available. The Company derives a significant portion of its income by realizing gains upon the sale of loans due to the excess servicing income of such loans. Excess servicing income represents the excess of the interest rate payable by a borrower on a loan over the interest rate passed through to the investor acquiring an interest in such loan, less the Company's normal servicing fee and other applicable recurring fees. When loans are sold, the Company recognizes as current income the present value of the excess servicing income expected to be realized over the anticipated average life of the loans sold less future estimated credit losses relating to the loans sold. At December 31, 1995, the Company's balance sheet reflected capitalized excess servicing income of approximately $283 million and an allowance for loss on loans serviced of approximately $45 million. The capitalized excess servicing income is computed using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar instruments at the time of sale. The weighted average discount rate used to determine the present value of the balance of capitalized excess servicing income on home equity loans reflected on the Company's balance sheet at December 31, 1995, was approximately 10%. The Company is not aware of an active market for this kind of receivable. No assurance can be given that this receivable could in fact be sold at its stated value on the balance sheet. Capitalized excess servicing income is amortized over the lesser of the estimated or actual remaining life of the underlying loans as an offset against the excess servicing income component of servicing income actually received in connection with such loans. Although management of the Company believes that it has made reasonable estimates of the excess servicing income likely to be realized, it should be recognized that the rate of prepayment and the amount of defaults utilized by the Company are estimates and actual experience may vary from these estimates. The Company periodically reviews its prepayment assumptions in relation to current rates of prepayment and, if necessary, writes down the remaining asset to the net present value of the estimated remaining future excess servicing income. Rapid increases in interest rates or competitive pressures may result in a reduction of excess servicing income, thereby reducing the gains recognized by the Company upon the sale of loans in the future. 7 8 The gain recognized by the Company upon the sale of loans will have been overstated if the excess servicing income actually received by the Company is less than originally assumed. An acceleration of future prepayments and/or delinquencies could result in capitalized excess servicing income amortization expense exceeding realized excess servicing income, thereby adversely affecting the Company's servicing income. The ability of the Company to sell loans and/or mortgage-backed securities in the secondary market, or an alternative source of funding loan production, is essential for continuation of the Company's loan origination operations. A prolonged, substantial reduction in the size of the secondary market for home equity loans may adversely affect the Company's ability to sell its loan originations and/or mortgage-backed securities in the secondary market with consequent adverse impact on the Company's profitability and future originations. Moreover, market and other considerations could affect the timing of the Company's securitization transactions and delays in such sales could reduce the amount of gains recognized from the sale of loans in a given quarter. Loan Servicing. The Company retains the servicing on substantially all loans it originates, including approximately 69,700 home equity loans with an aggregate principal balance of $2.7 billion owned and/or serviced at December 31, 1995, up 60% from the prior year-end. The following services are performed for investors to whom the Company has sold loans and for which it has retained servicing: investor reporting; collecting and remitting periodic principal and interest payments to investors and performing other administrative services, including maintaining required escrow accounts for payment of real estate taxes and standard hazard insurance; determining the adequacy of standard hazard insurance; advising investors of delinquent loans; conducting foreclosure proceedings, and inspecting and reporting on the physical condition of the mortgaged properties securing the mortgage loans; and disposing of foreclosed properties. The Company is generally obligated to advance interest on delinquent loans to the secondary market investors at the applicable pass-through rate until satisfaction of the note, liquidation of the mortgaged property or charge off of the loan. To the extent that the amount recovered through liquidation of collateral is insufficient to cover the unpaid balance of the loan, the Company incurs a loss until such losses aggregate the limit specified in the related loan sale agreement. In connection with its servicing activities, the Company sends to borrowers payment coupon books that specify the fixed payment amount and due date in the case of fixed-rate home equity loans and the adjusted payment amount and due date in the case of adjustable-rate home equity loans and the late payment amount, if any. Due dates for payments generally occur on the first day of the calendar month. With respect to adjustable-rate home equity loans, the Company provides written notices to borrowers of upcoming rate adjustments along with new payment coupon books reflecting the adjusted payment amounts. The Company, as master servicer, is required under each loan sale agreement to service the mortgage loans either directly or through sub-servicers. Substantially all servicing activities are centralized at the home office. Under the terms of the pending sale of UCLIC, servicing of commercial real estate loans owned by UCLIC and pass-through certificates owned by third parties and UCLIC which are backed by commercial real estate loans originated by UCLC will be transferred from UCLC to UCLIC at the closing of the sale. 8 9 The contractual balance of loans owned and/or serviced by UCLC, substantially all of which it originated, were as follows for the dates indicated:
December 31, --------------------------------------------- 1995 1994 1993 ----------- ----------- ------------ (in thousands) Owned and serviced: Home equity............................................. $ 2,701,481 $ 1,683,698 $ 1,125,139 Commercial.............................................. 251,241 274,413 345,365 Conventional............................................ 58,554 74,294 98,277 Manufactured housing.................................... 888 - - ------------ ------------ ------------ Total .................................................... $ 3,012,164 $ 2,032,405 $ 1,568,781 ============ ============ ============ Total serviced for third party investors.................................. $ 2,602,944 $ 1,679,875 $ 1,065,549 ============ ============ ============ Owned by the Company: Home equity............................................. $ 236,987 $ 203,651 $ 318,334 Commercial.............................................. 169,990 147,722 183,065 Conventional............................................ 1,355 1,157 1,833 Manufactured housing.................................... 888 - - ------------ ------------ ------------ Total .................................................... $ 409,220 $ 352,530 $ 503,232 ============ ============ ============
At December 31, 1995, the Company's home equity portfolio of properties acquired in foreclosure or for which deeds in lieu of foreclosure have been accepted and held by the Company pending disposition represented approximately $8.5 million (excluding the allowance for loan losses attributable to these properties). This amount may include the first mortgage balance, delinquent first mortgage payments and certain advances made on the property. When the Company believes that borrowers with existing loans with the Company are likely to refinance such loans due to interest rate changes, equity build-up or other reasons, the Company actively attempts to retain such borrowers through solicitations of such borrowers to refinance with the Company. Such refinancings generate fee income and servicing income for the Company. 9 10 Delinquency and Loss Experience. The following two tables set forth information relating to delinquency, loan loss and foreclosure experience for the home equity loan portfolio serviced by the Company (including loans owned by the Company) as of the dates and for the periods indicated:
December 31, ----------------------------------------------------- 1995 1994 1993 ------------- -------------- ------------- (dollars in thousands) Number of home equity loans ..................... 69,723 52,289 41,854 Dollar amount of home equity loans..............$ 2,701,481 $ 1,683,698 $ 1,125,139 Delinquency period (1) 30-59 days ...................................... 2.93% 2.40% 2.32% 60-89 days ...................................... 0.91% 0.91% 1.02% 90 days and over ................................ 4.31% 4.36% 4.92% Foreclosed properties (2) Owned by the Company ............................ 0.31% 0.52% 1.51% Serviced for third parties ...................... 0.80% 0.70% 0.74% Net write-offs - for the year ended ............. 0.56% 0.84% 0.88%
- ---------------------------- (1) The dollar amount of delinquent home equity loans as a percentage of the total "dollar amount of home equity loans" as of the date indicated. (2) Foreclosed property as a percentage of home equity loans serviced.
Year Ended December 31, -------------------------------------------------- 1995 1994 1993 ------------- -------------- -------------- (in thousands) Average dollar amount of home equity loans outstanding during period..............$ 2,192,590 $ 1,404,419 $ 972,294 Net losses Gross Losses (1).......................$ 13,818 $ 12,745 $ 9,114 Recoveries (2).........................$ (1,597) $ (1,051) $ (566) ------------- -------------- ------------- Net Losses (3).........................$ 12,221 $ 11,694 $ 8,548 ============ ============= =============
- ---------------------------- (1) "Gross Losses" are amounts which have been determined to be uncollectible relating to home equity loans for each respective period. (2) "Recoveries" are recoveries from liquidation proceeds and deficiency judgments. (3) "Net Losses" means "Gross Losses" minus "Recoveries". Loans are placed on a nonaccrual status when they are past due 150 days. The above delinquency and loan loss experience represents the Company's recent experience. However, the delinquency, foreclosure and net loss percentages may be affected by the increase in the size and relative lack of seasoning of a substantial portion of the portfolio. In addition, the Company can neither quantify the impact of 10 11 property value declines, if any, on the home equity loans nor predict whether, to what extent or how long, such declines may exist. In a period of such declines, the rates of delinquencies, foreclosures and losses on the home equity loans could be higher than those theretofore experienced in the mortgage lending industry in general. Adverse economic conditions (which may or may not affect real property values) may affect the timely payment by borrowers of scheduled payments of principal and interest on the home equity loans and, accordingly, the actual rates of delinquencies, foreclosures and losses. As a result, the information in the above tables should not be considered as a basis for assessing the likelihood, amount or severity of delinquencies or losses in the future on home equity loans and no assurance can be given that the delinquency and loss experience presented in the tables will be indicative of such experience on home equity loans. LIFE INSURANCE Overview. United Companies Life Insurance Company ("UCLIC"), the Company's wholly-owned life insurance company domiciled in Louisiana and organized in 1955, is currently authorized to conduct business in 47 states, the District of Columbia and Puerto Rico. The primary products of UCLIC are deferred annuities marketed on a commission basis principally through financial institutions and independent general agents and are generally sold to middle income customers seeking tax deferred insurance products, primarily to provide savings for retirement. During the fourth quarter of 1995, UCLIC added variable annuities to its product line. At December 31, 1995, the invested assets of UCLIC consisted of $1.1 billion in investment grade fixed maturity securities (at amortized cost), $169 million of residential first mortgage loans and $170 million of commercial mortgage loans. At December 31, 1995, the weighted average rating of its publicly traded bond portfolio was "AA", the assets allocated to investments in mortgage-backed securities were $778 million and the amount of non-investment grade bonds in the portfolio was $22 million or 1.9% of the portfolio. During 1995, the net interest spread on the Company's annuity business was 2.37% compared to 2.73% during 1994. Reserves for annuity policies constitute the Company's primary liabilities. At December 31, 1995 total annuity reserves were $1.4 billion. The duration of these liabilities is affected by a number of factors, including interest rates, surrender penalties, ratings, public confidence in the insurance industry generally and in the Company specifically, governmental regulations and tax laws. Since insurance commissions incurred at the origination of annuity policies are generally deferred and recognized over the estimated life of the policies, any unexpected increase in surrenders of annuity contracts would require more rapid recognition of these expenses, thereby adversely impacting profitability. Recent Developments. On February 2, 1996, the Company signed a stock purchase agreement dated as of January 30, 1996, for the sale of all of the outstanding capital stock of UCLIC to UC Life Holding Corp., a new Delaware corporation formed by Knightsbridge Capital Fund I, L.P. for an aggregate amount of $164 million plus earnings of UCLIC from January 1, 1996, to closing of the transaction. Knightsbridge, which is a private investment partnership with institutional partners, was formed in 1995 to make equity investments in companies engaged primarily in the life insurance industry. Under the terms of the agreement, the sales price is comprised of cash, currently estimated to be $109 million and UCLIC real estate and other assets to be distributed to the Company prior to the closing. The real estate to be distributed includes portions of the United Plaza office park, including the Company's home office. In addition, the Company will purchase a convertible promissory note from an affiliate of the purchaser for $15 million in cash. The note matures in 11 years and bears interest at 8% per annum payable at maturity. The purchaser also agreed that UCLIC would continue to be an investor in first lien home equity loans originated by the Company's lending operations and that UCLIC's home office operations would be maintained in its present location in Baton Rouge, Louisiana following the closing for at least two years. The agreement is subject to approval by UCFC's shareholders and regulatory authorities and the satisfaction of other conditions, and provides that the closing will occur on or before July 31, 1996. 11 12 Principal Products. The principal products marketed by UCLIC since 1978 have been deferred annuity contracts. A single premium, currently averaging approximately $21,000, is received on the sale of these contracts. The contracts typically guarantee an interest crediting rate for the first policy year. Thereafter, the interest crediting rate generally may be adjusted by UCLIC at any time (subject to certain minimum crediting rates stated in the contract). A policyholder is permitted at any time to withdraw all or part of the accumulated premium plus the amount of interest credited on the policy, less a surrender charge if applicable. The initial surrender charge typically ranges from 9-10% of the initial premium and decreases to zero during a penalty period of from five to ten years. Approximately 78% of UCLIC annuity policies at December 31, 1995 were subject to a surrender penalty. UCLIC produced $136 million and $250 million in sales of annuity products during the years ended December 31, 1995 and 1994, respectively. The Company believes that the decrease in annuity sales in 1995 is due in part to the interest rate environment, particularly the relative relationship between short term and intermediate term interest rates, and to the focus of the Company's resources on development of the variable annuity product. In addition, a financial institution which produced approximately 10% of UCLIC's annuity sales in 1994 discontinued the sale of annuities for UCLIC in 1995 subsequent to the merger of such financial institution. The interest earned on the annuity contract accumulates on a tax-deferred basis until withdrawal by the policyholder. The deferred annuity contracts written by UCLIC generally provide a death benefit equal to the amount of the accumulated premium plus accumulated interest earned less the amount of any prior withdrawals. The following table presents UCLIC's annuity sales by state by percent of total premiums for the periods indicated.
Year Ended December 31, ----------------------- State 1995 1994 ----- -------- -------- Florida............................... 21.8% 28.9% Missouri.............................. 20.9 10.3 Louisiana............................. 9.8 13.7 Illinois.............................. 9.8 8.6 Texas................................. 7.3 5.8 All others............................ 30.4 32.7 ----- ----- Total.............................. 100.0% 100.0% ===== =====
No other state individually accounted for more than 7% of premium income during 1995 or 1994. Distribution. UCLIC's strategy of marketing through financial institutions and independent general agents allows it to avoid substantial sales management office expense and to expand its sales efforts without significant development expense. Because financial institutions and independent general agents usually offer the products of several insurance companies, UCLIC must continue to provide products with competitive terms, interest crediting rates, commissions and service to both policyholders and the selling institutions and independent general agents. During 1995, UCLIC continued to focus on expanding the independent general agent share of its distribution network. Of the annuity contracts sold during 1995, approximately 55% of the total dollar amount were attributable to sales by independent general agents compared to 46% in 1994. Reinsurance. UCLIC generally limits the amount of insurance risk that it assumes with respect to any one insured to $100,000 and for larger policies follows industry practice of reinsuring that portion of the risk in excess of established retention limits. UCLIC, however, remains contingently liable for insurance ceded to reinsurers and remains liable to the policyholder in the event the reinsurer is unable to meet the obligations assumed under the reinsurance agreement. Reinsurance is currently ceded primarily to the following companies: First Capital Life Insurance Company of Louisiana ("First Capital") (not affiliated with First Capital Holding Company of California), Aetna Life Insurance Company ("Aetna") Continental Assurance Company ("Continental"), American United Life 12 13 Insurance Company ("American United") and Transamerica Occidental Life Insurance Company ("Transamerica"). American United and Transamerica are rated "A+" (Superior) by Best at December 31, 1995. Aetna and Continental are rated "A" (Excellent), and First Capital is rated "B" (Adequate). In the case of First Capital, the dollar amount of reserve credit taken by UCLIC is held in trust for the benefit of UCLIC. Life Insurance and Annuity Reserves. In accordance with applicable insurance regulations, UCLIC records as liabilities in its statutory financial statements actuarially determined reserves that are calculated to meet future obligations under outstanding insurance. The reserves are based on statutorily recognized methods using prescribed morbidity and mortality tables and interest rates. Reserves include unearned premiums, premium deposits, claims that have been reported but are not yet paid, claims that have been incurred but have not been reported, and claims in the process of settlement. UCLIC reserves satisfy minimum statutory requirements. The annuity reserves reflected in the Consolidated Financial Statements are calculated based on generally accepted accounting principles ("GAAP"). As of December 31, 1995, annuity reserves were $1.4 billion, policy benefit reserves were $111.2 million, and unearned premium reserves related to credit insurance were $1.8 million. These reserves are based upon UCLIC's best estimates of mortality, persistency, expenses and investment income, with appropriate provisions for adverse statistical deviation and the use of the net level premium method for all non-interest sensitive products and the retrospective deposit method for interest-sensitive products. GAAP reserves differ from statutory reserves due to the use of different assumptions regarding mortality and interest rates and the introduction of lapse assumptions into the GAAP reserve calculation. See Note 1 of Notes to Consolidated Financial Statements for additional information regarding reserve assumptions under GAAP. Investments. The investment function of UCLIC is overseen by an investment committee comprised of senior management, with the assistance of outside investment advisors in the management of certain assets. UCLIC's investment policy seeks to achieve attractive returns on a low to moderate risk portfolio of investments. These investments, primarily bonds and mortgage loans, must be within regulatory constraints to qualify as permitted assets, and within the yield, risk and maturity limitations established by UCLIC as necessary for meeting its objectives. The investment strategy continues to focus on maintaining the percentage of UCLIC's invested assets committed to commercial and residential mortgages and to investment grade corporate bonds and mortgage-backed securities. 13 14 The following table sets forth, at December 31, 1995, certain information regarding UCLIC's invested assets:
Amortized Percent of Cost Total ------------- ----------- (dollars in thousands) Fixed Maturity Securities (1) U.S. Government, government agencies & authorities.................... $ 11,504 .7% Foreign governments and other......................................... 20,819 1.3 Corporate bonds....................................................... 345,238 21.6 Mortgage-backed....................................................... 778,410 48.8 ------------- ------ Total.............................................................. 1,155,971 72.4 Mortgage loans on real estate .............................................. 345,181 21.6 Short-term investments...................................................... 22,804 1.4 Investment in limited partnerships.......................................... 25,594 1.6 Real estate - investment properties......................................... 22,845 1.4 Policy loans................................................................ 20,291 1.3 Capitalized excess servicing income......................................... 2,469 .2 Common and preferred stocks................................................. 1,012 .1 ------------- ------ Total.............................................................. $ 1,596,167 100.0% ============= ======
- -------------------- (1) Generally stated at amortized cost adjusted for permanent impairment in value. Total fair value of fixed maturities at December 31, 1995 was approximately $1.2 billion, representing net unrealized gain of $43.5 million. As reflected in the following table, the carrying value of UCLIC's investments classified as investment grade at December 31, 1995 was $1.1 billion or 94% of the fixed maturity portfolio:
Percent of Amortized Fair Carrying Total Carrying Investment Quality (1) Cost Value Value Value ------------- ------------- ------------- --------------- (dollars in thousands) Aaa....................................... $ 734,721 $ 756,251 $ 756,251 62.9% Aa........................................ 25,255 26,768 26,768 2.2 A......................................... 227,800 244,562 244,434 20.3 Baa....................................... 101,321 107,447 107,306 9.0 ------------- ------------- ------------- --------- Total Investment Grade.................... 1,089,097 1,135,028 1,134,759 94.4 Ba and below.............................. 21,980 22,093 22,093 1.9 Not rated................................. 44,894 42,369 44,894 3.7 ------------- ------------- ------------- --------- Total Fixed Maturities.................... $ 1,155,971 $ 1,199,490 $ 1,201,746 100.0% ============= ============= ============= =========
-------------------- (1) Fixed maturity investments are classified according to the ratings assigned by Moody's Investors Service, Inc. or, in the absence of such rating, by the National Association of Insurance Commissioners ("NAIC") whose ratings operate as follows: NAIC Class 1 was assumed equivalent to an A rating; NAIC Class 2, BBB/Baa; and NAIC Classes 3-6, BB/Ba and below. As a significant percentage of UCLIC's investment portfolio is invested in fixed rate, fixed maturity investments, the fair value of these investments is sensitive to changes in market rates of interest. In a rising interest rate environment, the fair value of these investments would be expected to decrease in value. An unanticipated increase in policy surrenders or claims could impact UCLIC's liquidity and require the sale of certain assets, such as bonds, prior to their maturity at a loss. 14 15 Fixed maturity investments. As of December 31, 1995, the amortized cost of UCLIC's fixed maturity investments totaled $1.2 billion or approximately 72.4% of UCLIC's invested assets. The fair value of fixed maturity investments at that date exceeded the amortized cost by approximately $43.5 million. In accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 115 ("SFAS 115"), the Company classifies its securities in one of three categories: "available-for-sale", "held-to-maturity" or "trading". Securities classified as held-to-maturity are carried at amortized cost, whereas securities classified as trading securities or available-for-sale are recorded at fair value. The adjustment, net of applicable income taxes, for investments classified as available-for-sale is recorded in "Net unrealized gain (loss) on securities" and is included in stockholders' equity on the balance sheet and the adjustment for investments classified as trading is recorded in "Investment income" in the statement of income. UCLIC may for business or regulatory reasons be required to sell certain of its investments prior to maturity, and in some cases these sales may be made at times when the fair value is less than carrying value, thereby resulting in a loss in the statements of income for financial and statutory reporting purposes. At December 31, 1995, 48.8% of UCLIC's total invested assets were invested in mortgage-backed securities. These mortgage-backed securities consist principally of collateralized mortgage obligations and mortgage-backed pass-through securities. Mortgage-backed securities generally are collateralized by mortgages backed by GNMA, FNMA and FHLMC. Only GNMA mortgages are backed by the full faith and credit of the United States Government. Certain mortgage-backed securities are subject to significant prepayment risk. In periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as individuals refinance higher-rate mortgages to take advantage of lower interest rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments that cannot be reinvested at an interest rate comparable to the rate on the prepaid mortgage. In addition to decreased investment yields, earnings could also be affected by capital gains or losses realized on these prepayments since the carrying value of securities purchased at a discount or premium may be different than the amount received upon prepayment. UCLIC has reduced the prepayment risk associated with mortgage-backed securities by investing in planned amortization class ("PAC") instruments. These instruments are designed to amortize in a predictable manner by shifting the primary risk of prepayment of the underlying collateral to other investors. PAC instruments represented approximately 54% of UCLIC's investments in mortgage-backed securities at December 31, 1995. Mortgage loans on real estate. At December 31, 1995, the contractual balance of UCLIC's portfolio of loans was comprised of $169 million in first mortgage residential home equity loans and $170 million in first mortgage commercial real estate loans substantially all of which were originated by the Company's mortgage lending subsidiaries. Since 1991, UCLIC has limited its investment in commercial real estate mortgage loans and has from time to time refinanced commercial mortgage loans sold in commercial mortgage loan securitization transactions in 1990. The principal balance of loans sold in these transactions which are scheduled to mature in 1996 is $12.1 million. During 1995, UCLIC invested approximately $21.3 million in new commercial real estate loans originated by UCLC and refinanced $18.2 million of existing commercial real estate mortgage loans. The mortgage loan portfolio of UCLIC is serviced by UCLC. UCLIC has full credit recourse to UCLC with respect to substantially all of the residential mortgage loans acquired from such subsidiary. The servicing of the commercial loan portfolio will be transferred from UCLC to UCLIC under the terms of the proposed sale of UCLIC by the Company. See "Life Insurance - Recent Developments" above. Historically, UCLIC has purchased on an interim basis substantially all of the first mortgage home equity loans originated by the Company's mortgage lending subsidiaries. These loans are typically held by UCLIC for short time periods (typically no longer than 90 days) and then sold back to the Company's mortgage lending subsidiaries prior to their sale in securitization transactions. Mortgage loans are carried at amortized cost less valuation adjustments for permanently impaired value where appropriate. Commercial mortgages range in size up to approximately $1.9 million with an average loan size of approximately $.6 million. At origination, substantially all of the mortgages are on properties with existing leases rather than on properties in construction or on start-up properties. The origination of commercial mortgages is 15 16 subject to underwriting procedures, including: (i) maximum loan to value ratio of 75% of the property's appraised value; (ii) specified debt coverage requirements; (iii) on-site inspections; (iv) third-party appraisals; and (v) personal guarantees of borrowers. The weighted average interest rate on UCLIC's commercial mortgage loan portfolio was 9.83% and 10.07% at December 31, 1995 and 1994, respectively. UCLIC's commercial mortgage portfolio is diversified by property type, location and borrower. The following table provides information at December 31, 1995 regarding UCLIC's commercial mortgage loans on real estate by property type, state and contractual maturity.
Percent of Amount Total ------------ -------------- (dollars in thousands) Commercial Mortgage Loans by Property Type: Retail............................................................... $ 74,321 43.9% Office............................................................... 43,527 25.7 Office and Warehouse................................................. 38,888 22.9 Other................................................................ 12,775 7.5 ------------ ------ Total............................................................. $ 169,511 100.0% ============ ====== Commercial Mortgage Loans by State: Florida.............................................................. $ 37,475 22.1% Georgia.............................................................. 32,530 19.2 Colorado............................................................. 21,428 12.6 Virginia............................................................. 13,873 8.2 Tennessee............................................................ 12,316 7.3 Texas................................................................ 9,750 5.8 All Others........................................................... 42,139 24.8 ------------ ------ Total............................................................. $ 169,511 100.0% ============= ====== Commercial Mortgage Loans by Contractual Maturity: 1996................................................................. $ 26,316 15.5% 1997................................................................. 17,781 10.5 1998................................................................. 19,633 11.6 1999................................................................. 16,387 9.7 After 1999........................................................... 89,394 52.7 ------------ ------ Total............................................................. $ 169,511 100.0% ============ ======
At December 31, 1995, UCLIC owned $13.6 million of commercial properties obtained through foreclosure. For substantially all commercial mortgages which UCLIC has foreclosed, an independent appraisal was obtained and, if warranted, UCLIC established a specific reserve based on its judgment as to the amount which may not be recoverable. As of December 31, 1995, the specific reserve amounted to $3.3 million. The Company also establishes a general reserve for all commercial mortgages where a specific reserve or write-down has not been established. As of December 31, 1995, the general reserve amounted to $5.1 million. 16 17 RATINGS. The ability of an insurance company to compete successfully depends in part on its financial strength, operating performance and claims-paying ability as rated by A.M. Best Company ("Best") and other rating agencies. UCLIC is currently rated "A-" (Excellent) by Best. Best's 15 categories of ratings for insurance companies currently range from "A++" (Superior) to "F" (In Liquidation). According to Best, an "A" or "A-" rating is assigned to companies which, in Best's opinion, have achieved excellent overall performance when compared to the standards of the life insurance industry and generally have demonstrated a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's statutory financial and operating performance, Best reviews the company's statutory profitability, leverage and liquidity, as well as the company's spread of risk, quality and appropriateness of its reinsurance program, quality and diversification of assets, the adequacy of its policy reserves and surplus, capital structure and the experience and competency of its management. Best ratings are based upon factors of concern to policyholders, agents and intermediaries and are not directed toward the protection of investors. On October 24, 1995, Duff & Phelps Credit Rating Co. ("Duff & Phelps") placed the 'A+' (Single-A-Plus) claims paying ability rating of UCLIC on Rating Watch--Uncertain. This rating action is based upon the announcement by the Company that it was evaluating strategic alternatives regarding UCLIC, including the possible sale of UCLIC. Duff and Phelps reported that the claims paying ability rating would remain on Rating Watch--Uncertain until more information becomes known about UCLIC's ultimate position within the Company's organization or another organization. During 1995, Standard & Poor's, a division of The McGraw-Hill Companies, Inc., revised the rating scale used in assigning its qualified solvency ratings of insurance companies and, as a result, revised its rating assigned to UCLIC from "BBq" to "Aq". The Company believes that UCLIC's present ratings will enable it to continue to compete successfully. Ratings held by UCLIC are important to maintaining public confidence in UCLIC and its ability to market its annuity products. A lower rating could materially and adversely affect UCLIC's ability to market its products. particularly the sale of annuities through financial institutions and could increase the surrender of its annuity policies. Both of these consequences could, depending upon the extent thereof, have a materially adverse effect on the Company's liquidity and, under certain circumstances, net income. OTHER OPERATIONS The Company has developed an office park that includes its home office building, which has approximately 94,000 square feet. In addition to its home office building completed in 1981, the Company constructed a 200,000 square foot office building in the park in 1984 at a cost of $12.8 million. This building was approximately 100% leased at December 31, 1995. During 1990, construction of a 100,000 square foot office building in the office park was completed by a partnership in which United Companies Realty and Development Co., Inc. ("UC Realty"), a wholly-owned subsidiary of the Company, is a general partner. The office building was 94% leased at December 31, 1995. During 1995, UC Realty completed construction of a 60,000 square feet office building on property also located in the office park. The Company uses approximately 30,000 square feet of this building and leases the remainder. The Company also engages in telecommunications business and property management with respect to its office park and a homeowners insurance agency, none of which are material to its operations. DISCONTINUED OPERATIONS For a discussion of Discontinued Operations see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations "Discontinued Operations" and Note 12 in the Notes to Consolidated Financial Statements. 17 18 GOVERNMENT REGULATION AND LEGISLATIOn GENERAL The Company's mortgage and insurance businesses are subject to extensive regulation, supervision and licensing by federal and state authorities. Regulated matters include, without limitation, maximum interest rates and fees which may be charged by the Company, disclosures in connection with loan originations, credit reporting requirements, servicing requirements, insurance premium rates and coverage issues, federal and state taxation, and multiple qualification and licensing requirements for doing business in various jurisdictions. While the Company believes that it maintains all requisite licenses, permits and approvals and is in compliance in all material respects with applicable federal and state regulations, there can be no assurance that more restrictive laws or regulations will not be adopted which could make compliance in the future more difficult and/or more expensive. Legislative and regulatory proposals are frequently advanced which, if adopted, could adversely affect the Company's profitability or the manner in which the Company conducts its activities. MORTGAGE The Company's mortgage operations are subject to extensive regulation, supervision and licensing by federal and state authorities. Regulated matters include, without limitation, maximum interest rates and fees which may be charged by the Company, disclosure in connection with loan originations, credit reporting requirements, servicing requirements, federal and state taxation, and multiple qualification and licensing requirements for doing business in various jurisdictions. The Company's loan origination activities are subject to the laws and regulations in each of the states in which those activities are conducted. The Company's activities as a lender are also subject to various federal laws including the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Fair Credit Reporting Act. In the course of its business, the Company may acquire properties securing loans that are in default. There is a risk that hazardous or toxic waste could be found on such properties. In such event, the Company could be held responsible for the cost of cleaning up or removing such waste, and such cost could exceed the value of the underlying properties. There are currently proposed various laws, rules and regulations which, if adopted, could impact the Company. There can be no assurance that these proposed laws, rules and regulations, or other such laws, rules or regulations, will not be adopted in the future which could make compliance much more difficult or expensive, restrict the Company's ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest and other charges earned on loans originated or sold by the Company, or otherwise adversely affect the business or prospects of the Company. LIFE INSURANCE General Regulation. UCLIC is subject to regulation by the State of Louisiana, its state of domicile, and the other states in which it transacts business. The laws of such states are designed for the protection of policyholders rather than securityholders. UCLIC is a member of a holding company system in Louisiana. All transactions within a holding company system affecting insurers must be both reasonable in relation to its outstanding liabilities and adequate for its needs. State laws also require prior notice or regulatory agency approval of changes in control of an insurer or its holding company and of material intercorporate transfers of assets within the holding company structure. Generally, under insurance holding company statutes, a state insurance authority must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company chartered in its state. 18 19 The laws of the various states establish regulatory agencies with broad administrative powers to approve policy forms, grant and revoke licenses to transact business, regulate trade practices, license agents, and prescribe the type and amount of investments permitted. Insurance companies are required to file detailed annual statements with the state insurance regulators in each of the states in which they do business, and their business and accounts are subject to examination by such agencies at any time. In addition, insurance regulators periodically examine the insurer's financial condition, adherence to statutory accounting practices, and compliance with insurance department rules and regulations. As part of their routine regulatory oversight process, state insurance departments conduct detailed examinations periodically (generally once every three years) of the books, records and accounts of insurance companies domiciled in their states. Such examinations are generally conducted in cooperation with the departments of two or three other states under guidelines promulgated by the National Association of Insurance Commissioners ("NAIC"). UCLIC's last examination occurred during 1994 for the three year period ended December 31, 1993. Final reports issued by the Louisiana Commissioner of Insurance did not raise any significant issues or adjustments. Regulation at Federal Level. Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity, minimum solvency requirements and the removal of barriers restricting banks from engaging in the insurance and mutual fund business. Congress has from time to time in the past considered possible legislation that would adversely affect the federal income tax treatment of certain annuity products offered by UCLIC. There can be no assurance that future tax legislation will not contain provisions that may result in adverse effects on UCLIC's products. COMPETITION As a marketer of credit and annuity products, the Company faces intense competition. Traditional competitors in the financial services business include other mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Competitors in the annuity business include an increasing number of insurance companies which have begun to offer annuity products. Many of these competitors in the financial services and annuity business are substantially larger and have more capital and other resources than the Company. Competition can take many forms including convenience in obtaining a loan or annuity, customer service, marketing and distribution channels and interest or crediting rates. In addition, the current level of gains realized by the Company and its existing competitors on the sale of its and their non-conventional loans could attract additional competitors into this market with the possible effect of lowering gains on future loan sales as the result of increased loan origination competition. ITEM 2. Properties The Company's executive offices are located in its home office building in Baton Rouge, Louisiana. The Company occupies all of its home office building which has approximately 94,000 square feet. UCLIC and the executive offices of the Company's mortgage lending subsidiaries are located at the Company's home office building and adjacent investment property. At December 31, 1995, the retail division of the Company's mortgage lending operations were conducted in 39 states from 5 locations owned by the Company in 5 cities and from 145 additional leased offices in 142 cities. The offices owned or leased range in size from approximately 600 square feet to 3,200 square feet; leases expire from 1996 to 2001, excluding renewal options. During 1995, aggregate annual rental expense for leased office space was approximately $3.9 million. Management believes that the properties are adequately maintained and insured, and satisfactorily meet the requirements of the business conducted therein. 19 20 ITEM 3. Legal Proceedings The nature of the Company's business is such that it is routinely involved in litigation and is a party to or subject to other items of pending or threatened litigation. Although the outcome of certain of these matters cannot be predicted, management of the Company believes, based upon information currently available, that the resolution of these various matters will not result in any material adverse effect on its consolidated financial condition. The remaining affairs of the Company's subsidiary, Foster Mortgage Corporation ("FMC"), a discontinued operation, are now being concluded under the supervision of a bankruptcy court. On December 21, 1993, the institutional lenders under FMC's primary credit facility (the "FMC Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause the remaining affairs of FMC to be concluded under the supervision of the bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court approved a plan of liquidation for FMC providing for the appointment of a trustee selected by the FMC Institutional Lenders. The FMC Institutional Lenders allege that FMC has certain claims against the Company, including a claim with respect to the Company's alleged failure to remit all sums due FMC regarding federal income taxes under a tax agreement among the Company and its subsidiaries, including FMC, estimated by the FMC Institutional Lenders to range from $2.1 million to $29 million. FMC and the Company executed, subject to the approval of the bankruptcy court, a settlement agreement relating to payments between FMC and the Company in connection with the federal income tax benefits resulting from FMC's losses and to certain prior intercompany payments between FMC and the Company. The settlement agreement included a release by FMC in favor of the Company of any and all claims relating to federal income taxes. The FMC Institutional Lenders opposed the proposed settlement agreement. At the conclusion of a hearing on the proposed settlement on August 18, 1994, the bankruptcy court approved the portion of the settlement providing for a net payment by the Company of $1.65 million to FMC in satisfaction of the federal income tax benefits resulting from FMC's losses and the release of any claims regarding federal income taxes. The Company had previously recorded substantially all of the impact of this portion of the settlement in its prior financial statements. The bankruptcy court declined to approve the other portion of the proposed settlement relating to payments received by the Company from FMC within twelve months of the bankruptcy filing. If the Company were required to refund such payments, the Company has estimated the potential additional loss to be $1.9 million, net of tax benefits. The decision of the bankruptcy court on the settlement was appealed by the FMC Institutional Lenders to the U.S. District Court which affirmed the bankruptcy court's decision. The FMC Institutional Lenders then appealed this decision to the U.S. Fifth Circuit Court of Appeals. In a decision rendered on November 9, 1995, the U.S. Fifth Circuit Court of Appeals reversed the district court, vacated the settlement between FMC and the Company and remanded the matter for further proceedings. The trustee under the plan of liquidation has filed an adversary proceeding in the bankruptcy proceedings against the Company seeking avoidance of alleged preferential payments totaling $3.72 million and has also instituted a suit in federal court against the Company alleging claims under the tax agreement estimated to range from $2 million to $29 million. Management of the Company does not believe that any additional amounts are owed by the Company to FMC or the trustee and intends to vigorously contest the claims which have been brought against it for such amounts by the trustee under the plan of liquidation. The Company did not guarantee any debt of FMC. ITEM 4. Submission of Matters to a Vote of Security Holders None. 20 21 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Common Stock Prices and Dividends The Company's Common Stock is traded on the National Association of Securities Dealers Automated Quotation System/National Stock Market ("the Nasdaq Stock Market") under the symbol "UCFC". The following table sets forth for the periods indicated the high and low sale prices of the Company's Common Stock as reported on the National Stock Market and the per share cash dividends declared. All amounts have been adjusted for stock dividends.
SALES PRICES CASH HIGH LOW DIVIDENDS ---- --- --------- 1995 First Quarter ........................ $ 18.250 $ 11.375 $ .05 Second Quarter ....................... 23.375 11.375 .05 Third Quarter (1)..................... 36.750 22.125 .05 Fourth Quarter........................ 37.375 25.500 .05 -------- Total.............................. $ .20 ======== 1994 First Quarter ........................ $ 21.821 $ 17.161 $ .0455 Second Quarter ....................... 19.093 14.320 .0455 Third Quarter ........................ 20.116 14.433 .0455 Fourth Quarter (2) ................... 15.911 11.000 .0455 -------- Total ............................. $ .1820 ========
- -------------------- (1) On August 23, 1995, the Company announced a 100% Common Stock dividend payable on October 20, 1995, to stockholders of record on October 9, 1995. (2) On October 26, 1994, the Company announced a 10% Common Stock dividend payable on January 10, 1995, to stockholders of record on December 22, 1994. The Company has declared and paid regular quarterly cash dividends on its Common Stock since 1974. While the Company intends to continue to pay regular quarterly cash dividends on its Common Stock, its ability to do so will be subject to its earnings, financial condition, capital and regulatory requirements, credit facility restrictions and such other factors as the Company's Board of Directors may consider relevant. (See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.) Approximate Number of Equity Security Holders Approximate Number of Shareholders Title of Class As of March 12, 1996 -------------- ---------------------------------- Common Stock, $2.00 par value 3,084 21 22 ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below are derived from the Company's audited Consolidated Financial Statements.
Year Ended December 31, (1) (3) --------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ----------- ----------- ----------- ------------ (dollars in thousands, except per share data) INCOME STATEMENT DATA:...................... Interest, charges and fees on loans $ 128,665 $ 111,994 $ 92,737 $ 89,780 $ 88,078 Loan sale gains............................. 142,156 86,735 59,441 33,475 29,627 Investment income........................... 104,062 84,666 75,527 65,548 61,828 Loan servicing income....................... 14,559 19,926 13,624 13,616 11,594 Net insurance premiums...................... 8,508 11,373 18,684 22,860 36,269 ---------- ----------- ----------- ----------- ----------- Total revenues.............................. 397,950 314,694 260,013 225,279 227,396 Total expenses.............................. 283,186 230,620 216,952 204,664 219,580 ---------- ----------- ----------- ----------- ----------- Income from continuing operations before income taxes...................... 114,764 84,074 43,061 20,615 7,816 Provision for income taxes.................. 41,805 29,492 14,744 7,601 3,164 ---------- ----------- ----------- ----------- ------------ Income from continuing operations 72,959 54,582 28,317 13,014 4,652 Income (loss) from discontinued operations............................... (3,491) (5,048) (16,742) (2,768) 6,824 ---------- ----------- ----------- ----------- ------------ Net income ............................... $ 69,468 $ 49,534 $ 11,575 $ 10,246 $ 11,476 ========== =========== =========== =========== ============ PER SHARE DATA (4): Primary: Income from continuing operations $ 2.39 $ 1.92 $ 1.26 $ .66 $ .24 Income (loss) from discontinued operations............................... (.11) (.18) (.75) (.14) .34 ---------- ----------- ----------- ----------- ------------ Net income ............................... $ 2.28 $ 1.74 $ .51 $ .52 $ .58 ========== =========== =========== =========== ============ Fully Diluted: Income from continuing operations $ 2.36 $ 1.92 $ 1.20 $ .66 $ .24 Income (loss) from discontinued operations........................ (.11) (.18) (.71) (.14) .34 ---------- ----------- ----------- ----------- ----------- Net income .............................. $ 2.25 $ 1.74 $ .49 $ .52 $ .58 ========== =========== =========== =========== ============ Weighted average shares outstanding Primary................................ 30,501 28,490 22,208 19,834 19,766 Fully diluted.......................... 30,903 28,490 23,706 19,834 19,766 Cash dividends.............................. $ .20 $ .1818 $ .1546 $ .1364 $ .1278 Stockholders' equity - year end (2) $ 10.52 $ 5.67 $ 5.73 $ 4.85 $ 4.47
22 23
Year Ended December 31 --------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------------ ----------- ----------- ----------- ------------ (dollars in thousands) BALANCE SHEET DATA - YEAR END: Investment securities - net (2)................ $ 1,218,353 $ 1,044,842 $ 902,091 $ 759,354 $ 376,966 Loans -net..................................... 413,574 369,382 517,720 502,229 604,942 Capitalized excess servicing income............ 283,454 179,065 113,192 72,062 53,942 Deferred policy acquisition costs.............. 90,703 91,915 83,495 80,007 78,599 Total assets................................... 2,366,886 1,978,255 1,817,153 1,627,900 1,492,816 Annuity reserves............................... 1,417,803 1,425,973 1,294,983 1,147,555 1,014,649 Notes payable.................................. 255,756 213,668 155,500 206,850 200,447 Total liabilities.............................. 1,984,935 1,823,005 1,663,785 1,531,642 1,404,382 Stockholders' equity (2)....................... 381,951 155,250 153,368 96,258 88,434 OTHER DATA: Mortgage Total loan production........................ $ 1,562,788 $ 913,319 $ 545,229 $ 321,198 $ 328,184 Home equity loan production.................. 1,541,537 908,821 539,868 301,234 253,613 Average home equity loan size................ 49 41 39 28 24 Home equity loans serviced - year end................................... 2,701,481 1,683,698 1,125,139 819,448 703,922 Total loans serviced - year end.............. 3,012,164 2,032,405 1,568,781 1,367,822 1,344,388 Average coupon on home equity loans produced............................. 11.6% 11.7% 11.8% 13.4% N/A Loan origination fees as % of home equity loans............................... 4.4% 5.9% 7.0% 7.9% 8.2% Weighted average interest spread retained on home equity loans sold......... 4.98% 4.49% 6.06% 4.56% 4.42% Life Insurance Annuity sales................................ $ 135,534 $ 249,737 $ 207,682 $ 187,050 $ 175,796 Net interest spread on annuities ................................. 2.37% 2.73% 2.20% 1.84% 1.88% Investment grade bonds as % of invested assets......................... 68.2% 69.6% 59.6% 54.3% 25.1%
(1) On April 10, 1995, the Company decided to dispose of its investment in its wholly-owned subsidiary, United General Title Insurance Company ("UGTIC"), and on May 1, 1995 approved a formal plan of disposal. Previously, on May 7, 1993, the Company announced its decision to dispose of the net assets and operations of Foster Mortgage Corporation ("FMC"), a wholly-owned subsidiary of the Company. The operations of UGTIC and FMC have been reclassified as discontinued operations and the prior years' financial statements of the Company included herewith have been restated accordingly. (2) During the first quarter of 1994, the Company implemented the provisions of FASB Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which revised the method of accounting for certain of the Company's investments. Prior to adoption of SFAS 115, the Company reported its investments in fixed income investments at amortized cost, adjusted for declines in value considered to be other than temporary. SFAS 115 requires the classification of securities in one of three categories: "available-for-sale", "held-to-maturity" or "trading securities". Securities classified as held-to-maturity are carried at amortized cost, whereas securities 23 24 classified as trading securities or available-for-sale are recorded at fair value. Effective with the adoption of SFAS 115, the Company determined the appropriate classification of its investments and, if necessary, adjusted the carrying value of such securities accordingly as if the unrealized gains or losses had been realized. The adjustment, net of applicable income taxes, for investments classified as available-for-sale is recorded in "Net unrealized loss on securities" and is included in Stockholders' equity on the balance sheet and the adjustment for investments classified as trading is recorded in "Investment income" in the statement of income. In accordance with the provisions of SFAS 115, prior year investments were not restated. (3) During the third quarter of 1995, the Company implemented, on a prospective basis, the provisions of FASB Statement of Financial Accounting Standards No. 122 ("SFAS 122") which revised the method of accounting for mortgage servicing rights on loans originated by the Company. SFAS requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others that have been acquired through either the purchase or origination of such loans. Prior to the adoption of SFAS 122, the Company recognized late charges and other ancillary income when collected and charged costs to service mortgage loans when incurred. Net income for 1995 was increased by $3.9 million or $.13 per share on a fully diluted basis as the result of the Company's implementation of SFAS 122. The amount capitalized is included in "Other assets". (4) All share and per share data have been adjusted to reflect stock dividends. 24 25 SELECTED INCOME STATEMENT DATA BY SEGMENT
Year Ended December 31, --------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ----------- ----------- ----------- ----------- (in thousands) MORTGAGE Interest, charges and fees on loans....... $ 84,496 $ 63,905 $ 41,249 $ 31,998 $ 34,073 Investment income......................... 7,227 2,762 1,054 696 1,137 Loan sale gains........................... 142,156 86,289 59,220 29,679 15,571 Loan servicing income..................... 19,219 24,645 19,116 18,289 14,209 ---------- ----------- ----------- ----------- ----------- Total revenues............................ 253,098 177,601 120,639 80,662 64,990 Total expenses............................ 145,425 96,446 74,344 56,661 60,592 ---------- ----------- ----------- ----------- ----------- Income from continuing operations before income taxes.................... 107,673 81,155 46,295 24,001 4,398 ---------- ----------- ----------- ----------- ----------- LIFE INSURANCE Interest, charges and fees on loans....... 38,077 43,647 45,561 51,396 51,585 Investment income......................... 99,327 83,614 75,594 67,287 63,285 Net insurance premiums.................... 8,508 11,373 18,684 22,860 36,269 Loan sale gains........................... - - - 3,310 - Loan servicing income..................... (1,427) (505) 340 673 1,645 ---------- ----------- ---------- ----------- ----------- Total revenues............................ 144,485 138,129 140,179 145,526 152,784 Total expenses............................ 132,386 129,049 137,544 140,061 150,707 ---------- ----------- ----------- ----------- ----------- Income from continuing operations before income taxes......... 12,099 9,080 2,635 5,465 2,077 ---------- ----------- ----------- ----------- ----------- CORPORATE, OTHER OPERATIONS AND ELIMINATIONS Income (loss) from continuing operations before income taxes.................... (5,008) (6,161) (5,869) (8,851) 1,341 ---------- ----------- ----------- ----------- ----------- CONSOLIDATED Income from continuing operations before income taxes.................... 114,764 84,074 43,061 20,615 7,816 Provision for income taxes................ 41,805 29,492 14,744 7,601 3,164 ---------- ----------- ----------- ----------- ----------- Income from continuing operations......... 72,959 54,582 28,317 13,014 4,652 Income (loss) from discontinued operations............................. (3,491) (5,048) (16,742) (2,768) 6,824 ---------- ----------- ----------- ----------- ----------- Net income ............................... $ 69,468 $ 49,534 $ 11,575 $ 10,246 $ 11,476 ========== =========== =========== =========== ============
25 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis should be read in conjunction with the Company's Consolidated Financial Statements and accompanying Notes presented elsewhere herein. The table below sets forth income from continuing operations before income taxes for each of the Company's business segments and certain home equity loan data for the indicated periods:
Year Ended December 31, --------------------------------------------- 1995 1994 1993 ------ ------ ------ (dollars in thousands) Mortgage ......................................... $ 107,673 $ 81,155 $ 46,295 Life insurance.................................... 12,099 9,080 2,635 Corporate, other operations and eliminations...... (5,008) (6,161) (5,869) ------------ ------------ ----------- Total........................................... $ 114,764 $ 84,074 $ 43,061 ============ ============ =========== Home equity loan production....................... $ 1,541,537 $ 908,821 $ 539,868 Home equity loans sold............................ 1,471,868 977,653 462,873 Weighted average interest spread retained on home equity loans sold...................... 4.98% 4.49% 6.06%
The following summary identifies the major factors which influenced the results of operations of the Company's primary operating divisions during the indicated periods. MORTGAGE. The Company's mortgage operations primarily consist of the production (by origination or purchase), sale and servicing of first mortgage, non-conventional, home equity loans. In the fourth quarter of 1995, the Company expanded its lending operations to include additional manufactured housing loan products. Fundamental to the profitability and funding of the Company's mortgage operations is the sale of loans with servicing rights retained. The majority of the revenue of the mortgage segment is derived from gain recognized on the sale of loans and the recognition of net loan fees at the time of sale of the loans. Net loan fees on loans owned by the Company are recognized over the lives of the loans. Prior to 1991, the Company had either held the home equity loans it originated in its own portfolio or sold them to financial institutions. Since the fourth quarter of 1991, the Company has pooled and sold large numbers of loans in mortgage-backed securitization transactions. In late 1991 and 1992, this was accomplished primarily through private placement transactions. In 1993, the Company began selling its loans in public securitization transactions through its own shelf registration statement and sold publicly $1.5 billion, $973 million and $451 million of home equity loans during 1995, 1994 and 1993, respectively. The Company's mortgage operations are interest rate sensitive and, therefore, fluctuations in and the level of interest rates can have a variety of effects on the Company's profitability. In particular, significant changes in interest rates may impact the volume of loans produced, and will influence the funding costs of such production and the amount of gain recognized on loans sold in the secondary market. During periods of declining interest rates the mortgage operations will generally experience an increase in profitability as the interest spread should widen both on loans held by the Company as an investment and on loans sold in the secondary market. During 1993, the positive effect on income of the mortgage operations resulted primarily from a wider interest margin retained on loans sold than experienced in 1994 and 1995. The weighted average interest spread on loans sold to third parties (the difference between the stated rate on the loan and the rate paid to purchasers, less recurring 26 27 fees) was 6.06% in 1993, declined to 4.49% in 1994 and increased to 4.98% in 1995 due to changes in the interest rate environment. The weighted average interest spread on loans sold is determined without regard to credit losses, which are provided for separately by the Company. The lower interest spread on loans sold during 1994 and 1995 was somewhat offset by an increased volume of loans produced and sold. Although historically a lower interest rate environment has not resulted in a significant increase in the level of prepayment of loans originated and serviced by the Company, a significant and sustained reduction in interest rates could cause prepayments to increase, and thereby result in a contraction of the amount of loans owned and serviced and an accelerated amortization of capitalized excess servicing income. Increased prepayments reduce the time period during which the Company receives excess servicing income and other servicing income with respect to prepaid loans. Increased amortization of capitalized excess servicing income is a current charge to earnings. Likewise, if delinquencies or liquidations were to occur sooner in the portfolio of loans sold by the Company and/or with greater frequency than was initially assumed, capitalized excess servicing income amortization would occur more quickly than originally anticipated, which would have an adverse effect on servicing income in the period of such adjustment. In contrast, an increase in the level of interest rates for an extended period of time could adversely affect the ability of the Company to originate loans, as well as the profitability of the loan origination program, by increasing the cost of funding and reducing the interest spread on loans retained and loans sold. If actual prepayments with respect to loans sold occur more slowly than estimated at the time of sale, total income would exceed previously estimated amounts; however, no adjustments would be made to capitalized excess servicing income on the Company's consolidated balance sheet as such income would be recognized prospectively. (For further discussion of loan sale gains and capitalized excess servicing income see Note 1.2 to Notes to the Consolidated Financial Statements.) LIFE INSURANCE. United Companies Life Insurance Company ("UCLIC"), the Company's wholly-owned life insurance subsidiary, has focused its efforts on expanding its annuity product line and its distribution network of financial institutions and independent general agents. On February 2, 1996, the Company entered into an agreement to sell all of the outstanding capital stock of UCLIC. The proposed sale is subject to approval of the Company's shareholders and regulatory authorities and the satisfaction of certain other conditions. See Note 13 to Notes to Consolidated Financial Statements. In 1995, annuity sales were $136 million compared to $250 million in 1994. The Company believes that the decrease in annuity sales in 1995 is due in part to the interest rate environment, particularly the relative relationships between short term and intermediate term interest rates, and to the focus of UCLIC's resources on development of its variable annuity product. In addition, a financial institution which produced approximately 10% of UCLIC's annuity sales in 1994 discontinued the sale of annuities for UCLIC in 1995 subsequent to the merger of such financial institution. UCLIC focused in 1994 and 1995 on expanding the independent general agents share of its distribution network, which agents sold approximately 55% of the total dollar amount of annuities written in 1995 compared to 46% in 1994 and 30% in 1993. As with the Company's mortgage operation, fluctuations in and the level of interest rates also impacts the operations of UCLIC. The average spread on the annuity business was 2.20%, 2.73% and $2.37% during 1993, 1994 and 1995, respectively. Surrenders of annuity policies increased in 1994 and 1995 compared to 1993 due in part to the continued reduction in interest crediting rates on new and existing annuity contracts and to a rising interest rate environment and an increase in the number of annuity contracts which were beyond the surrender penalty period. At December 31, 1995, the weighted average rating of the publicly traded bond portfolio was "AA", the amortized cost of assets allocated to investments in investment grade fixed maturity securities was $355.6 million or 30.8% of the portfolio and in investment grade mortgage-backed securities was $733.5 million or 63.5% of the portfolio. At December 31, 1995 the amortized cost of UCLIC's holdings of non-investment grade bonds was $22.0 million or 1.9% of the portfolio. UCLIC's invested assets also include residential and commercial real estate mortgages originated and serviced by United Companies Lending Corporation ("UCLC"); however, the percentage 27 28 of assets invested in mortgage loans in recent years has been reduced primarily as the result of their disfavor with insurance regulatory authorities and rating agencies. The annuities sold by UCLIC are monetary in nature and therefore sensitive to changes in the interest rate environment. Profitability of UCLIC is directly affected by its ability to invest annuity premiums at yields above the interest crediting rates on the related policy liabilities. One of the primary financial objectives of UCLIC is to effectively manage this interest spread over time in changing interest rate environments. This is accomplished in part by adjusting the interest crediting rate paid on its existing and new annuity policies. During periods of declining interest rates, the fair value of UCLIC's investments, primarily fixed maturity investments, increases; however, yields earned on investments made during such periods decline. In contrast, during periods of rising interest rates the fair value of the investment portfolio declines and the risk of policy surrenders increases. An unanticipated increase in surrenders would impact the Company's liquidity, potentially requiring the sale of certain investments prior to their maturities, which may be at a loss. Reserves for annuity policies constitute the Company's primary liabilities. The duration of these liabilities is affected by a number of factors, including interest rates, surrender penalties, ratings, public confidence in the insurance industry generally and in UCLIC specifically, governmental regulations and tax laws. Since insurance commissions incurred at the origination of annuity policies are generally deferred and recognized over the estimated life of the policies, any unexpected increase in surrenders of annuity contracts would require more rapid recognition of these expenses, thereby adversely impacting profitability. DISCONTINUED OPERATIONS. UGTIC United General Title Insurance Company. On April 10, 1995, the Company made a decision to dispose of its investment in United General Title Insurance Company ("UGTIC"), a wholly owned subsidiary of the Company, and, on May 1, 1995, approved a formal plan of disposal. The decision to dispose of UGTIC was independent of the consummation of the sale thereof pursuant to the definitive stock sale agreement signed on August 11, 1995. As a result, the operations of UGTIC have been classified as discontinued operations, and, accordingly, the consolidated financial statements and the related notes of the Company segregate continuing and discontinued operations. The sale was concluded on February 29, 1996. The definitive stock sale agreement provided for the sale of 100% of the stock of UGTIC and contains a provision making the Company liable to UGTIC for claims from defalcations and fraud losses incurred by UGTIC which are unknown and occur prior to closing and are discovered within 24 months thereafter. The Company is also liable, up to $4.2 million, for policy claims paid over a ten year period after closing that exceed certain specified levels. The Company recorded a loss from discontinued operations (net of income tax benefit) of $3.5 million in 1995 in connection with the sale of UGTIC. UGTIC was formed in 1983 in part to compliment the Company's mortgage operations; however, underwriting of affiliated transactions represented only approximately 3% of UGTIC's business in 1994 and 1995. At December 31, 1995 UGTIC was licensed in 29 states, was represented by approximately 948 independent general agents and had no direct operations. Key markets for UGTIC are Colorado, Louisiana, Florida and California. During 1995, 1994 and 1993, title insurance premiums were $37.0 million, $44.7 million and $24.4 million, respectively. During 1995 and 1994, UGTIC experienced a net loss of $2.0 million and $5.0 million, respectively, compared to net income of $.8 million in 1993. Operations in 1994 suffered severely as the result of claims related to agency defalcations. In addition to the incurred losses, the profitability of UGTIC in 1994 was negatively impacted by a $3.8 million increase in its reserve for policy losses. 28 29 FOSTER MORTGAGE CORPORATION On May 7, 1993, the Company decided to divest its subsidiary Foster Mortgage Corporation ("FMC"). As of November 30, 1993, the servicing rights owned by FMC, which constituted substantially all of its assets, were sold. On December 21, 1993, the institutional lenders under FMC's primary credit facility (the "FMC Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause the remaining affairs of FMC to be concluded under the supervision of the bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court approved a plan of liquidation for FMC providing for the appointment of a trustee selected by the FMC Institutional Lenders. The FMC Institutional Lenders allege that FMC has certain claims against the Company, including a claim with respect to the Company's alleged failure to remit all sums due FMC regarding federal income taxes under a tax agreement among the Company and its subsidiaries, including FMC, estimated by the FMC Institutional Lenders to range from $2.1 million to $29 million. FMC and the Company executed, subject to the approval of the bankruptcy court, a settlement agreement relating to payments between FMC and the Company in connection with the federal income tax benefits resulting from FMC's losses and to certain prior intercompany payments between FMC and the Company. The settlement agreement included a release by FMC in favor of the Company of any and all claims relating to federal income taxes. The FMC Institutional Lenders opposed the proposed settlement agreement. At the conclusion of a hearing on the proposed settlement on August 18, 1994, the bankruptcy court approved the portion of the settlement providing for a net payment by the Company of $1.65 million to FMC in satisfaction of the federal income tax benefits resulting from FMC's losses and the release of any claims regarding federal income taxes. The Company had previously recorded substantially all of the impact of this portion of the settlement in its prior financial statements. The bankruptcy court declined to approve the other portion of the proposed settlement relating to payments received by the Company from FMC within twelve months of the bankruptcy filing. If the Company were required to refund such payments, the Company has estimated the potential additional loss to be $1.9 million, net of tax benefits. The decision of the bankruptcy court on the settlement was appealed by the FMC Institutional Lenders to the U.S. District Court which affirmed the bankruptcy court's decision. The FMC Institutional Lenders then appealed this decision to the U.S. Fifth Circuit Court of Appeals. In a decision rendered on November 9, 1995, the U.S. Fifth Circuit Court of Appeals reversed the district court, vacated the settlement between FMC and the Company and remanded the matter for further proceedings. The trustee under the plan of liquidation has filed an adversary proceeding in the bankruptcy proceedings against the Company seeking avoidance of alleged preferential payments totaling $3.72 million and has also instituted a suit in federal court against the Company alleging claims under the tax agreement estimated to range from $2 million to $29 million. Management of the Company does not believe that any additional amounts are owed by the Company to FMC or the trustee and intends to vigorously contest the claims which have been brought against it for such amounts by the trustee under the plan of liquidation. The Company did not guarantee any debt of FMC. 1995, 1994 AND 1993 RESULTS OF OPERATION Net income for 1995 was $69.5 million ($2.25 per share based on 30.9 million weighted average shares outstanding) compared to $49.5 million for 1994 ($1.74 per share based on 28.5 million weighted average shares outstanding) and $11.6 million for 1993 ($.49 per share based on 23.7 million weighted average shares outstanding). The increase in net income in 1995 resulted primarily from an increase in the amount of loans sold and the gain and fees recognized in connection therewith. As previously discussed in "Discontinued operations", net income for 1995, 1994 and 1993 was reduced by losses of $3.5 million, $5.0 million and $16.7 million recognized in connection with the Company's decisions to divest United General Title Insurance Company and Foster Mortgage Corporation. 29 30 The following table sets forth certain financial data for the periods indicated.
Year Ended December 31, ---------------------------------------- 1995 1994 1993 ----------- ---------- ---------- (in thousands) Total revenues........................................$ 397,950 $ 314,694 $ 260,013 Total expenses........................................ 283,186 230,620 216,952 Income from continuing operations before income taxes........................................ 114,764 84,074 43,061 Income from continuing operations .................... 72,959 54,582 28,317
Revenues. The following table sets forth information regarding the components of the Company's revenues for the years ended December 31, 1995, 1994 and 1993.
Year Ended December 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (in thousands) Interest, charges and fees on loans .................$ 128,665 $ 111,994 $ 92,737 Loan sale gains...................................... 142,156 86,735 59,441 Investment income.................................... 104,062 84,666 75,527 Loan servicing income................................ 14,559 19,926 13,624 Net insurance premiums............................... 8,508 11,373 18,684 ---------- ---------- ---------- Total............................................$ 397,950 $ 314,694 $ 260,013 ========== ========== ==========
Interest, charges and fees on loans increased $16.7 million and $19.3 million for 1995 and 1994, respectively. This line item includes interest on mortgage loans owned by the mortgage and insurance divisions and loan origination fees earned by the mortgage division. Loan origination fees in excess of direct origination costs on each loan held by the Company are recognized over the life of the loan or earlier at the time of sale of the loan to a third party. During 1995, 1994 and 1993, the Company sold approximately $1.5 billion, $978 million and $463 million, respectively, in home equity loans and recognized approximately $36.0 million, $32.5 million and $18.9 million, respectively, in net loan origination fees (which relate primarily to fixed rate retail production) in connection with these sales. The following table presents the composition of interest, charges and fees on loans for the periods indicated.
Year Ended December 31, ---------------------------------------- 1995 1994 1993 ----------- ---------- ---------- (in thousands) Loan origination fees ...............................$ 68,442 $ 56,576 $ 35,987 Mortgage loan interest............................... 47,185 47,996 51,763 Other loan income ................................... 13,038 7,422 4,987 ----------- ---------- ---------- Total ...........................................$ 128,665 $ 111,994 $ 92,737 =========== ========== ==========
The Company estimates that nonaccrual loans reduced mortgage loan interest for 1995, 1994 and 1993 by approximately $13.3 million, $10.3 million and $9.5 million, respectively. During 1995 the average amount of 30 31 nonaccrual loans owned by the Company was $21.6 million compared to $25.5 million for 1994 and $31.7 million for 1993. In addition, the average balance of loans serviced for third parties which were on a nonaccrual basis or in foreclosure was $83.1 million during 1995, compared to $55.6 million and $43.4 million during 1994 and 1993, respectively, representing 3.9%, 4.1% and 4.5%, respectively, of the average amount of loans serviced for third parties. The Company is generally obligated to advance interest on delinquent loans to the investor or holder of the mortgage-backed security, as the case may be, at the pass-through rate until satisfaction of the note, liquidation of the collateral or charge off of the delinquent loan. At December 31, 1995 the Company owned approximately $7.2 million of commercial loans which were on an accrual status, but which the Company considers as potential problem loans, compared to $7.8 million and $8.1 million at December 31, 1994 and 1993, respectively. The Company evaluates each of these commercial loans to estimate its risk of loss in the investment and provides for such loss through a charge to earnings. Loan sale gains were $142.2 million, $86.7 million and $59.4 million in 1995, 1994 and 1993, respectively. Loan sale gains approximate the present value for the estimated lives of the loans of the excess of the contractual rates on the loans sold over the sum of the pass-through rate paid to the buyer, a normal servicing fee, a trustee fee, a surety bond fee, if any, in mortgage-backed securitization transactions, and an estimate of future credit losses. The increase in the amount of loan sale gains was due primarily to a $494 million and a $515 million increase in the amount of loans sold during 1995 and 1994, respectively. Excess servicing income retained by the Company (i.e., the stated interest rate on the loan less the pass-through rate and the normal servicing fee and other applicable recurring fees) decreased in 1994 compared to 1993 but increased in 1995 compared to 1994. Interest spread retained by the Company on loans sold includes the normal servicing fee. During 1994, guidelines were established which defined an industry accepted "normal servicing fee" as 50 basis points for servicing "B" and "C" quality home equity loans, such as those originated by the Company. As the result of this industry data, the Company, effective July 1, 1994, implemented a servicing fee rate in its loan securitization transactions of 50 basis points. This resulted in an increase in the amount of loan sale gain recognized on the home equity loans sold compared to previous securitization transactions which included a servicing fee rate of 75 basis points. In addition, as further discussed in Note 1.11, during the third quarter of 1995, the Company implemented a new accounting pronouncement related to mortgage servicing rights on loans originated by the Company. The implementation of the pronouncement increased loan sale gains by approximately $6.0 million during 1995. Loan sale gains during 1995 were reduced by the use of higher prepayment assumptions, primarily related to adjustable rate mortgage loans, in calculating the gain on sale of loans compared to prior years. The impact of the change in assumptions reduced loan sale gains by approximately $12.4 million. In addition, loan sale gains during 1995 were reduced by approximately $5.5 million as the result of the utilization of interest hedge mechanisms to protect the Company against an increase in market interest rates on the pass-through certificates sold in the second quarter of 1995 securitization transaction. The reduction in income resulted from a decline in interest rates prior to the pricing of this securitization transaction. The following table presents information regarding home equity loan sale transactions for the periods indicated.
Year Ended December 31, ------------------------------------- 1995 1994 1993 ---------- --------- --------- (dollars in thousands) Home equity loans sold...............................$ 1,471,868 $ 977,653 $ 462,873 Average coupon on home equity loans sold............. 11.67% 11.80% 12.00% Weighted interest spread retained on home equity loans sold............................... 4.98% 4.49% 6.06% Home equity loan sale gains..........................$ 142,156 $ 86,735 $ 59,220
31 32 Fluctuations in and the level of market interest rates will impact the interest spread retained by the Company on loans sold, and, potentially, the amount of its loan sale gains. An increase in the level of market interest rates will generally adversely affect the interest spread on loans sold, whereas such interest spread generally widens during a declining interest rate environment. The effect of actions which may be taken by the Company during a rising interest rate environment to mitigate the impact on earnings of fluctuations in market rates, such as increasing the coupon rate charged on its loan products, will generally lag the impact of market rate fluctuations. In connection with loan securitization transactions, the Company has used a prefunding feature which "locks in" the pass-through rate that the Company will pay to the investor on a predetermined amount of loans for future delivery. The Company is obligated for the difference between the earnings on the prefunded amount and the pass-through interest paid to the investor during the period from the date of the closing of the securitization transaction until the date of delivery of the loans. In connection with the home equity loan securitization transaction which closed in the fourth quarter of 1995, approximately $3.7 million was held in a prefunding account for purchase of the Company's home equity loans during the first quarter of 1996. Pursuant thereto, home equity loans with a remaining principal balance of approximately $3.7 million were delivered on January 10, 1996. Investment income totaled $104.1 million for 1995 compared to investment income of $84.7 million and $75.5 million during 1994 and 1993, respectively. Investment income during 1995 was positively affected by a $4.8 million increase in income, compared to 1994, related to the Company's investment in a limited partnership. In addition, interest earned on temporary investments reserve accounts totaled $7.2 million in 1995 compared to $2.7 million and $1.1 million during 1994 and 1993, respectively. Investment income for 1995, 1994 and 1993 also includes investment gains of $.5 million, $.2 million and $.6 million, respectively. At December 31, 1995 the amortized cost of the fixed income portfolio totaled $1.1 billion and was comprised principally of $734 million in investment grade mortgage-backed securities and $345 million in investment grade bonds. At December 31, 1995, the weighted average rating of the publicly traded bond portfolio according to nationally recognized statistical rating agencies was "AA". At December 31, 1995 the carrying value of investments in the Company's trading account, which is comprised of investments in common stocks, was $752,000 reflecting a $207,000 unrealized gain which is included in investment income for 1995. Loan servicing income was $14.6 million, $19.9 million and $13.6 million for 1995, 1994 and 1993, respectively. Loan servicing income in 1995 was negatively affected by a $6.3 million increase in the amortization of capitalized excess servicing income as the result of an adjustment in the estimated prepayment assumptions of certain mortgage loans serviced by the Company, primarily adjustable rate mortgage loans. This adjustment offset the impact of an increase of approximately $800 million in the average amount of home equity loans serviced by the Company for third parties during 1995 compared to the same period of 1994. As discussed above, the industry accepted "normal servicing fee" was defined during the second quarter of 1994 as 50 basis points. Effective July 1, 1994, the Company reduced its estimate of normal servicing fee and began using 50 basis points in computing loan sale gains. The reduction in the normal servicing fee for home equity loans from 75 to 50 basis points has the impact of increasing current revenues (loan sale gains) while reducing future revenues (loan servicing income). The following table reflects the components of loan servicing income for the periods indicated.
Year Ended December 31, ---------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (in thousands) Servicing fees earned.........................................$ 87,278 $ 60,181 $ 35,168 Amortization of capitalized excess servicing income........... (72,719) (40,255) (21,544) ----------- ----------- ----------- Total................................................$ 14,559 $ 19,926 $ 13,624 =========== =========== ===========
Net insurance premiums were $8.5 million, $11.4 million and $18.7 million for 1995, 1994 and 1993, respectively. Net insurance premiums reflect revenues associated primarily with credit insurance underwritten by 32 33 UCLIC. The decrease in premium income is primarily the result of the impact of UCLIC's decision to discontinue sales of credit insurance products. Expenses. The following table presents the components of the Company's expenses for the periods indicated.
Year Ended December 31, -------------------------------------------- 1995 1994 1993 ------------ ---------- ---------- (in thousands) Interest on annuity policies......................... $ 79,086 $ 73,065 $ 76,086 Personnel............................................ 76,022 57,380 40,784 Interest............................................. 28,308 14,563 10,158 Loan loss provision.................................. 16,025 13,457 17,343 Insurance commissions................................ 13,630 14,264 13,920 Insurance benefits .................................. 9,930 12,654 18,200 Other operating...................................... 60,185 45,237 40,461 ----------- ----------- ---------- Total............................................ $ 283,186 $ 230,620 $ 216,952 =========== =========== ==========
Interest on annuity policies increased $6.0 million during 1995 compared to 1994, primarily as the result of a $70 million increase in average annuity reserves. The decline in interest on annuity policies of $3.0 million in 1994 compared to 1993 resulted primarily from a reduction in the average interest crediting rate on the Company's annuity policies. Average annuity reserves were $1.4 billion during 1995 and 1994 and $1.2 billion during 1993. Personnel expenses were $76.0 million, $57.4 million and $40.8 million in 1995, 1994 and 1993, respectively. The increase in personnel costs are primarily associated with the expansion of the Company's mortgage operations, including start-up costs for the manufactured housing lending program, loan production related incentives and an increase in the cost of the Company's employee benefit and incentive plans. Insurance commissions for 1995, 1994 and 1993 were $13.6 million, $14.3 million and $13.9 million, respectively. Commissions paid on issuance of the Company's deferred annuity products are generally capitalized as deferred policy acquisition costs ("DPAC") and amortized over the estimated life of the policy. During 1995 and 1994, the Company capitalized approximately $11.9 million and $20.7 million, respectively, in commissions paid on sales of annuities compared to $13.7 million during 1993. Amortization of commission expense on annuities capitalized in prior periods was $11.0 million and $9.5 million during 1995 and 1994, respectively, compared to $5.6 million during 1993. Insurance benefits were $9.9 million, $12.7 million and $18.2 million for 1995, 1994 and 1993, respectively. The declining trend of insurance benefits resulted from a reduction in benefits associated with ordinary life and credit insurance products. The Company's loan loss provision was $16.0 million, $13.5 million and $17.3 million for 1995, 1994 and 1993, respectively. The fluctuation in the level of the Company's provision for loan losses is attributed in part to increases and decreases in the amount of loans owned by the Company during the respective periods. During 1994, the amount of loans owned by the Company declined by approximately $151 million compared to 1993. The amount of loans owned during 1995 increased $57 million compared to 1994. Interest expense for 1995 increased approximately $13.7 million compared to 1994 primarily as the result of an increase in the weighted average interest rate charged on debt and an increase in the average amount of debt outstanding. The $4.4 million increase in interest expense from 1993 to 1994 was likewise attributed to an increase in the weighted average interest rate charged on debt. 33 34 Other operating expenses increased approximately $14.9 million and $4.8 million during 1995 and 1994, respectively, primarily as the result of costs associated with the expansion of the Company's mortgage operations. During 1995, 1994 and 1993, advertising expense totaled $9.0 million, $3.1 million and $.8 million and occupancy and equipment expenses were $10.9 million, $8.0 million and $6.8 million, respectively. Other operating expenses in 1993 included a $2.3 million accrual for the estimated cost of a legal settlement and $1.4 million in estimated losses in connection with termination of a third party administrative contract for credit insurance. FINANCIAL INFORMATION ON BUSINESS SEGMENTS The following tables reflect income from continuing operations before income taxes for each of the Company's business segments for the years ended December 31, 1995, 1994 and 1993.
Year Ended December 31, 1995 ----------------------------------------------------------------- Corporate, Life Other Operations Mortgage Insurance & Eliminations Total -------- --------- ---------------- ----- (in thousands) Revenues Interest, charges and fees on loans........... $ 84,496 $ 38,077 $ 6,092 $ 128,665 Loan sale gains............................... 142,156 - - 142,156 Investment income............................. 7,227 99,327 (2,492) 104,062 Net insurance premiums........................ - 8,508 - 8,508 Loan servicing income......................... 19,219 (1,427) (3,233) 14,559 ------------- -------------- ----------- --------------- Total...................................... 253,098 144,485 367 397,950 ------------- -------------- ----------- --------------- Expenses: Interest on annuity policies.................. - 79,086 - 79,086 Personnel..................................... 62,677 5,260 8,085 76,022 Insurance commissions......................... - 13,427 203 13,630 Insurance benefits............................ - 9,930 - 9,930 Loan loss provision........................... 11,974 4,051 - 16,025 Interest...................................... 20,566 3,417 4,325 28,308 Other operating............................... 50,208 17,215 (7,238) 60,185 ------------- -------------- ----------- --------------- Total...................................... 145,425 132,386 5,375 283,186 ------------- -------------- ----------- --------------- Income (loss) from continuing operations before income taxes........................... $ 107,673 $ 12,099 $ (5,008) $ 114,764 ============= ============= ============ ==============
34 35
Year Ended December 31, 1994 ---------------------------------------------------------- Corporate, Life Other Operations Mortgage Insurance & Eliminations Total -------- ---------- ----------------- ----- (in thousands) Revenues: Interest, charges and fees on loans...... $ 63,905 $ 43,647 $ 4,442 $ 111,994 Loan sale gains.......................... 86,289 - 446 86,735 Investment income........................ 2,762 83,614 (1,710) 84,666 Net insurance premiums................... - 11,373 - 11,373 Loan servicing income.................... 24,645 (505) (4,214) 19,926 ---------- ---------- --------- --------- Total................................. 177,601 138,129 (1,036) 314,694 ---------- ---------- --------- --------- Expenses: Interest on annuity policies............. - 73,065 - 73,065 Personnel................................ 46,356 4,959 6,065 57,380 Insurance commissions.................... - 13,710 554 14,264 Insurance benefits....................... - 12,654 - 12,654 Loan loss provision...................... 8,398 5,059 - 13,457 Interest................................. 6,496 1,979 6,088 14,563 Other operating.......................... 35,196 17,623 (7,582) 45,237 ---------- ---------- --------- --------- Total................................. 96,446 129,049 5,125 230,620 ---------- ---------- --------- --------- Income (loss) from continuing operations before income taxes................... $ 81,155 $ 9,080 $ (6,161) $ 84,074 ========== ========== ========= =========
Year Ended December 31, 1993 ------------------------------------------------------- Corporate, Life Other Operations Mortgage Insurance & Eliminations Total -------- ---------- ----------------- ----- (in thousands) Revenues: Interest, charges and fees on loans.... $ 41,250 $ 45,561 $ 5,926 $ 92,737 Investment income .................. 1,054 75,594 (1,121) 75,527 Loan sale gains .................. 59,220 - 221 59,441 Net insurance premiums................. - 18,684 - 18,684 Loan servicing income.................. 19,115 340 (5,831) 13,624 ---------- ---------- --------- --------- Total .................. 120,639 140,179 (805) 260,013 ---------- ---------- --------- --------- Expenses: Interest on annuity policies........... - 76,086 - 76,086 Personnel.............................. 31,987 3,878 4,919 40,784 Insurance commissions.................. - 13,185 735 13,920 Insurance benefits..................... - 18,200 - 18,200 Loan loss provision.................... 12,349 4,994 - 17,343 Interest............................... 4,315 628 5,215 10,158 Other operating........................ 25,693 20,573 (5,805) 40,461 ---------- ---------- --------- --------- Total............................... 74,344 137,544 5,064 216,952 ---------- ---------- --------- --------- Income (loss) from continuing operations before income taxes................... $ 46,295 $ 2,635 $ (5,869) $ 43,061 ========== ========== ========= =========
35 36 ASSET QUALITY AND RESERVES The quality of the Company's loan and bond portfolios and of the loan portfolio serviced for third parties significantly affects the profitability of the Company. The values of and markets for these assets are dependent on a number of factors, including general economic conditions, interest rates and governmental regulations. Adverse changes in such factors, which become more pronounced in periods of economic decline, may affect the quality of these assets and the Company's resulting ability to sell these assets for acceptable prices. General economic deterioration can result in increased delinquencies on existing loans, reductions in collateral values and declines in the value of investments resulting from a reduced capacity of issuers to repay the bonds. Loans. Substantially all of the loans owned by the Company were produced through the Company's branch (i.e., retail) network or wholesale loan programs. In connection with its origination of home equity loans, the Company relies on specified underwriting and credit review procedures, a mortgage on the borrower's residence and, in some cases, other security, and, in its retail origination program, contact with borrowers through its branch office system to manage credit risk on its loans. In addition to servicing the loans owned by the Company, the mortgage division serviced approximately $2.6 billion in loans for third parties at December 31, 1995, $2.5 billion of which are home equity loans. Substantially all of the home equity loans serviced for third parties were publicly sold as mortgage backed securities ("pass-through certificates"). The purchasers of the pass-through certificates receive a credit enhanced security which is achieved in part through a guaranty provided by a third party insurer and by subordinating the excess interest spread retained by the Company to the payment of scheduled principal and interest on the certificates. The Company has, from time to time, used the Financial Guaranty Insurance Company ("FGIC") and MBIA Insurance Corporation ('MBIA") as third party insurers. The subordination of the excess interest spread retained by the Company relates to credit losses which may occur after the sale of the loans and continues until the earlier of the payment in full of the loans or termination of the agreement pursuant to which the loans were sold. If cumulative payment defaults exceed the amount subordinated, the third party insurer is obligated to pay any further losses experienced by the owners of the pass-through certificates. The Company is also obligated to cure, repurchase or replace loans which may be determined after the sale to violate representations and warranties relating to them and which are made by the Company at the time of the sale. The Company regularly evaluates the quality of the loan portfolio and estimates its risk of loss based upon historical loss experience, prevailing economic conditions, estimated collateral value and such other factors which, in management's judgment, are relevant in estimating the credit risk in owned and/or serviced loans. Estimated losses on the owned portfolio are provided for by an increase in the allowance for loan losses through a charge to current operating income. At December 31, 1995, the Company's allowance for loan losses was $14.9 million. For loans sold, the Company reduces the amount of gain recognized on the sale by the estimated amount of credit losses, and records such amount on its balance sheet in the allowance for loss on loans serviced. At December 31, 1995, the allowance for loss on loans serviced was $45.0 million. The maximum recourse associated with sales of home equity loans according to terms of the loan sale agreements totaled approximately $475 million, of which amount approximately $466 million relates to the subordinated cash and excess interest spread. Should credit losses on loans sold materially exceed the Company's estimates for such losses, such consequence will have a material adverse impact on the Company's financial statements. At December 31, 1995, the contractual balance of loans serviced was approximately $3.0 billion comprised of approximately $409 million serviced for the Company and approximately $2.6 billion serviced for investors. The portfolio is geographically diversified. Although the Company services loans in 48 states, at December 31, 1995 a substantial portion of the loans serviced were originated in Florida (10.5%), Ohio (10.0%) and Louisiana (8.8%), respectively, and no other state accounted for more than 7.5% of the serviced portfolio. Included in the serviced portfolio are commercial loans originated by the Company, a substantial portion of which were originated in Florida (25.9%), Georgia (19.4%) and Colorado (10.9%) and no other state accounted for more than 8.0% of the commercial loans serviced. The risk inherent in such concentrations is dependent not only upon regional and general economic stability which affects property values, but also the financial well-being and creditworthiness of 36 37 the borrower. The following table provides a summary of loans owned and/or serviced which are past due 30 days or more, foreclosed properties and loans charged off as of the dates indicated.
Foreclosed Properties ------------------------ Contractual Delinquencies % of Owned Serviced for % of Balance Contractual Contractual by the Third Party Net Loans Average Year Ended of Loans Balance Balance Company Investors Charged Off Loans - ---------- -------------------------------------------------------------------------------------------------- (dollars in thousands) December 31, 1995 Home equity................. $ 2,701,481 $ 220,145 8.15% $ 8,469 $ 21,604 $ 12,221 0.56% Commercial.................. 251,241 4,518 1.80% 16,547 5,325 4,416 1.68% Conventional................ 58,554 2,734 4.67% - - 132 .20% Manufactured housing........ 888 - - - - - - ------------ ----------- --------- ---------- ----------- Total.................. $ 3,012,164 $ 227,397 7.55% $ 25,016 $ 26,929 $ 16,769 ============ =========== ========= ========== =========== December 31, 1994 Home equity................. $ 1,683,698 $ 129,203 7.67% $ 8,791 $ 11,837 $ 11,694 0.84% Commercial.................. 274,413 5,377 1.96% 22,131 8,784 5,658 1.83% Conventional................ 74,294 2,672 3.60% 35 - 100 0.16% ------------ ----------- --------- ---------- ----------- Total.................. $ 2,032,405 $ 137,252 6.75% $ 30,957 $ 20,621 $ 17,452 ============ =========== ========= ========== =========== December 31, 1993 Home equity................. $ 1,125,139 $ 92,974 8.26% $ 17,014 $ 8,355 $ 8,548 0.88% Commercial.................. 345,365 19,292 5.59% 20,871 9,275 3,579 0.95% Conventional................ 98,277 3,747 3.81% 148 - 77 0.09% ------------ ----------- --------- ---------- ----------- Total.................. $ 1,568,781 $ 116,013 7.40% $ 38,033 $ 17,630 $ 12,204 ============ =========== ========= ========== ===========
Management continues to focus on reducing the level of non-earning assets owned and/or serviced by expediting the foreclosure process. The balance of foreclosed home equity loans owned and/or serviced as a percentage of the home equity loans owned and/or serviced was 1.1%, 1.2% and 2.3% at December 31, 1995, 1994 and 1993, respectively. The above delinquency and loan loss experience represents the Company's recent experience. However, the delinquency, foreclosure and net loss percentages may be affected by the increase in the size and relative lack of seasoning of a substantial portion of the portfolio. In addition, the Company can neither quantify the impact of property value declines, if any, on the home equity loans nor predict whether to what extent or how long such declines may exist. In a period of such declines, the rates of delinquencies, foreclosures and losses on the home equity loans could be higher than those theretofore experienced in the mortgage lending industry in general. Adverse economic conditions (which may or may not affect real property values) may affect the timely payment by borrowers of scheduled payments of principal and interest on the home equity loans and, accordingly, the actual rates of delinquencies, foreclosures and losses. As a result, the information in the above tables should not be considered as a basis for assessing the likelihood, amount or severity of delinquencies or losses in the future on home equity loans and no assurance can be given that the delinquency and loss experience presented in the tables will be indicative of such experience on home equity loans. A summary analysis of the changes in the Company's allowance for loan losses and the allowance for loss on loans serviced is shown in Note 3.3 of the Notes to the Consolidated Financial Statements. 37 38 Investment securities. The Company's investment portfolio consists primarily of mortgage backed securities and corporate bonds, comprising 65.7% and 29.3% of the portfolio at December 31, 1995, respectively. At December 31, 1995, approximately 93.6% of the Company's portfolio of investment securities were classified in an available-for-sale category and the carrying value adjusted to fair value by means of an adjustment to stockholders' equity. The remainder of the portfolio consists primarily of private placements made either directly or through an investment partnership and are classified as held-to-maturity and valued at cost. At December 31, 1995, the Company owned $.8 million in equity securities classified as trading securities. The net unrealized gain in the debt securities portfolio (fair value over amortized cost) at December 31, 1995 was $43.8 million compared to a net unrealized loss of $73.9 million at December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's principal cash requirements consist of funding loan production in its mortgage operations and the payment of policyholder claims and surrenders incurred in its insurance operations. The Company's mortgage operations require continued access to short and long-term sources of debt financing and the sale of loans and asset-backed securities. The liquidity requirements for the Company's insurance operations are generally met by funds provided from the sale of annuities and cash flow from its investments in fixed income securities and mortgage loans. Prior to 1994, the Company's primary debt facility was a revolving credit facility (the "Bank Facility") dated as of October 11, 1988. On November 2, 1994 the Company publicly sold $125 million of its senior unsecured notes and used the net proceeds from the sale of the senior notes to repay a portion of the principal amount of the indebtedness outstanding under the Bank Facility. During 1995, the Company publicly sold $100 million of its senior unsecured notes and used a portion of the net proceeds from the sale of the senior notes to repay the remaining balance outstanding under the Bank Facility, which was scheduled to mature on December 31, 1996. The remainder of the proceeds were used for general corporate purposes. The Company terminated the Bank Facility effective July 25, 1995. In addition, the Company maintains short-term credit facilities with various financial institutions. As of December 31, 1995, $65 million in such credit facilities were available to the Company and no amounts were outstanding thereunder. During 1995, the Company sold 1,955,000 shares of its Preferred Redeemable Increased Dividend Equity Securities(sm), 6 3/4% PRIDES, Convertible Preferred Stock ("PRIDES(sm)") at a price per share of $44.00. Net proceeds to the Company were approximately $83.3 million. The net proceeds from the sale of the shares of PRIDES were used for general corporate purposes. At December 31, 1995, the Company had secured warehouse facilities available from (i) a syndicate of commercial banks (the "Commercial Bank Warehouse") and (ii) the investment bank that acted as lead underwriter for the Company's fourth quarter securitization (the "Investment Bank Warehouse"). The Commercial Bank Warehouse permits certain of the Company's mortgage lending subsidiaries to borrow up to $150 million on a revolving basis secured by home equity loans eligible thereunder. Loans under this facility are subject to the satisfaction of certain borrowing conditions, including a minimum borrowing base and will bear interest at a floating rate. Borrowings under this facility are required to be repaid from the proceeds of the sale or other disposition of the home equity loan collateral. The lenders' commitment under this facility is scheduled to terminate on May 23, 1997. At December 31, 1995, $19.3 million was outstanding under the Commercial Bank Warehouse. The Investment Bank Warehouse was directly related to the 1995 fourth quarter securitization and initially provided funding for up to $250 million of eligible home equity loans for such securitization and terminated with the closing of the last delivery of loans under the prefunding accounts relative to this securitization. As of December 31, 1995, $75 million was available and no amounts were outstanding under the Investment Bank Warehouse. The Company expects to have facilities similar to the Investment Bank Warehouse available in conjunction with its future securitizations. 38 39 The following discussion reflects the primary sources of liquidity and capital for each of the Company's primary operating divisions. Mortgage. The principal cash requirements of the Company's mortgage operations arise from loan production, deposits to reserve accounts, repayments of intercompany debt borrowed under the Company's senior notes, payments of operating and interest expenses, and income taxes related to loan sale transactions. Loan production is funded principally through proceeds from the issuance of the Company's senior notes, short-term bank facilities and warehouse facilities pending loan sales. Substantially all of the loans originated or acquired by the Company are sold. Net cash used by operating activities of the Company in 1995 and 1994, respectively, reflects approximately $1.6 billion and $949 million, respectively, in cash used for loan originations and acquisitions. The primary source of funding for loan originations is derived from the reinvestment of proceeds from the ultimate sale of loans in the secondary market which totaled approximately $1.5 billion and $978 million in 1995 and 1994, respectively. In connection with the loan sale transactions in the secondary market, third-party surety bonds and cash deposits by the Company as credit enhancements were provided. The loan sale transactions required the subordination of certain cash flows payable to UCLC and its subsidiaries to the payment of principal and interest due to certificate holders. In connection with these transactions, UCLC has been required, in some instances, to fund an initial deposit, and thereafter, in each transaction, a portion of the amounts receivable by UCLC and its subsidiaries from the excess interest spread has been required to be placed and maintained in a reserve account to the extent of the subordination requirements. The subordination requirements generally provide that the excess interest spread is payable to a reserve account until a specified level of cash, which is less than the maximum subordination amount, is accumulated therein. The capitalized excess servicing income of the Company is subject to being utilized first to replenish cash paid from the reserve account to fund shortfalls in collections from borrowers who default on the payment of principal or interest on the loans underlying the pass-through certificates issued until the total of the Company's deposits into the reserve account equal the maximum subordination amount. In connection with the issuance and sale of approximately $3.2 billion of pass-through certificates through December 31, 1995, the subordination amounts aggregate approximately $466 million. After the Company's deposits into the reserve account equal the maximum subordination amount for a transaction, the subordination of the related excess interest spread (including the guarantee fee payable therefrom) for these purposes is terminated. The excess interest spread required to be deposited and maintained in the respective reserve accounts will not be available to support the cash flow requirements of the Company until such amount exceeds the maximum subordinated amount (other than amounts, if any, in excess of the specified levels required to be maintained in the reserve accounts, which may be distributed periodically to the Company). At December 31, 1995, the amounts on deposit in such reserve accounts totaled $155 million. Life insurance. The principal cash requirement of UCLIC consists of contractual obligations to policyholders, principally through policy claims and surrenders. The primary sources of funding these obligations, in addition to cash flow from investments, are the sale of annuities. Net cash flow from annuity operations is used to build an investment portfolio, which in turn produces future cash flows from investment income and provides a secondary source of liquidity for this division. Net cash provided by operating activities of the insurance division (which excludes annuity sales and surrenders) in 1995 and 1994 was approximately $87 million and $64 million, respectively, resulting primarily from cash earnings on investments. The Company monitors available cash and cash equivalents to maintain adequate balances for current payments while maximizing cash available for longer term investment activities. The Company's financing activities during 1995 and 1994 reflect approximately $136 million and $250 million, respectively, in cash received primarily from sales by UCLIC of its annuity products. The Company believes that the decrease in annuity sales is due in part to the interest rate environment, particularly the relative relationship between short term and intermediate term interest rates, and to the focus by UCLIC on development of its variable annuity product. In addition, a financial institution which produced approximately 10% of UCLIC's annuity sales in 1994 discontinued the sale of annuities for UCLIC in 1995 subsequent to the merger of such financial institution. As reflected in the net cash used by investing activities during the same periods, investment purchases were approximately $137 million and $300 million, respectively, reflecting the investment of 39 40 these funds and the reinvestment of proceeds from maturities of investments. Cash used by financing activities during these twelve month periods also reflects payments of $223 million and $192 million primarily on annuity products resulting from policyholder surrenders and claims. The increase in annuity surrenders during 1995 was expected, due in part to an increase in the amount of annuity policies which were beyond the surrender penalty period. Should annuity surrenders continue to exceed annuity sales, such consequence will decrease the liquidity of UCLIC and potentially result in the sale of certain assets, such as bonds and loans, prior to their maturity, which may be at a loss. UCLIC's investments at December 31, 1995, included approximately $345 million in residential and commercial mortgage loans, and the amortized cost of its bond portfolio included $378 million in corporate and government bonds and private debt placements and $778 million in mortgage-backed securities. As a Louisiana domiciled insurance company, UCLIC is subject to certain regulatory restrictions on the payment of dividends. UCLIC had the capacity at December 31, 1995 to pay dividends of $9.2 million. UCLIC did not pay any dividends to the Company during 1993, 1994 or 1995 in order to retain capital in UCLIC. PENDING SALE OF UCLIC . On February 2, 1996, the Company signed a Stock Purchase Agreement (the "Agreement") dated as of January 30, 1996, for the sale of all of the outstanding capital stock of UCLIC to UC Life Holding Corp., a new Delaware corporation formed by Knightsbridge Capital Fund I, L.P. for an aggregate amount of $164 million plus earnings of UCLIC from January 1, 1996, to closing of the transaction. Knightsbridge, which is a private investment partnership with institutional partners, was formed in 1995 to make equity investments in companies engaged primarily in the life insurance industry. Under the terms of the agreement, the sales price is comprised of cash currently estimated to be $109 million and UCLIC real estate and other assets to be distributed to the Company prior to the closing. The real estate to be distributed includes portions of the United Plaza office park, including the Company's home office. In addition, the Company will purchase a convertible promissory note from an affiliate of the purchaser for $15 million in cash. The note matures in 11 years and bears interest at a rate of 8% per annum payable at maturity. The Company does not expect the sale of UCLIC to have a material effect on net income. The purchaser also agreed that UCLIC would continue to be an investor in first lien home equity loans originated by the Company's lending operations and that UCLIC's home office operations would be maintained in its present location in Baton Rouge, Louisiana following the closing for at least two years. The agreement is subject to approval by UCFC's shareholders and regulatory authorities and the satisfaction of other conditions, and provides that the closing will occur on or before July 31, 1996. RATINGS The Company. During 1994, the Company sold publicly $125 million of its unsecured and unsubordinated 9.35% senior notes due November 1, 1999. Duff and Phelps Credit Rating Co. ("D&P") rated the issue BBB, Standard and Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), rated the notes BBB- and Moody's Investor Services, Inc. ("Moody's") rated the notes Ba2, respectively. D&P previously assigned a rating of BBB to the Bank Facility. On July 25, 1995 the Company issued $100 million of its unsecured and unsubordinated 7% senior notes due July 15, 1998. The notes received ratings of "BBB" from D&P, "BBB-" from S&P and "Ba2" from Moody's. Life insurance subsidiary. In June, 1994, A.M. Best Company ("Best") reaffirmed its "A-" (Excellent) rating of UCLIC. Best's ratings depend in part on its analysis of an insurance company's financial strength, operating performance and claims paying ability. In addition, in 1995, S&P revised the rating scale used in assigning 40 41 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. 41 42 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 42 43 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- 1995 1994 ----------- ----------- Assets (in thousands) Cash and cash equivalents................................................... $ 28,087 $ 56,359 Temporary investments - reserve accounts ................................... 155,254 81,980 Investment securities Trading ................................................................ 752 679 Available-for-sale ..................................................... 1,140,421 960,100 Held-to-maturity ....................................................... 51,586 57,391 Other .................................................................. 25,594 26,672 Loans - net ................................................................ 413,574 369,382 Capitalized excess servicing income ........................................ 283,454 179,065 Deferred policy acquisition costs .......................................... 90,703 91,915 Accrued interest receivable ................................................ 53,265 37,200 Property - net ............................................................. 38,659 30,565 Deferred income tax benefit ................................................ -- 7,420 Net assets of discontinued operations ...................................... 6,245 9,736 Other assets ............................................................... 79,292 69,791 ----------- ----------- Total assets..................................................... $ 2,366,886 $ 1,978,255 =========== =========== Liabilities and Stockholders' Equity Annuity reserves............................................................ $ 1,417,803 $ 1,425,973 Notes payable .............................................................. 255,756 213,668 Insurance reserves ......................................................... 113,002 120,992 Deferred income taxes payable .............................................. 64,461 -- Allowance for loss on loans serviced ....................................... 44,970 26,822 Repurchase agreements ...................................................... 40,857 -- Other liabilities .......................................................... 48,086 35,550 ----------- ----------- Total liabilities ............................................... 1,984,935 1,823,005 ----------- ----------- Stockholders' equity: Preferred stock, $2 par value; Authorized - 20,000,000 shares; Issued - 1,955,000 shares of 6 3/4% PRIDES(sm) ($44 per share liquidation preference) ......................................... 3,910 -- Common stock, $2 par value; Authorized - 100,000,000 shares; Issued - 29,302,246 and 28,541,154 shares .......................... 58,604 57,082 Additional paid-in capital ............................................. 179,848 94,129 Net unrealized gain (loss) on securities ............................... 29,514 (46,858) Retained earnings ...................................................... 122,816 62,025 Treasury stock and ESOP debt ........................................... (12,741) (11,128) ----------- ----------- Total stockholders' equity ......................................... 381,951 155,250 ----------- ----------- Total liabilities and stockholders' equity....................... $ 2,366,886 $ 1,978,255 =========== ===========
See notes to consolidated financial statements. 43 44 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ----------------------------------- 1995 1994 1993 --------- --------- --------- (in thousands, except per share data) Revenues: Interest, charges and fees on loans .............. $ 128,665 $ 111,994 $ 92,737 Loan sale gains .................................. 142,156 86,735 59,441 Investment income ................................ 104,062 84,666 75,527 Loan servicing income ............................ 14,559 19,926 13,624 Net insurance premiums ........................... 8,508 11,373 18,684 --------- --------- --------- Total ............................................ 397,950 314,694 260,013 --------- --------- --------- Expenses: Interest on annuity policies ..................... 79,086 73,065 76,086 Personnel ........................................ 76,022 57,380 40,784 Interest ......................................... 28,308 14,563 10,158 Loan loss provision .............................. 16,025 13,457 17,343 Insurance commissions ............................ 13,630 14,264 13,920 Insurance benefits ............................... 9,930 12,654 18,200 Other operating .................................. 60,185 45,237 40,461 --------- --------- --------- Total .................................... 283,186 230,620 216,952 --------- --------- --------- Income from continuing operations before income taxes 114,764 84,074 43,061 Provision for income taxes .......................... 41,805 29,492 14,744 --------- --------- --------- Income from continuing operations ................... 72,959 54,582 28,317 Loss from discontinued operations: Loss from discontinued operations, net of income tax expense benefit of $1,084 $2,702 and $314, respectively ................ (2,014) (5,048) (676) Loss on disposal, net of income tax benefit of $794 and $8,326, respectively ............. (1,477) -- (16,066) --------- --------- --------- Total .................................... (3,491) (5,048) (16,742) --------- --------- --------- Net income .......................................... $ 69,468 $ 49,534 $ 11,575 ========= ========= ========= Per share data: Income from continuing operations ................ $ 2.36 $ 1.92 $ 1.20 Loss from discontinued operations ................ (.11) (.18) (.71) --------- --------- --------- Net income ....................................... $ 2.25 $ 1.74 $ .49 ========= ========= =========
See notes to consolidated financial statements. 44 45 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------- 1995 1994 1993 ------------------------------------------- (in thousands) Cash flows from continuing operating activities: Income from continuing operations ....................................... $ 72,959 $ 54,582 $ 28,317 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities: Decrease (increase) in deferred policy acquisition costs ............. 1,212 (8,420) (3,488) Increase in accrued interest receivable .............................. (16,065) (7,033) (3,401) Decrease (increase) in other assets .................................. 2,044 (8,155) 595 Decrease in insurance reserves ....................................... (7,990) (12,596) (8,727) Increase (decrease) in other liabilities ............................. (5,911) (2,829) 18,241 Loan sale gains ...................................................... (164,112) (94,673) (62,896) Amortization of capitalized excess servicing income .................. 72,719 40,255 21,544 Investment gains ..................................................... (325) (219) (595) Interest on annuity policies ......................................... 79,086 73,065 76,086 Loan loss provision .................................................. 16,025 13,457 17,343 Amortization and depreciation ........................................ 4,462 3,387 3,624 Deferred income taxes ................................................ 30,758 12,301 (3,532) Proceeds from sales and principal collections of loans held for sale ...................................................... 1,507,514 1,000,970 478,213 Originations and purchases of loans held for sale .................... (1,600,213) (949,448) (595,893) Net cash flows from trading investment securities .................... (73) (687) -- ----------- ----------- ----------- Net cash provided (used) by continuing operating activities . (7,910) 113,957 (34,569) ----------- ----------- ----------- Cash flows from discontinued operating activities ............................ -- (2,889) (5,612) ----------- ----------- ----------- Cash flows from investing activities: Principal collected on loans held for investment .................. 77,182 94,588 95,755 Proceeds from sales of loans held for investment .................. -- -- 593 Originations and acquisition of loans held for investment ......... (39,547) (8,798) (4,560) Increase in reserve accounts ...................................... (73,274) (54,308) (20,046) Proceeds from sales of investment securities ...................... 27,047 9,459 25,475 Proceeds from maturities or calls of investment securities ........ 53,914 76,978 117,117 Purchase of held-to-maturity securities ........................... -- -- (283,853) Purchases of available-for-sale securities ........................ (136,579) (300,384) -- Capital expenditures .............................................. (10,885) (4,693) (893) ----------- ----------- ----------- Net cash used by investing activities ....................... (102,142) (187,158) (70,412) ----------- ----------- ----------- Cash flows from financing activities: Payments on mortgage loan ......................................... -- -- (15,750) Proceeds from senior debt and mortgage loan ....................... 103,219 125,192 -- Decrease in revolving credit debt ................................. (72,163) (82,838) (35,000) Increase (decrease) in repurchase agreement ....................... 40,857 (30,000) 30,000 Increase (decrease) in debt with maturities of three months or less (14,750) 14,250 (600) Increase in warehouse loan facility ............................... 19,321 -- -- Proceeds from ESOP debt ........................................... 6,283 -- -- Payments on ESOP debt ............................................. (321) -- -- Deposits received from annuities .................................. 135,534 249,737 207,682 Payments on annuities ............................................. (222,791) (191,811) (136,340) Cash dividends paid ............................................... (8,677) (5,050) (3,624) Increase in managed cash overdraft ................................ 11,241 10,374 2,409 Proceeds from issuance of stock ................................... 83,254 4,545 48,714 Increase in unearned ESOP compensation ............................ (2,313) (2,434) -- Proceeds from exercise of stock options and warrants .............. 3,086 542 298 ----------- ----------- ----------- Net cash provided by financing activities ................... 81,780 92,507 97,789 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ............................. (28,272) 16,417 (12,804) Cash and cash equivalents at beginning of period ............................. 56,359 39,942 52,746 ----------- ----------- ----------- Cash and cash equivalents at end of period ................................... $ 28,087 $ 56,359 $ 39,942 =========== =========== ===========
See notes to consolidated financial statements. 45 46 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Treasury Additional Unrealized Stock and Total Common Preferred Paid-in Gain (Loss) on Retained ESOP Stockholders' Stock Stock Capital Securities Earnings Debt Equity --------- ---------- ----------- ---------- ---------- ----------- ------------ (in thousands) Balance, December 31, 1992, as previously reported...........$ 18,730 $ 31,461 $ 52,037 $ (5,970) $ 96,258 Effect of 1995 stock split............ 18,730 (18,730) --------- ---------- ----------- -------- ---------- ----------- ---------- Balance, December 31, 1992, as restated...................... 37,460 12,731 52,037 (5,970) 96,258 Net income............................ 11,575 11,575 Dividends paid........................ (3,624) (3,624) Decrease in ESOP debt................. 147 147 Common stock options exercised........................ 1,476 1,301 2,777 Treasury shares acquired.............. (2,479) (2,479) Preferred stock issued................ $ 20,000 (1,239) 18,761 Preferred stock converted into common stock........................ 7,804 (20,000) 12,196 Common stock issued................... 4,000 25,953 29,953 --------- ---------- ----------- -------- ---------- ----------- ---------- Balance, December 31, 1993............ 50,740 - 50,942 59,988 (8,302) 153,368 Net income............................ 49,534 49,534 Dividends paid........................ 5,184 37,263 (47,497) (5,050) Increase in ESOP debt................. (2,222) (2,222) Common stock options.................. exercised........................ 398 1,749 2,147 Treasury shares acquired.............. (604) (604) Common stock issued................... 600 3,945 4,545 Common stock warrants exercised........................... 160 230 390 Mark-to-market adjustment on investments...................... (46,858) (46,858) --------- ---------- ----------- -------- ---------- ----------- ---------- Balance, December 31, 1994 57,082 - 94,129 (46,858) 62,025 (11,128) 155,250 Net income............................ 69,468 69,468 Dividends paid........................ (8,677) (8,677) Increase in ESOP debt................. ( 1,613) (1,613) Common stock warrants exercised........................ 704 696 1,400 Common stock options exercised........................ 818 5,386 6,204 Preferred stock issued................ 3,910 79,344 83,254 Release of ESOP shares................ 293 293 Mark-to-market adjustment on investments................... 76,372 76,372 --------- ---------- ----------- -------- ---------- ----------- ---------- Balance, December 31, 1995 $ 58,604 $ 3,910 $ 179,848 $ 29,514 $ 122,816 $ (12,741) $ 381,951 ========= ========== =========== ======== ========== =========== ==========
See notes to consolidated financial statements. 46 47 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ACCOUNTING POLICIES 1.1 Principles of Consolidation. The consolidated financial statements include United Companies Financial Corporation (the "Company" or "United Companies") and subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. 1.2 Loan Accounting. The Company originates loans for its own portfolio and for sale and/or securitization in the secondary market. 1.2(a) Loan Sales. The Company sells substantially all loans which it originates and generally retains the servicing rights on loans sold. At the time of sale, the Company recognizes a gain on loans sold in an amount equal to the present value of the difference between the interest spread retained by the Company and a normal servicing fee and other expenses over the estimated life of the loan. Under the sales/servicing agreements, the buyer receives the principal collected on the loan and an agreed upon rate of return on the outstanding principal balance; the Company retains the excess of the interest at the contractual rate over the sum of the rate paid to the buyer (the "pass-through" rate) and, where applicable, the trustee fee and surety bond fee. Generally, this interest spread retained by the Company differs significantly from a normal servicing fee and is reflected on the Company's balance sheet as a receivable, capitalized excess servicing income. Capitalized excess servicing income is calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar financial instruments at the time of the sale but is not reduced for estimated credit losses under recourse provisions of the sale. Such estimated credit losses are shown separately as a liability on the Company's balance sheet as allowance for loss on loans serviced. The Company has developed its assumptions based on experience with its own loan portfolio and available market data. For fixed rate loans the Company uses prepayment assumptions based on the prepayment experience of its owned and serviced loan portfolio. Prepayment rates for adjustable rate loans are derived from available market data and prepayment experience of the Company's owned and serviced portfolio. The weighted average discount rate used by the Company to determine the present value of expected cash flows from excess servicing arising from loan sale transactions occurring in 1995, 1994 and 1993 was 10%. Gains from partial sales of loans are adjusted based on fair value on the date that the loan was acquired or, if not practicable, the date of the sale. The Company believes that the capitalized excess servicing income recognized at the time of sale does not exceed the amount that would have been received if it were sold in the marketplace. In calculating loan sale gains, the Company considers current economic and market conditions at the date of sale. In subsequent periods, the Company reviews as of each balance sheet date its prepayment assumptions in relation to current rate of prepayment and, if necessary, revises its estimates using the original discount rate. Any losses arising from adverse prepayment experience are recognized immediately. Favorable experience is recognized prospectively. 1.2(b) Nonrefundable Loan Fees. Loan origination fees and incremental direct costs associated with loan originations are deferred and recognized over the lives of the loans as an adjustment to yield, using the interest method. Unamortized costs and fees are recognized upon sale of the loan or related mortgage-backed securities to third parties. 1.2(c) Loan Servicing. The Company generally retains the right to service loans it originates and subsequently sells or securitizes in the secondary market. Fees for servicing loans and mortgage-backed securities relating to loans originated by the Company and sold with servicing rights retained are generally based on a stipulated percentage of the outstanding principal balance of such loans and are recognized when earned. Interest received 47 48 on loans sold, less amounts paid to investors, is reported as loan servicing income. Capitalized excess servicing income is amortized systematically to reduce loan servicing income to an amount representing normal servicing income and the present value discount. Prior to the adoption of Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights", the Company recognized late charges and other ancillary income when collected and charged costs to service mortgage loans when incurred. As further discussed in Note 1.11, the Company implemented the provisions of SFAS 122 in the third quarter of 1995 and, in connection therewith, changed its method of accounting for mortgage servicing rights to recognize as separate assets rights to service mortgage loans for others that have been acquired through either the purchase or origination of such loans. 1.2(d) Allowance for Loan Losses. The Company provides for estimated loan losses on loans owned by the Company by establishing an allowance for loan losses through a charge to earnings. The Company conducts periodic reviews of the quality of the loan portfolio and estimates the risk of loss based upon historical loss experience, prevailing economic conditions, estimated collateral value and such other factors which, in management's judgment, are relevant in estimating the adequacy of the Company's allowance for loan losses. While management uses the best information available in conducting its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions, collateral value or other elements used in conducting the review. 1.2(e) Allowance for Loss on Loans Serviced. The Company's loan sale agreements generally provide for the subordination of cash and excess interest spread relating to the loans sold. Such subordination relates to credit losses which may occur after the sale of the loans and continues until the earlier of the payment in full of the loans or the termination of the agreement pursuant to which the loans were sold. In connection with the securitization and sale of home equity pass-through certificates, the interest retained by the Company is subordinated to a limited extent to the sold certificates and will be used to fund a reserve account, thereby providing a credit enhancement to the holders of the certificates. On certain loan sale transactions prior to 1991, the loan sale agreements provided limited recourse against the Company for credit losses. The Company has funded a portion of such recourse through the pledge of certificates of deposit. Regardless of the structure of the loan sale transaction, the Company estimates the amount of future losses under the loan sale agreements and provides a reserve for such loss in determining the amount of gain recorded on the sale. 1.2(f) Other. Loans are placed on a nonaccrual status when they are past due 150 days. 1.2(g) Property Acquired in Satisfaction of Debt. The Company records properties received in settlement of loans ("foreclosed property") at the lower of their market value less estimated costs to sell ("market") or the outstanding loan amount plus accrued interest ("cost"). The Company accomplishes this by providing a specific reserve, on a property by property basis, for the difference between market and cost. Market value is determined by property appraisals performed either by Company personnel or independent appraisers. The related adjustments are included in the Company's provision for loan losses. 1.3 Insurance Accounting. 1.3(a) Life and Annuity Contracts. Income on short duration single premium contracts, primarily credit insurance products, is recognized over the contract period. Premiums on other insurance contracts, principally traditional life insurance and limited payment life insurance policies, are recognized as revenue when due. Policy benefit reserves for traditional life insurance policies have been provided on a net level premium method including assumptions as to investment yield, mortality and withdrawals based on the Company's experience and industry standards with provisions for possible adverse deviation. Investment yield assumptions range from 5.5% to 8.5% per annum. Policy benefit reserves include certain deferred profits on limited payment policies. These profits are being recognized in income over the policy term. 48 49 Reserves for annuity policies and interest sensitive life policies represent the policy account balance, or accumulated fund value, before applicable surrender charges. Benefit claims incurred in excess of related policy account balances and interest credited during the period to policy account balances are charged to expense. Commissions and other costs related to the production of new and renewal business have been deferred. The deferred costs related to traditional life insurance are amortized over the premium payment period using assumptions consistent with those used in computing policy benefit reserves. Deferred costs related to annuities and interest sensitive products are amortized over the estimated life of the policy in relation to the present value of estimated gross profits on the contract. The Company periodically reviews the appropriateness of assumptions used in calculating the estimated gross profits on annuity contracts. Any change required in these assumptions may result in an adjustment to deferred policy acquisition costs which would affect income. Participating business, primarily related to the Company's pre-need funeral policy, represented 8.2%, 7.2%, and 6.3% of the life insurance in force as of December 31, 1995, 1994 and 1993, respectively. The amount of dividends paid on participating policies is based on published dividend scales and totaled $1.2 million, $1.0 million and $1.5 million for the years ended December 31, 1995, 1994 and 1993, respectively. 1.3(b) Reinsurance. Life insurance. UCLIC generally reinsures with other insurance companies the portion of any one risk which exceeds $100,000. On certain types of policies this limit is $25,000. UCLIC is contingently liable for insurance ceded to reinsurers. Premiums ceded under reinsurance agreements were $1.7 million, $2.1 million, and $3.6 million in 1995, 1994 and 1993, respectively. Reserve credit taken under reinsurance agreements totaled $32.9 million, $34.0 million and $35.2 million at December 31, 1995, 1994 and 1993, respectively. UCLIC has assumed the following reinsurance from other insurers:
Insurance in Force Premiums ----------- ----------- (in thousands) 1995............................. $ 992,979 $ 2,589 1994............................. 1,106,148 2,966 1993............................. 1,106,721 3,039
UCLIC has a receivable at December 31, 1995 of approximately $33.9 million from one reinsurer; however, the funds supporting the receivable are escrowed in a separate trust account for the benefit of UCLIC by the reinsurer. The following table reflects the effect of reinsurance agreements on premiums and the amounts earned for the periods indicated.
Year Ended December 31, ------------------------------------ 1995 1994 1993 --------- --------- --------- (in thousands) Direct premiums........................ $ 7,659 $ 10,537 $ 19,294 Reinsurance assumed.................... 2,589 2,966 3,039 Reinsurance ceded...................... (1,740) (2,130) (3,649) -------- -------- --------- Net insurance premiums.............. $ 8,508 $ 11,373 $ 18,684 ======== ======== ========
49 50 1.4 Temporary Investments - Reserve Accounts. In connection with its loan sale transactions, the Company has made initial cash deposits and has subordinated certain cash flows (excess servicing income) payable to the Company to the payment of scheduled principal and interest to investors. The amounts on deposit are invested in certain instruments as permitted by the trustee and earnings thereon accrue to the Company. To the extent amounts on deposit exceed specified levels required by the subordination requirements, distributions are made to the Company, and, at the termination of the transaction, any remaining amounts on deposit will be distributed to the Company. 1.5 Investment securities. In accordance with the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS 115"), the Company classifies securities in one of three categories: "available-for-sale", "held-to-maturity" or "trading". Securities classified as held-to-maturity are carried at amortized cost, whereas securities classified as trading securities or available-for-sale are recorded at fair value. The adjustment, net of applicable income taxes, for investments classified as available-for-sale is recorded in "Net unrealized gain (loss) on securities" and is included in Stockholders' equity on the balance sheet and the adjustment for investments classified as trading is recorded in "Investment income" in the statement of income. 1.6 Property. Property is stated at cost less accumulated depreciation. Depreciation is computed on the straight-line and accelerated methods over the estimated useful lives of the assets. 1.7 Income Taxes. The Company and its subsidiaries file a consolidated federal income tax return. The Company allocates to its subsidiaries their proportionate share of the consolidated tax liability under a tax allocation agreement whereby each affiliate's federal income tax provision is computed on a separate return basis. Deferred income taxes are provided for the effect of revenues and expenses which are reported in different periods for financial reporting purposes than for tax purposes. Such differences result primarily from deferring policy acquisition costs, providing for bond and loan losses, differences in the methods of computing reserves, loan income, loan sale gains and depreciation. 1.8 Cash Equivalents. For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1995, cash equivalents totaled $28.1 million bearing interest rates ranging from 5.25% to 5.61% per annum. 1.9 Repurchase agreements. At December 31, 1995, UCLIC had a liability of approximately $40.9 million incurred pursuant to securities sold under agreements to repurchase ("repurchase agreements"). The securities sold under these agreements are classified as "Available-for-sale" investment securities and are carried at their aggregate market value of $42.2 million at December 31, 1995. The repurchase agreements bear interest at 5.70% and 5.74% and matured in January, 1996. 1.10 Financial instruments. The Company from time to time enters into interest rate hedge mechanisms to manage its exposure to interest rate changes in connection with the securitization and sale of its home equity loans. The Company closes out the hedge position to coincide with the related loan sale and recognizes the results of the hedge transaction in determining the amount of the related loan sale gain. 1.11 Accounting Standards. In May 1993 and in October 1994, the FASB issued Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114" and "SFAS 118") which address the accounting by creditors for impairment of loans and specify how allowances for credit losses related to certain loans should be determined. The statements also address the accounting by creditors for all loans that are restructured in a troubled debt restructuring involving modification of terms of a receivable. The implementation of the provisions of SFAS 114 and SFAS 118 in the first quarter of 1995 did not have a material effect on the financial statements of the Company. On May 12, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"). SFAS No. 122 requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others that have been 50 51 acquired through either the purchase or origination of such loans. With respect to loans originated, this is accomplished by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. The estimated fair value of the servicing rights is determined by discounting expected future cash flows using a discount rate commensurate with the risk involved. Prior to the adoption of SFAS No. 122, the Company recognized late charges and other ancillary income when collected and charged costs to service mortgage loans when incurred. The Company elected to implement the provisions of this statement on a prospective basis during the third quarter of 1995. The assumptions used by the Company included estimates of the cost of servicing the loans, the discount rate, float value, inflation rate, ancillary income per loan, prepayment speeds and default rates. The amount capitalized at December 31, 1995 was $5.8 million and is included in "other assets". Net income for 1995 was increased by $3.9 million, or $.13 per share, respectively, on a fully diluted basis as a result of the Company's implementation of SFAS No. 122. On October 23, 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages, but does not require, the recognition of compensation expense for grants of stock, stock options and other equity instruments to employees based on a fair value method of accounting. Companies are permitted to continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"); however, companies that choose to retain this method of accounting will be required to provide expanded disclosures of pro forma net income and earnings per share in the notes to financial statements as if the new fair value method of accounting had been adopted. The provisions of SFAS 123 are effective for fiscal years beginning after December 15, 1995. The Company has elected to continue to apply the accounting rules contained in APB 25 and to comply with the additional disclosure requirements as set forth in SFAS 123. 1.12 Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income. 2. INVESTMENT SECURITIES - NET The Company's portfolio of investment securities as of December 31, 1995 consisted of the following:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------- (in thousands) Trading Common stock.............................. $ 545 $ 215 $ 8 $ 752 ============ =========== ======== =========== Available-for-sale Debt securities Corporate............................. $ 328,546 $ 22,452 $ 679 $ 350,319 U.S. Treasury......................... 11,504 409 - 11,913 Mortgage-backed..................... 733,516 22,258 602 755,172 Foreign governments................. 20,394 1,916 - 22,310 Other............................... 425 21 - 446 ------------ ----------- -------- ----------- Total.............................................. 1,094,385 47,056 1,281 1,140,160 ------------ ----------- -------- ----------- Equity securities........................ 629 78 446 261 ------------ ----------- -------- ----------- Total.......................... $ 1,095,014 $ 47,134 1,727 $ 1,140,421 ============ =========== ======== =========== Held-to-maturity Debt securities Corporate............................ $ 6,692 $ 550 $ - $ 7,242 Mortgage-backed...................... 44,894 1,414 3,939 42,369 ------------ ----------- -------- ----------- Total.......................... $ 51,586 $ 1,964 3,939 $ 49,611 ============ =========== ======== =========== Other Investment in limited partnerships....... $ 25,594 $ 25,594 ============ ===========
51 52 The Company's portfolio of investment securities as of December 31, 1994 consisted of the following:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------------------------------------------------------------- (in thousands) Trading Common stock............................. $ 656 $ 51 $ 28 $ 679 ============== ============ ============ ============= Available-for-sale Debt securities Corporate............................ $ 258,549 $ 321 $ 13,148 $ 245,722 U.S. Treasury........................ 10,720 31 238 10,513 Mortgage-backed...................... 743,359 22 58,218 685,163 Foreign governments.................. 18,433 190 603 18,020 Other................................ 425 13 - 438 -------------- ------------ ------------ ------------- Total.......................... 1,031,486 577 72,207 959,856 -------------- ------------ ------------ ------------- Equity securities....................... 703 36 495 244 -------------- ------------ ------------ ------------- Total.......................... $ 1,032,189 $ 613 $ 72,702 $ 960,100 ============== ============ ============ ============= Held-to-maturity Debt securities Corporate........................... $ 10,829 $ 300 $ 212 $ 10,917 Mortgage-backed..................... 46,562 110 2,505 44,167 -------------- ------------ ------------ ------------- Total.......................... $ 57,391 $ 410 $ 2,717 $ 55,084 ============== ============ ============ ============= Other Investment in limited partnerships....... $ 26,672 $ 26,672 ============== =============
The cost and estimated fair value of debt securities at December 31, 1995, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because certain issues may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity ------------------------------ ---------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------- ------------- ----------- ------------ (in thousands) 1 year or less..................................... $ 6,601 $ 6,513 $ - $ - Over 1 year through 5 years........................ 80,080 84,349 2,286 2,361 Over 5 years through 10 years...................... 266,238 285,826 4,406 4,881 After 10 years..................................... 7,950 8,300 - - Mortgage-backed securities......................... 733,516 755,172 44,894 42,369 ------------- ------------- ----------- ------------ Total..................................... $ 1,094,385 $ 1,140,160 $ 51,586 $ 49,611 ============= ============= =========== ============
Net unrealized gains (losses) on available-for-sale securities included in Stockholders' equity at December 31, 1995 and 1994 are presented net of deferred income taxes (benefit) of $15.9 million and ($25.2) million, respectively. Proceeds from the sales of investments during 1995 totaled $27.0 million and resulted in realized investment gains of $.3 million. Net investment gains for the years ended December 31, 1995, 1994 and 1993 were $.5 52 53 million, $.2 million and $.6 million, respectively, and are included in investment income. At December 31, 1995, securities with a cost of $9.4 million were on deposit with insurance regulatory authorities. 3. LOANS - net 3.1 Loans Owned. The following schedule sets forth the components of Loans owned by the Company at December 31, 1995 and 1994.
December 31, -------------------------------------- 1995 1994 ------------ ------------- (in thousands) Home equity............................................... $ 236,987 $ 202,551 Commercial................................................ 169,990 155,271 Conventional.............................................. 1,340 1,106 Foreclosed properties..................................... 25,017 31,073 Nonrefundable loan fees................................... (4,950) (4,538) Consumer and other........................................ 732 1,536 ------------ ------------- Total................................................. $ 429,116 $ 386,999 ============ =============
Included in owned loans at December 31, 1995 and 1994 were nonaccrual loans totaling $20.8 million and $21.7 million, respectively. The following schedule summarizes the composition of Loans - net at December 31, 1995 and 1994:
December 31, --------------------------------------- 1995 1994 ------------ ------------- (in thousands) Loans..................................................... $ 429,116 $ 386,999 Allowance for loan losses................................. (14,891) (16,508) Unearned discount......................................... (651) (1,109) ------------ ------------- Loans - net............................................... $ 413,574 $ 369,382 ============ ============
3.2 Loans Serviced. The following table sets forth the loans serviced by the Company for third parties at December 31, 1995 and 1994, by type of loan. The right to service these loans was retained upon their sale in the secondary market. Substantially all of these loans were originated by the Company.
December 31, ------------------------------------- 1995 1994 ------------ ------------ (in thousands) Home equity............................................... $ 2,464,495 $ 1,480,047 Commercial................................................ 81,251 126,691 Conventional.............................................. 57,198 73,136 ------------ ------------ Total........................................... $ 2,602,944 $ 1,679,874 ============ ============
3.3 Loan Loss Allowances. The Company provides an estimate for future credit losses in an Allowance for Loan Losses for loans owned by the Company and in an Allowance for Loss on Loans Serviced for loans serviced for others. 53 54 A summary analysis of the changes in the Company's Allowance for Loan Losses is as follows:
Year Ended December 31, -------------------------------- 1995 1994 1993 -------- --------- -------- (in thousands) Balance at beginning of period $ 16,508 $ 21,017 $ 15,842 Loans charged to allowance Home equity .............. (13,818) (12,745) (9,114) Commercial ............... (4,416) (5,767) (3,579) Conventional ............. (178) (149) (142) -------- -------- -------- Total ............... (18,412) (18,661) (12,835) Recoveries on loans previously charged to allowance ....... 1,643 1,209 631 -------- -------- -------- Net loans charged off ........ (16,769) (17,452) (12,204) Loan loss provision .......... 16,025 13,457 17,343 Reserve reclassification ..... (873) (514) 36 -------- -------- -------- Balance at end of year ....... $ 14,891 $ 16,508 $ 21,017 ======== ======== ======== Specific reserves ............ $ 5,445 $ 6,571 $ 8,500 Unallocated reserves ......... 9,446 9,937 12,517 -------- -------- -------- Total reserves ............... $ 14,891 $ 16,508 $ 21,017 ======== ======== ========
Specific reserves are provided for foreclosures in which the carrying value of the loan exceeds the market value of the collateral. Unallocated reserves are provided for loans not in foreclosure and are calculated primarily using objective measurement techniques. Unallocated reserves also include reserves for active loans which have been modified or indicate potential problems as well as reserves for a $32.5 million subordinated position the Company acquired in connection with the securitization and sale of approximately $230 million in commercial real estate mortgage loans in 1990. At December 31, 1995, the Company owned $25.0 million of property acquired in settlement of loans, excluding the specific reserves attributed to these properties. These balances are included in the loans owned by the Company. The specific reserve in the table above is provided to reduce the carrying value of these properties to their estimated market value. A summary of the allowances for future credit losses on loans and foreclosed properties owned by the Company and loans sold with recourse is as follows:
December 31, ---------------------------- 1995 1994 1993 ------- -------- -------- (in thousands) Allowance for loan losses (applicable to loans and foreclosed properties owned by the Company) ................... $14,891 $16,508 $21,017 Allowance for loss on loans serviced (applicable to loans sold with recourse) 44,970 26,822 12,938 ------- ------- ------- Total ............................. $59,861 $43,330 $33,955 ======= ======= =======
54 55 As of December 31, 1995, approximately $2.5 billion of home equity loans sold were serviced under agreements substantially all of which provide for the subordination of cash and excess interest spread owned by the Company for credit losses ("loans sold with recourse"). The maximum recourse associated with sales of home equity loans according to terms of the loan sales agreements was approximately $475 million at December 31, 1995, of which $466 million relates to the subordinated cash and excess interest spread. The Company's estimate of its losses, based on historical loan loss experience, was approximately $45.0 million at December 31, 1995 and is recorded in the Company's allowance for loss on loans serviced. Should credit losses on loans sold with limited recourse, or subordination of cash and excess interest spread owned by the Company, materially exceed the Company's estimate for such losses, such consequence will have a material adverse impact on the Company's operations. 3.4 Concentration of Credit Risk. The Company's serviced portfolio is geographically diversified. Although the Company services mortgage loans in 48 states, at December 31, 1995, a substantial portion of loans serviced were originated in Florida (10.5%), Ohio (10.0%) and Louisiana (8.8%) , respectively, and no other state accounted for more than 7.5% of the serviced portfolio. Included in the serviced portfolio are commercial loans originated by the Company, a substantial portion of which were originated in Florida (25.9%), Georgia (19.4%) and Colorado (10.9%) and no other state accounted for more than 8.0% of the commercial loans serviced. The risk inherent in such concentrations is dependent not only upon regional and general economic stability which affects property values, but also the financial well-being and creditworthiness of the borrower. 3.5 Commitments. The Company uses a prefunding feature in connection with loan securitization transactions. At December 31, 1995 approximately $3.7 million was held in a prefunding account for the purchase of the Company's home equity loans during the first quarter of 1996. Pursuant to this commitment, home equity loans with a remaining principal balance of approximately $3.7 million were delivered January 10, 1996. 4. PROPERTY - NET Property is summarized as follows:
December 31, --------------------------- 1995 1994 --------- --------- (in thousands) Land and buildings................................................ $ 41,796 $ 34,716 Furniture, fixtures and equipment................................. 21,751 18,943 --------- --------- Total......................................................... 63,547 53,659 Less accumulated depreciation..................................... (24,888) (23,094) --------- --------- Total......................................................... $ 38,659 $ 30,565 ========== =========
Rental expense on operating leases, including real estate, computer equipment and automobiles, totaled $6.4 million, $5.3 million and $3.3 million during 1995, 1994 and 1993, respectively. Minimum annual commitments at December 31, 1995 under noncancellable operating leases are as follows (in thousands): 1996............................................. $ 5,652 1997............................................. 3,686 1998............................................. 1,544 1999............................................. 386 2000 ............................................ 108 Thereafter....................................... 4 --------- Total.................................... $ 11,380 =========
55 56 5. OTHER ASSETS AND OTHER LIABILITIES At December 31, 1995, Other assets included amounts due from reinsurers of $33.6 million and Policy loans of $20.3 million compared to $35.0 million and $20.2 million, respectively, at December 31, 1994. In addition, included in Other assets at December 31, 1994 was a federal income tax receivable of $6.2 million. Other liabilities at December 31, 1995 and 1994 included a $24.0 million and $12.8 million managed cash overdraft, respectively. 6. NOTES PAYABLE Notes payable consisted of the following:
December 31, -------------------- 1995 1994 -------- -------- (in thousands) 9.35% Senior unsecured notes due 11/1/99 $125,000 $125,000 7% Senior unsecured notes due 7/15/98 .. 100,000 -- Revolving credit agreement ............. -- 72,163 Mortgage loan .......................... 5,473 1,755 Warehouse facility ..................... 19,321 -- ESOP debt .............................. 5,962 -- Short-term borrowings .................. -- 14,750 -------- -------- Total ....................... $255,756 $213,668 ======== ========
On July 25, 1995 and on November 2, 1994, the Company publicly sold $100 million and $125 million, respectively, of its senior unsecured notes. The notes provide for interest payable semi-annually and are not redeemable prior to maturity. The notes rank on a parity with other unsecured and unsubordinated indebtedness of the Company. The net proceeds from the sale of the notes were used primarily to repay the principal amount of indebtedness outstanding under the Company's existing revolving credit facility with a group of banks. At December 31, 1995, the Company had available a secured warehouse facility provided by the investment bank that acted as lead underwriter of the Company's fourth quarter public loan securitization transaction. The warehouse facility was directly related to the public securitization and initially provided funding for up to $250 million of eligible home equity loans for such securitization and matured on January 10, 1996 with the closing of the last delivery of loans for the securitization. In addition, the mortgage lending subsidiaries of the Company entered into a credit agreement dated as of May 23, 1995 with First Union National Bank of North Carolina and certain other lenders signatory thereto. Under this facility, the mortgage lending subsidiaries may borrow up to $150 million on a revolving basis secured by home equity loans eligible thereunder. Loans under this facility are subject to the satisfaction of certain borrowing conditions, including a minimum borrowing base and bear interest at a floating rate. Borrowings under this warehouse facility are required to be repaid from the proceeds of the sale or other disposition of the home equity loan collateral. The lenders' commitment under this facility is scheduled to terminate on May 23, 1997. As of December 31, 1995, approximately $19.3 million was outstanding under this warehouse facility. The Company also has arrangements with banks providing for short-term unsecured borrowings of up to $65 million, none of which was outstanding at December 31, 1995. Borrowings under these lines of credit bear interest at market or prime rates. Notes payable at December 31, 1995 include a $5.5 million mortgage loan for the construction of an office building adjacent to the Company's home office building and is secured by a mortgage on the property. 56 57 The Company made payments for interest of $25.7 million, $13.0 million and $9.5 million during the years ended December 31, 1995, 1994 and 1993, respectively. 7. INCOME TAXES The provision for income taxes attributable to continuing operations is as follows:
Year Ended December 31, ------------------------------------------ 1995 1994 1993 ----------- ----------- ----------- Current.................................................... $ 11,047 $ 17,191 $ 18,276 Deferred................................................... 30,758 12,301 (3,532) ----------- ----------- ---------- Total...................................................... $ 41,805 $ 29,492 $ 14,744 =========== =========== ==========
Reported income tax expense attributable to continuing operations differs from the amount computed by applying the statutory federal income tax rate to consolidated income from continuing operations before income taxes for the following reasons:
Year Ended December 31, ------------------------------------------ 1995 1994 1993 ----------- ---------- ---------- Federal income tax at statutory rate........................ $ 40,168 $ 29,426 $ 15,072 Differences resulting from: Reversal of timing differences at prior tax rates......... - - 15 State income taxes........................................ 511 (72) 75 Other..................................................... 1,126 138 (418) ----------- ---------- ---------- Reported income tax provisions.............................. $ 41,805 $ 29,492 $ 14,744 =========== ========== ==========
The significant components of the Company's net deferred income tax (benefit) liability at December 31, 1995 and 1994 are as follows:
December 31, --------------------------------- 1995 1994 ------------ ------------ (in thousands) Deferred income tax assets: Allowance for loan losses................................... $ 904 $ 1,011 Nonrefundable loan fees..................................... 1,732 1,588 Policy reserves............................................. 21,530 21,464 Mark-to-market adjustment................................... - 25,231 Investment securities....................................... 3,377 1,924 Other....................................................... 840 913 ------------ ----------- 28,383 52,131 ------------ ----------- Deferred income tax liabilities: Loan income................................................. 41,022 10,910 Mark-to-market adjustment................................... 15,892 - Mortgage servicing rights................................... 2,034 - Real estate................................................. 4,421 4,175 Deferred policy acquisition costs........................... 29,475 29,626 ------------ ----------- 92,844 44,711 ------------ ----------- Net deferred income tax (benefit) liability.................... $ 64,461 $ (7,420) ============ ===========
57 58 Payments made for income taxes during the years ended December 31, 1995, 1994 and 1993 were $7.8 million, $28.3 million and $5.4 million, respectively. Consolidated retained earnings at December 31, 1995 include approximately $5.2 million of "Policyholders' Surplus" on which no federal income tax payment will be required unless it is distributed as a dividend or exceeds the limits prescribed by tax laws applicable to life insurance companies. A deferred income tax liability has not been recognized for this amount. The maximum federal income tax provision possibly required based on the current federal income tax rate would be $1.8 million. At December 31, 1995 and 1994, the Company had a current income tax receivable of $11.2 million and $6.2 million, respectively, which is included in "Other assets". 8. CAPITAL STOCK The Company has authorization to issue up to 100,000,000 shares of its $2.00 par value common stock. There were 28,142,564 and 27,381,472 shares outstanding at December 31, 1995 and 1994, respectively, excluding 1,159,682 treasury shares. The Company also has authorization to issue 20,000,000 shares of preferred stock of which 1,955,000 shares are currently issued (see discussion of "PRIDES(sm)" below). Included in the authorized preferred stock are 1,000,000 shares of Series A Junior Participating preferred stock and 800,000 shares of Cumulative Convertible preferred stock, none of which is outstanding. On June 16, 1995, the Company concluded the sale of 1,955,000 shares of its Preferred Redeemable Increased Dividend Equity Securities(sm), 6 3/4% PRIDES(sm), Convertible Preferred Stock, par value $2.00 per share ("PRIDES(sm)"), at a price per share of $44.00. Dividends on the PRIDES(sm) are cumulative and are payable quarterly in arrears on each January 1, April 1, July 1 and October 1. Net proceeds to the Company were approximately $83.3 million. The net proceeds from the sale of shares of PRIDES(sm) were used for general corporate purposes. The PRIDES(sm) rank prior to the Company's common stock as to payment of dividends and distribution of assets upon liquidation. The shares of PRIDES(sm) mandatorily convert into shares of common stock on July 1, 2000 (the "Mandatory Conversion Date") on a two share to one share basis (as adjusted for the 100% common stock dividend paid October 20, 1995), and the shares of PRIDES(sm) are convertible into shares of common stock at the option of the holder at any time prior to the Mandatory Conversion Date on the basis of 1.652 of a share of common stock for each share of PRIDES(sm), in each case subject to adjustment in certain events. In addition, the Company has the option to convert the shares of PRIDES(sm), in whole or in part, on or after July 1, 1998 until the Mandatory Conversion Date, into shares of its common stock according to a formula. On October 26, 1994, the Company's Board of Directors declared a 10% common stock dividend payable to shareholders of record on December 22, 1994. The additional shares were distributed on January 10, 1995. On August 23, 1995, the Company's Board of Directors declared a two-for-one common stock split effected in the form of a 100% stock dividend on outstanding stock which was distributed October 20, 1995, to stockholders of record on October 9, 1995. All per share amounts, numbers of shares and related amounts for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted to reflect these transactions. During 1995 and 1994, the Company paid cash dividends on its common stock in the amount of $5.5 million and $5.1 million, or $.20 and $.182 per share, respectively. In addition, during 1995, the Company paid cash dividends on its PRIDES(sm) in the amount of $3.1 million or $1.61 per share. See Note 10 for a discussion of dividend restrictions on retained earnings. On July 27, 1994, the Board of Directors authorized the redemption of the rights under the rights plan of the Company adopted in 1989 (the "1989 Rights Plan") and approved a new rights plan (the "1994 Rights Plan"). In connection with the redemption, the rights under the 1989 Rights Plan (the "1989 Rights") were redeemed at a price of $.0039526 per 1989 Right with the aggregate redemption price payable to each holder of the 1989 Rights to be rounded up to the nearest $.01. In approving the 1994 Rights Plan, the Board of Directors declared a dividend 58 59 distribution of one preferred share purchase right for each outstanding share of the Company's Common Stock. The rights under the 1994 Rights Plan will become exercisable only upon the occurrence of certain events as specified therein (primarily certain changes in ownership of the Company). At December 31, 1995 and 1994, 1,159,682 shares of the Company's common stock, or 4% of the issued common stock, were held as treasury stock at a cost of $6.8 million. 9. EMPLOYEE BENEFIT PLANS 9.1 Employee Stock Ownership Plan. All employees who meet minimum age and service requirements participate in the Company's Employee Stock Ownership Plan ("ESOP"). The Company makes annual tax deductible contributions to the ESOP which are used to purchase additional shares of the Company's common stock or to pay debt service on shares acquired with the proceeds of loans ("leveraged shares"). The ESOP's leveraged shares are initially pledged as collateral for the debt incurred in connection with the acquisition of such shares. As the debt is repaid, the shares are released from collateral and allocated to plan participants. Contributions are allocated among participants based on years of service and compensations. Upon retirement, death or disability, the employee or a beneficiary receives the designated common stock. The Company's cash contributions to the ESOP were $2.3 million, $2.2 million and $.9 million for the years ended December 31, 1995, 1994 and 1993, respectively. Shares held by the ESOP at December 31, 1995, 1994 and 1993 were approximately 4.0 million, 4.7 million and 4.3 million, respectively. At December 31, 1994, the ESOP had borrowed $4.3 million from the Company bearing interest at rates ranging from 7.85% to 9.50%. During 1995, the ESOP was granted a $10 million line of credit from a financial institution. During 1995, the ESOP borrowed $1.6 million under this line of credit and refinanced the amounts previously borrowed from the Company. At December 31, 1995 the ESOP had notes payable with a balance of $6.0 million under this line of credit. Because the source of the loan payments is primarily contributions received by the ESOP from the Company, such debt is included in the Company's notes payable with a corresponding reduction of stockholder's equity. In accordance with Statement of Position 93-6 ("SOP 93-6"), leveraged shares purchased subsequent to December 31, 1992 are, upon release, reflected as compensation expense based on the then current market price of the shares. Shares which have not been committed to be released are not considered outstanding for purposes of the computation of earnings per share. During 1995, 165,000 shares of the Company's common stock which were considered outstanding for earnings per share purposes in prior periods were not considered outstanding. At December 31, 1995, approximately 8,000 shares of common stock were committed to be released resulting in additional compensation expense of approximately $.2 million during 1995. At December 31, 1995, the ESOP had approximately 800,000 leveraged shares, of which approximately 288,000 were accounted for under the provisions of SOP 93-6. The fair value of the 288,000 leveraged shares accounted for under the provisions of SOP 93-6 was $7.6 million at December 31, 1995. 59 60 9.2 Stock Option Plans. The following is a summary of options granted, exercised or canceled during 1993, 1994 and 1995.
Option Price Shares Per Share ------------ ---------------------- January 1, 1993............................ 1,871,050 $ 2.77 to $ 4.55 Granted............................. 847,880 $ 4.12 to $ 6.42 Exercised........................... (811,652) $ 2.77 to $ 4.13 Canceled............................ (97,432) ------------ December 31, 1993.......................... 1,809,846 $ 2.77 to $ 6.42 Granted............................. 138,596 $ 15.46 to $ 19.21 Exercised........................... (219,174) $ 2.77 to $ 4.13 Canceled............................ (29,822) ------------ December 31, 1994.......................... 1,699,446 $ 2.77 to $ 19.21 Granted............................. 670,600 $ 16.00 to $ 22.38 Exercised........................... (409,092) $ 2.77 to $ 6.42 Canceled............................ (40,734) ------------ December 31, 1995.......................... 1,920,220 ============
At December 31, 1995 options for 522,084 of the Company's common stock were exercisable and 914,396 shares were available for the granting of options. During 1995 and 1994, the Company recognized a $4.4 million and a $1.4 million federal income tax benefit, respectively, as a result of the exercise of non-qualified stock options. This benefit resulted in a decrease in current income taxes payable and an increase in additional paid-in capital. 9.3 Employees' Savings Plan and Trust. The United Companies Financial Corporation Employees' Savings Plan and Trust is designed to be a qualified plan under Sections 401(a) and 401(k) of the Internal Revenue Code. Under the plan, employees are allowed to defer income on a pre-tax basis through contributions to the plan and the Company matches a portion of such contributions. The Company's matching contributions totaled $1.3 million, $1.0 million and $.4 million during 1995, 1994 and 1993, respectively. Employees have five investment options, one of which is to invest in the Company's common stock. The plan held 567,971 and 558,386 shares of the Company's common stock at December 31, 1995 and 1994, respectively. 9.4 Deferred Compensation Plans. Postretirement benefits are provided to eligible executive and senior officers of the Company under a deferred compensation plan. The cost of this plan during 1995 and 1994 was $.2 million and $.3 million, respectively. The Company calculated its postretirement benefit obligation as of December 31, 1995 using a weighted average discount rate of 6.5%. A reconciliation of the funded status of the deferred compensation plan as of December 31, 1995 and 1994 is as follows:
December 31, 1995 Net Change December 31, 1994 ----------------- ---------- ----------------- (in thousands) Accumulated postretirement benefit obligation................. $ (1,912) $ (90) $ (1,822) Plan assets............................ - - - ----------- --------- ------------ Funded status.......................... (1,912) (90) (1,822) Unrecognized transition obligation......................... 1,138 (66) 1,204 ----------- --------- ------------ Accrued postretirement benefit cost....................... $ (774) $ (156) $ (618) =========== ========= ============
60 61 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. 61 62 The carrying value and fair value of the Company's financial assets and liabilities at December 31, 1995 and 1994 were as follows:
1995 1994 -------------------------- --------------------------- Carrying Carrying Value Fair Value Value Fair Value ----------- ------------ ------------- ----------- (in thousands) (in thousands) Financial assets: Cash and cash equivalents.................... $ 28,087 $ 28,087 $ 56,359 $ 56,359 Temporary investments - reserve accounts..... 155,254 155,254 81,980 81,980 Loans - net.................................. 394,002 396,923 344,880 343,121 Capitalized excess servicing income.......... 283,454 283,454 179,065 179,065 Investment securities: Trading................................. 752 752 679 679 Available-for-sale...................... 1,140,421 1,140,421 960,100 960,100 Held-to-maturity........................ 51,586 49,611 57,391 55,084 Other assets................................. 70,916 71,628 61,430 61,430 Financial liabilities: Annuity reserves............................. 1,417,803 1,350,626 1,425,973 1,354,944 Notes payable................................ 255,756 270,558 213,668 212,314 Allowance for loss on loans serviced......... 44,970 44,970 26,822 26,822 Repurchase agreements........................ 40,857 40,857 - - Other liabilities............................ 29,528 29,528 15,679 15,679
The above values do not reflect any premium or discount from offering for sale at one time the Company's entire holdings of a particular financial instrument. Fair value estimates are made at a specific point in time based on relevant market information, if available. Because no market exists for certain of the Company's financial instruments, fair value estimates for these assets and liabilities were based on subjective estimates of market conditions and perceived risks of the financial instruments. Fair value estimates were also based on judgments regarding future loss and prepayment experience and were influenced by the Company's historical information. The following methods and assumptions were used to estimate the fair value of the Company's financial instruments: Cash and cash equivalents. The carrying amount of cash and cash equivalents approximates their fair values because these assets generally mature in 90 days or less and do not present any significant credit concerns. Temporary investments - reserve accounts. The carrying value of temporary investments is considered to be a reasonable estimate of fair value. Loans. The fair value of the Company's loan portfolio was determined by segregating the portfolio by type of loan and further by its performing and nonperforming components. Performing loans were further segregated based on the due date of their payments, an analysis of credit risk by category was performed and a matrix of pricing by category was developed. Loans which had been identified for sale were valued at their estimated sales price, which includes the estimated value of the portion of the interest and fees which are not sold with the securities backed by the loans. Loans which were current but not identified for sale approximate the remaining principal balance which is believed to represent an estimate of market discount from similar loans identified for sale. The fair value of delinquent loans was estimated by using the Company's historical recoverable amount on defaulted loans. Foreclosed property is excluded from this disclosure because it is not considered a financial instrument. Capitalized excess servicing income. The value of capitalized excess servicing, which relates to the excess interest retained on loans sold, was estimated by discounting the future cash flows, adjusted for prepayments and 62 63 estimated losses on loans sold with recourse. The carrying value is considered to be a reasonable estimate of fair value. Investment securities. The estimated fair value for the Company's investment security portfolio was generally determined from quoted market prices for publicly traded securities. Certain of the securities owned by the Company may trade infrequently or not at all; therefore, fair value for these securities was determined by management by evaluating the relationship between quoted market values and carrying value and assigning a liquidity factor to this segment of the investment portfolio. Allowance for loss on loans serviced. In estimating the fair value of the allowance for loss on loans serviced with recourse, the Company estimated the timing of cash flows and discounted these cash flows using a risk-free interest rate. Repurchase agreement. The repurchase agreements mature in less than 60 days; therefore, the carrying amount of the repurchase agreements are considered to be a reasonable estimate of fair value. Other assets and other liabilities. Other assets include primarily due from reinsurers, policy loans and mortgage servicing rights. Other liabilities are comprised primarily of managed cash overdraft, amounts due investors, escrow accounts and accrued interest payable. In estimating the fair value of these assets and liabilities, the Company scheduled the timing of their estimated cash flows and discounted these cash flows based on a market rate of interest. Annuity reserves. The Company's annuity contracts generally do not have a defined maturity and are considered as deposits under SFAS 97. SFAS 107 states that the fair value to be disclosed for deposit liabilities with no defined maturities is the amount payable on demand at the reporting date. Accordingly, the Company has estimated the fair value of its annuity reserves as the cash surrender value of these contracts at December 31, 1995. Notes payable. Notes payable consists primarily of amounts payable for the Company's senior unsecured notes. The fair value of the senior unsecured notes is based upon the estimated current rate offered to the Company for debt of the same remaining maturity. The fair values presented herein are based on pertinent information available to management as of December 31, 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 12. DISCONTINUED OPERATIONS United General Title Insurance Company. On April 10, 1995, the Company made a decision to dispose of its investment in United General Title Insurance Company ("UGTIC"), a wholly owned subsidiary of the Company, and, on May 1, 1995, approved a formal plan of disposal. The decision to dispose of UGTIC was independent of the consummation of the sale thereof pursuant to the definitive stock sale agreement signed on August 11, 1995. As a result, the operations of UGTIC have been classified as discontinued operations, and, accordingly, the consolidated financial statements and the related notes of the Company segregate continuing and discontinued operations. The sale was concluded on February 29, 1996 at a sales price of approximately $5.5 million. The definitive stock sale agreement provided for the sale of 100% of the stock of UGTIC and contains a provision making the Company liable to UGTIC for claims from defalcations and fraud losses incurred by UGTIC which are unknown and occur prior to closing and are discovered within 24 months thereafter. The Company is also liable, up to $4.2 million, for policy claims paid over a ten year period after closing that exceed certain specified levels. The Company recorded a loss from discontinued operations (net of income tax benefit) of $3.5 million in 1995 in connection with the sale of UGTIC. 63 64 Revenues for UGTIC for the years ended December 31, 1995, 1994 and 1993 were $37.8 million, $45.5 million and $25.1 million, respectively. At December 31, 1995, total assets and total liabilities of UGTIC were $16.8 million and $8.3 million, respectively. Foster Mortgage Corporation. On May 7, 1993, the Company decided to divest its subsidiary Foster Mortgage Corporation ("FMC"). As of November 30, 1993, the servicing rights owned by FMC, which constituted substantially all of its assets, were sold. On December 21, 1993, the institutional lenders under FMC's primary credit facility (the "FMC Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause the remaining affairs of FMC to be concluded under the supervision of the bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court approved a plan of liquidation for FMC providing for the appointment of a trustee selected by the FMC Institutional Lenders. The FMC Institutional Lenders allege that FMC has certain claims against the Company, including a claim with respect to the Company's alleged failure to remit all sums due FMC regarding federal income taxes under a tax agreement among the Company and its subsidiaries, including FMC, estimated by the FMC Institutional Lenders to range from $2.1 million to $29 million. FMC and the Company executed, subject to the approval of the bankruptcy court, a settlement agreement relating to payments between FMC and the Company in connection with the federal income tax benefits resulting from FMC's losses and to certain prior intercompany payments between FMC and the Company. The settlement agreement included a release by FMC in favor of the Company of any and all claims relating to federal income taxes. The FMC Institutional Lenders opposed the proposed settlement agreement. At the conclusion of a hearing on the proposed settlement on August 18, 1994, the bankruptcy court approved the portion of the settlement providing for a net payment by the Company of $1.65 million to FMC in satisfaction of the federal income tax benefits resulting from FMC's losses and the release of any claims regarding federal income taxes. The Company had previously recorded substantially all of the impact of this portion of the settlement in its prior financial statements. The bankruptcy court declined to approve the other portion of the proposed settlement relating to payments received by the Company from FMC within twelve months of the bankruptcy filing. If the Company were required to refund such payments, the Company has estimated the potential additional loss to be $1.9 million, net of tax benefits. The decision of the bankruptcy court on the settlement was appealed by the FMC Institutional Lenders to the U.S. District Court which affirmed the bankruptcy court's decision. The FMC Institutional Lenders then appealed this decision to the U.S. Fifth Circuit Court of Appeals. In a decision rendered on November 9, 1995, the U.S. Fifth Circuit Court of Appeals reversed the district court, vacated the settlement between FMC and the Company and remanded the matter for further proceedings. The trustee under the plan of liquidation has filed an adversary proceeding in the bankruptcy proceedings against the Company seeking avoidance of alleged preferential payments totaling $3.72 million and has also instituted a suit in federal court against the Company alleging claims under the tax agreement estimated to range from $2 million to $29 million. Management of the Company does not believe that any additional amounts are owed by the Company to FMC or the trustee and intends to vigorously contest the claims which have been brought against it for such amounts by the trustee under the plan of liquidation. The Company did not guarantee any debt of FMC. 13. SUBSEQUENT EVENT. On February 2, 1996, the Company signed a stock purchase agreement dated as of January 30, 1996, for the sale of all of the stock of UCLIC to UC Life Holding Corp., a new Delaware corporation formed by Knightsbridge Capital Fund I, L.P. for an aggregate amount of $164 million plus earnings of UCLIC from January 1, 1996, to closing of the transaction. Knightsbridge, which is a private investment partnership with institutional partners, was formed in 1995 to make equity investments in companies engaged primarily in the life insurance industry. Under the terms of the agreement, the sales price is comprised of cash, currently estimated to be $109 million and UCLIC real estate and other assets to be distributed to the Company prior to the closing. The real estate to be distributed includes portions of the United Plaza office park, including the Company's home office. In addition, the Company will purchase a convertible promissory note from an affiliate of the purchaser for $15 million in cash. The note matures in 11 years and bears interest at 8% per annum payable at maturity. The Company does not expect the sale to have a material effect on net income. 64 65 The purchaser also agreed that UCLIC would continue to be an investor in first lien home equity loans originated by the Company's lending operations and that UCLIC's home office operations would be maintained in its present location in Baton Rouge, Louisiana following the closing for at least two years. The agreement is subject to approval by UCFC's shareholders and regulatory authorities and the satisfaction of other conditions, and provides that the closing will occur on or before July 31, 1996. 14. SEGMENT INFORMATION The following table sets forth the Company's revenues, income from continuing operations before income taxes and assets for each of its business segments for the years ended December 31, 1995, 1994 and 1993:
Year Ended December 31, --------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- (in thousands) Revenues Mortgage......................................... $ 253,098 $ 177,601 $ 120,639 Life insurance................................... 144,485 138,129 140,179 Corporate, other operations, and eliminations................................. 367 (1,036) (805) ------------- ------------- ------------- Total................................... $ 397,950 $ 314,694 $ 260,013 ============= ============= ============= Income from continuing operations before income taxes Mortgage......................................... $ 107,673 $ 81,155 $ 46,295 Life insurance................................... 12,099 9,080 2,635 Corporate, other operations, and eliminations................................. (5,008) (6,161) (5,869) ------------- ------------- ------------- Total................................... $ 114,764 $ 84,074 $ 43,061 ============= ============= ============= Assets - Year-end Mortgage......................................... $ 533,952 $ 301,330 $ 182,672 Life Insurance................................... 1,789,608 1,641,026 1,622,879 Corporate, other operations, and eliminations................................. 43,326 35,899 11,602 ------------- ------------- ------------- Total................................... $ 2,366,886 $ 1,978,255 $ 1,817,153 ============= ============= =============
15. CONTINGENCIES As discussed in Note 12 above, the Company, in February, 1996, concluded the sale of its investment in UGTIC. In connection therewith, the stock sale agreement includes a provision making the Company liable to UGTIC for claims from defalcations and fraud losses incurred by UGTIC which are unknown and occur prior to closing and are discovered within 24 months thereafter. The Company is also liable, up to $4.2 million, for policy claims paid over a ten year period after closing that exceed certain specified levels. As also discussed in Note 12 above, the U.S. Fifth Circuit Court of Appeals reversed the lower court decision approving the settlement agreement between FMC and the Company, vacated the settlement between FMC and the Company and remanded the matter for further proceedings. The trustee under the plan of liquidation has filed an adversary proceeding in the bankruptcy proceedings against the Company seeking avoidance of alleged preferential payments totaling $3.72 million and has also instituted a suit in federal court against the Company alleging claims under the tax agreement estimated to range from $2 million to $29 million. Management of the Company does not believe that any additional amounts are owed by the Company to FMC or the trustee and intends to vigorously contest the claims which have been brought against it for such amounts by the trustee under the plan of liquidation. The Company did not guarantee any debt of FMC. 65 66 16. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows:
Three Months Ended ---------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 ---------- ---------- ----------- ----------- (in thousands, except per share data) 1995 Total revenues................................................. $ 86,835 $ 101,876 $ 106,109 $ 103,130 Income from continuing operations before income taxes.......... 19,549 30,379 34,070 30,766 Net income..................................................... 12,696 16,426 21,248 19,099 Per share data - net income: Primary: Income from continuing operations......................... $ .46 $ .66 $ .68 $ .61 Income (loss) from discontinued operations................ (.01) (.09) (.01) (.01) ---------- ---------- ----------- ----------- Total.................................................. $ .45 $ .57 $ .67 $ .60 ========== ========== =========== =========== Fully Diluted: Income from continuing operations......................... $ .46 $ .66 $ .66 $ .60 Income (loss) from discontinued operations................ (.01) (.10) (.01) (.01) ---------- ---------- ----------- ----------- Total................................................. $ .45 $ .56 $ .65 $ .59 ========== ========== =========== ===========
Three Months Ended ----------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 ----------- ---------- ----------- ----------- (in thousands, except per share data) 1994 Total revenues................................................... $ 74,816 $ 78,175 $ 82,054 $ 79,649 Income from continuing operations before income taxes............ 20,832 22,751 23,290 17,201 Net income....................................................... 13,710 14,699 15,253 5,872 Per share data - net income: Primary: Income from continuing operations........................ $ .47 $ .52 $ .53 $ .39 Income (loss) from discontinued operations............... .01 (.01) - (.18) ------------ ----------- --------- ---------- Total.................................................... $ .48 $ .51 $ .53 $ .21 ============ =========== ========= ========== Fully Diluted: Income from continuing operations........................ $ .47 $ .52 $ .53 $ .39 Income (loss) from discontinued operations............... .01 (.01) - (.18) ------------ ---------- --------- ---------- Total.................................................... $ .48 $ .51 $ .53 $ .21 ============ ========== ========= ===========
66 67 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information called for by Part III (Items 10, 11, 12 and 13) has been omitted since the Company will file with the Commission a definitive proxy statement pursuant to Regulation 14A or a definitive information statement pursuant to Regulation 14C, which involves the election of directors, within 120 days after the close of the year. 67 68 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial Statements Included in Part II of this report: Independent Auditors' Report Page 42 December 31, 1995 and 1994 Consolidated Balance Sheets Page 43 For the three years ended December 31, 1995 Consolidated Statements of Income Page 44 Consolidated Statements of Cash Flows Page 45 Consolidated Statements of Stockholders' Equity Page 46 Notes to Consolidated Financial Statements Pages 47-66 Financial Statement Schedules Included in Part IV of this report: Individual financial statements of the registrant have been omitted because consolidated financial statements of the registrant and its subsidiaries required by Item 8 have been included in Part II of this report and, as of December 31, 1995, the registrant was primarily an operating company and all subsidiaries are wholly owned. Schedule II Valuation and Qualifying Accounts, for the three years ended December 31, 1995. Page 74 Schedule V* Supplementary Insurance Information, for the three years ended December 31, 1995. Page 75 Schedule VI* Reinsurance, for the three years ended December 31, 1995. Page 76 * Filed in compliance with Article 7 of Regulation S-X. 68 69 Exhibits
Exhibit No. Description of Document 2(1) Stock Purchase Agreement dated as of January 30, 1996 by and between the Company and UC Life Holding Corporation 3.1(2) Articles of Incorporation, as amended 3.1A(3) Amendment to Articles of Incorporation effective April 28, 1994 3.1B(4) Amendment to Articles of Incorporation effective June 19, 1995 3.2(5) By-Laws, as amended 4.1(6) Senior Indenture 4.2(6) Subordinated Indenture 4.3(6) First Supplemental Indenture with respect to 9.35% Senior Notes due November 1, 1999 4.4(6) Form of certificate for shares of Preferred Redeemable Increased Dividend Equity Securities 6 3/4% PRIDES(sm), Convertible Preferred Stock, par value $2.00 per share 4.5(7) Second Supplemental Indenture for 7% Senior Notes due July 15, 1998 4.6(8) Series A Junior Participating Preferred Stock Purchase Rights 10.1(2) 1986 Employee Incentive Stock Option Plan 10.2(2) Employee Stock Ownership Plan and Trust 10.3(2) Management and compensatory contracts with executive officers and directors 10.4(2) Deferred compensation agreements 10.5(9) Management Incentive Plan, as amended 10.6(2) Employees' Savings Plan and Trust 10.7(2) Agreement for termination of employee agreement 10.8(2) Agreement for termination of employment agreement 10.9(2) Unfunded Salary Deferral Agreement dated April 1, 1989 with executive officer 10.10(2) Split-Dollar Insurance Agreement dated April 1, 1989 with executive officer 10.11(2) 1989 Stock Incentive Plan 10.12(2) 1989 Non-Employee Director Stock Option Plan 10.13(2) 1992 Form 11K, Employees' Savings Plan and Trust 10.14(10) Stock Purchase Warrant dated as of July 1, 1993 10.15(2) 1993 Form 11K, Employees' Savings Plan and Trust 10.16(9) 1993 Stock Incentive Plan
69 70
Exhibit No. Description of Document 10.17(9) 1993 Non-Employee Director Plan 10.19(2) 1994 Form 11-K, Employees' Savings Plan and Trust 10.20(11) 1995 Form 11-K, Employee Savings Plan 10.21(5) Indemnification agreements 10.22(12) Change of Control Agreement 10.23(12) Supplemental Retirement Agreement 10.24(12) Split Dollar Agreement 11.1(12) Statement regarding computation of per share earnings 21.1(12) List of Subsidiaries of the Company 23.1(12) Consent of Deloitte & Touche LLP 27(12) Financial Data Schedule
(1) Incorporated herein by reference to the designated Exhibit on the Company's Current Report on Form 8-K filed on February 9, 1996. (2) Incorporated herein by reference to the designated Exhibit of the Company's Annual Report on Form 10-K dated December 31, 1994. (3) Incorporated herein by reference to the designated Exhibit of the Company's Quarterly Report on Form 10-Q dated June 30, 1994. (4) Incorporated herein by reference to the designated Exhibit of the Company's Quarterly Report on Form 10-Q dated June 30, 1995. (5) Incorporated herein by reference to the designated Exhibit of the Company's Quarterly Report on Form 10-Q dated March 31, 1995. (6) Incorporated by reference to the designated Exhibits of the Company's Current Report on Form 8-K filed on June 16, 1995. (7) Incorporated herein by reference to the designated Exhibit to the Company's Current Report on Form 8-K filed July 26, 1995. (8) Incorporated by reference to the designated Exhibit of the Company's Form 8-A dated August 5, 1994. (9) Incorporated by reference from the designated Exhibit of the Company's Registration Statement on Form S-8 filed September 29, 1995. (10) Incorporated herein by reference to the designated Exhibit of the Company's Registration Statement on Form S-3 (SEC File No. 33-52739). (11) To be filed as Amendment to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (12) Filed herewith. Exhibit No. 10.22 - Page 79 Exhibit No. 10.23 - Page 107 Exhibit No. 10.24 - Page 115 Exhibit No. 11.1 - Page 120 Exhibit No. 21.1 - Page 121 Exhibit No. 23.1 - Page 122 Exhibit No. 27 - Page 123 70 71 Reports on Form 8-K On October 31, 1995, the Company filed a Current Report on Form 8-K announcing that it was reviewing strategic alternatives with respect to its life insurance subsidiary, United Companies Life Insurance Company ("UCLIC"), including the possible sale of such subsidiary. On February 9, 1996, the Company filed a Current Report on Form 8-K to report that it had signed a definitive agreement with respect to the sale of all of the outstanding capital stock of UCLIC. 71 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 15, 1996 UNITED COMPANIES FINANCIAL CORPORATION By: /s/ SHERRY E. ANDERSON -------------------------------- Sherry E. Anderson Senior Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934 this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 1996. /s/ J. TERRELL BROWN Chairman of the Board, Chief Executive Officer - ----------------------------------- (Principal Executive Officer) J. Terrell Brown /s/ JOHN D. DIENES President, Chief Operating Officer and - ----------------------------------- Director (Principal Operating Officer) John D. Dienes /s/ DALE E. REDMAN Executive Vice President, Chief Financial Officer, - ----------------------------------- and Director (Principal Financial Officer) Dale E. Redman /s/ JESSE O. GRIFFIN Senior Vice President and Controller - ----------------------------------- (Principal Accounting Officer) Jesse O. Griffin /s/ JAMES J. BAILEY, III Director - ----------------------------------- James J. Bailey, III /s/ ROBERT H. BARROW Director - ----------------------------------- Robert H. Barrow /s/ RICHARD A. CAMPBELL Director - ----------------------------------- Richard A. Campbell
72 73 SIGNATURES /s/ HARRIS J. CHUSTZ, JR. Director - ----------------------------------- Harris J. Chustz, Jr. /s/ ROY G. KADAIR, MD. Director - ----------------------------------- Roy G. Kadair, M.D. /s/ ROBERT D. KILPATRICK Director - ----------------------------------- Robert D. Kilpatrick /s/ O. MILES POLLARD, JR. Director - ----------------------------------- O. Miles Pollard, Jr. /s/ WILLIAM H. WRIGHT, JR. Director - ----------------------------------- William H. Wright, Jr.
73 74 SCHEDULE II UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E(3) ADDITIONS DEDUCTIONS(2) Charged Balance at to Costs Charged Balance at Beginning and to Other End Description of Year Expenses Accounts (1) of Year - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) December 31, 1995 Allowance for loan losses................. $ 16,508 $ 16,025 $ (873) $ 16,769 $ 14,891 Allowance for bond losses................. - - - - - Unearned loan charges..................... 1,109 - - 458 651 ---------- ---------- ---------- ----------- ----------- Total............................. $ 17,617 $ 16,025 $ (873) $ 17,227 $ 15,542 ========== ========== ========== =========== =========== December 31, 1994........................... Allowance for loan losses................. $ 21,017 $ 13,457 $ (514) $ 17,452 $ 16,508 Allowance for bond losses................. 500 - - 500 - Unearned loan charges..................... 1,982 - - 873 1,109 ---------- ---------- ---------- ----------- ----------- Total............................. $ 23,499 $ 13,457 $ (514) $ 18,825 $ 17,617 ========== ========== ========== =========== =========== December 31, 1993 Allowance for loan losses................. $ 15,842 $ 17,343 $ 36 $ 12,204 $ 21,017 Allowance for bond losses................. - 500 - - 500 Unearned loan charges..................... 3,260 - - 1,278 1,982 ---------- ---------- ---------- ----------- ----------- Total.............................. $ 19,102 $ 17,843 $ 36 $ 13,482 $ 23,499 ========== ========== ========== =========== ===========
NOTES: (1) Represents the approximate amount of unearned loan charges on installment loans originated during the period. (2) Represents loans and bonds charged off and loan charges earned during the period. (3) All of the above are deducted in the balance sheet from the asset to which they apply. 74 75 ================================================================================ SCHEDULE V UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION For the Three Years Ended December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J Deferred Policy Deferred Acquisition Cost Amortization and Policy Net Benefits, Other Acquisition Future Policy Unearned Premium Investment Claims, Operating Costs Benefits(1) Premiums Revenue(3) Income Losses, Etc. Expenses(4) - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Year ended December 31, 1995 ............ $ 90,703 $1,529,012 $ 1,793 $ 8,508 $ 136,037 $ 9,930 $ 31,971 Year ended December 31, 1994 ............ $ 91,915 $1,542,474 $ 4,491 $ 11,373 $ 126,108 $ 12,654 $ 32,960 Year ended December 31, 1993 ............ $ 83,495 $1,418,310 $ 10,260 $ 18,684 $ 109,728 $ 18,200 $ 24,967
NOTES: (1) Column C includes accumulated fund values on annuity and interest sensitive products. (2) Column E is omitted as amounts are not material and are included with Column C. (3) Column F excludes premiums on annuity and interest sensitive products which are accounted for as deposits. (4) Column I and J are combined as actuarial method employed to determine Deferred Policy Acquisition Cost provides only the net asset change for the period. 75 76 SCHEDULE VI UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES REINSURANCE FOR THE THREE YEARS ENDED DECEMBER 31, 1995
============================================================================================================================ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Percentage Ceded to Assumed of Amount Direct Other From Other Net Assumed to Amount Companies Companies Amount Net Amount - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) December 31, 1995 Life insurance in force ................................... $ 554,131 $ 149,080 $ 992,979 $1,398,030 71.0% ========== ========== ========== ========== Premiums Life insurance .......................................... $ 6,016 $ 1,625 $ 2,588 $ 6,979 37.1% Accident and health insurance ............................................ 1,643 115 1 1,529 -- ---------- ---------- ---------- ---------- Total premiums .................................. $ 7,659 $ 1,740 $ 2,589 $ 8,508 30.4% ========== ========== ========== ========== December 31, 1994 Life insurance in force ................................... $ 709,883 $ 177,585 $1,106,148 $1,638,446 67.5% ========== ========== ========== ========== Premiums Life insurance .......................................... $ 7,467 $ 1,931 $ 2,959 $ 8,495 34.8% Accident and health insurance ............................................ 3,070 199 7 2,878 -- ---------- ---------- ---------- ---------- Total premiums .................................. $ 10,537 $ 2,130 $ 2,966 $ 11,373 26.1% ========== ========== ========== ========== December 31, 1993 Life insurance in force ................................... $ 956,788 $ 215,918 $1,106,721 $1,847,591 59.9% ========== ========== ========== ========== Premiums Life insurance .......................................... $ 12,657 $ 3,196 $ 3,020 $ 12,481 24.2% Accident and health insurance ............................................ 6,637 453 19 6,203 -- ---------- ---------- ---------- ---------- Total premiums .................................. $ 19,294 $ 3,649 $ 3,039 $ 18,684 16.3% ========== ========== ========== ==========
76 77 INDEX TO EXHIBITS
Exhibit No. Description of Document - ----------- ----------------------- 2(1) Stock Purchase Agreement dated as of January 30, 1996 by and between the Company and UC Life Holding Corporation 3.1(2) Articles of Incorporation, as amended 3.1A(3) Amendment to Articles of Incorporation effective April 28, 1994 3.1B(4) Amendment to Articles of Incorporation effective June 19, 1995 3.2(5) By-Laws, as amended 4.1(6) Senior Indenture 4.2(6) Subordinated Indenture 4.3(6) First Supplemental Indenture with respect to 9.35% Senior Notes due November 1, 1999 4.4(6) Form of certificate for shares of Preferred Redeemable Increased Dividend Equity Securities 6 3/4% PRIDES(sm), Convertible Preferred Stock, par value $2.00 per share 4.5(7) Second Supplemental Indenture for 7% Senior Notes due July 15, 1998 4.6(8) Series A Junior Participating Preferred Stock Purchase Rights 10.1(2) 1986 Employee Incentive Stock Option Plan 10.2(2) Employee Stock Ownership Plan and Trust 10.3(2) Management and compensatory contracts with executive officers and directors 10.4(2) Deferred compensation agreements 10.5(9) Management Incentive Plan, as amended 10.6(2) Employees' Savings Plan and Trust 10.7(2) Agreement for termination of employee agreement 10.8(2) Agreement for termination of employment agreement 10.9(2) Unfunded Salary Deferral Agreement dated April 1, 1989 with executive officer 10.10(2) Split-Dollar Insurance Agreement dated April 1, 1989 with executive officer 10.11(2) 1989 Stock Incentive Plan 10.12(2) 1989 Non-Employee Director Stock Option Plan 10.13(2) 1992 Form 11K, Employees' Savings Plan and Trust 10.14(10) Stock Purchase Warrant dated as of July 1, 1993 10.15(2) 1993 Form 11K, Employees' Savings Plan and Trust 10.16(9) 1993 Stock Incentive Plan 10.17(9) 1993 Non-Employee Director Plan
77 78
Exhibit No. Description of Document - ----------- ----------------------- 10.19(2) 1994 Form 11-K, Employees' Savings Plan and Trust 10.20(11) 1995 Form 11-K, Employee Savings Plan 10.21(5) Indemnification agreements 10.22(12) Change of Control Agreement 10.23(12) Supplemental Retirement Agreement 10.24(12) Split Dollar Agreement 11.1(12) Statement regarding computation of per share earnings 21.1(12) List of Subsidiaries of the Company 23.1(12) Consent of Deloitte & Touche LLP 27(12) Financial Data Schedule
(1) Incorporated herein by reference to the designated Exhibit on the Company's Current Report on Form 8-K filed on February 9, 1996. (2) Incorporated herein by reference to the designated Exhibit of the Company's Annual Report on Form 10-K dated December 31, 1994. (3) Incorporated herein by reference to the designated Exhibit of the Company's Quarterly Report on Form 10-Q dated June 30, 1994. (4) Incorporated herein by reference to the designated Exhibit of the Company's Quarterly Report on Form 10-Q dated June 30, 1995. (5) Incorporated herein by reference to the designated Exhibit of the Company's Quarterly Report on Form 10-Q dated March 31, 1995. (6) Incorporated by reference to the designated Exhibits of the Company's Current Report on Form 8-K filed on June 16, 1995. (7) Incorporated herein by reference to the designated Exhibit to the Company's Current Report on Form 8-K filed July 26, 1995. (8) Incorporated by reference to the designated Exhibit of the Company's Form 8-A dated August 5, 1994. (9) Incorporated by reference from the designated Exhibit of the Company's Registration Statement on Form S-8 filed September 29, 1995. (10) Incorporated herein by reference to the designated Exhibit of the Company's Registration Statement on Form S-3 (SEC File No. 33-52739). (11) To be filed as Amendment to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (12) Filed herewith. Exhibit No. 10.22 - Page 79 Exhibit No. 10.23 - Page 107 Exhibit No. 10.24 - Page 115 Exhibit No. 11.1 - Page 120 Exhibit No. 21.1 - Page 121 Exhibit No. 23.1 - Page 122 Exhibit No. 27 - Page 123 78 EX-10.22 2 CHANGE OF CONTROL AGREEMENT 1 EXHIBIT 10.22 CHANGE OF CONTROL AGREEMENT THIS CHANGE OF CONTROL AGREEMENT (the "Agreement"), is dated and effective as of the _____ day of ________________, 199___, by and between United Companies Financial Corporation, a Louisiana corporation (the "Company"), which has its corporate headquarters at 4041 Essen Lane, Baton Rouge, Louisiana 70809 and _____________________________________________ ____("Employee"). RECITALS WHEREAS, Employee is a senior executive of the Company and has made and is expected to continue to make major contributions to the profitability, growth and financial strength of the Company; and WHEREAS, the Company recognizes that, as is the case for most publicly held companies, the possibility of a Change in Control (as herein defined) exists; and WHEREAS, the Company desires to assure itself of both present and future continuity of management in the event of a Change in Control and desires to establish certain minimum compensation rights of its key senior executive officers, including Employee, applicable in the event of a Change in Control; and 79 2 WHEREAS, the Company wishes to ensure that its key senior executives are not practically disabled from discharging their duties upon a Change in Control; and WHEREAS, this Agreement is not intended to alter the compensation and benefits which Employee could reasonably expect to receive from the Company absent a Change in Control and, accordingly, although effective and binding as of the date hereof, this Agreement shall become operative only upon the occurrence of a Change in Control; and WHEREAS, Employee is willing to render services to the Company on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of these premises, and of the mutual covenants and undertakings set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Employee hereby agree as follows: 1. NOT AN EMPLOYMENT CONTRACT, ETC.. (a) This Agreement is not an employment contract. Nothing herein shall ever be construed so as to require the Company to employ Employee or retain Employee in its employ. Employee expressly acknowledges that no provision of this Agreement shall ever be interpreted so as to require or impose upon the Company any obligation whatsoever to employ Employee. 80 3 (b) This Agreement shall be effective and binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement shall not be operative unless and until there shall have occurred a "Change in Control" as defined in Section 4. Upon the occurrence of a Change of Control at any time during the period during which this Agreement shall be in effect (the "Term"), this Agreement shall become immediately operative. (c) The Term of this Agreement shall commence as of the date hereof and shall expire as of the later of (i) the close of business on December 31, 1998, or (ii) the expiration of the earliest of (x) the expiration of the twenty-four month period following the first occurrence of a Change in Control or (y) earlier termination as provided in Section 2 of this Agreement; provided, however, that (A) commencing on January 1, 1996, and each January 1 thereafter, the term of this Agreement shall automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or Employee shall have given notice that it or he, as the case may be, does not wish to have the Term extended and (B) subject to Section 1(d) hereof, if, prior to a Change in Control, Employee ceases for any reason to be an employee of the Company, thereupon the Term shall be deemed to have expired and this Agreement shall immediately terminate and be of no further effect. (d) Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or Employee to have Employee remain in the employment of the Company prior to any Change in Control; provided, however, 81 4 that any termination of employment of Employee or the removal of Employee from his office or position in the Company following the commencement of any discussion with a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of Employee after a Change in Control for purposes of this Agreement. (e) The Recitals set forth hereinabove are incorporated herein. 2. TERMINATION BY COMPANY FOLLOWING A CHANGE IN CONTROL. If Employee is in the employ of the Company at the time there is a Change in Control and if Employee's employment is terminated by the Company without Cause (as herein defined) prior to the second anniversary of the first occurrence of a Change in Control, subject to Section 1(d), other than by reason of (i) the death of Employee, (ii) the permanent disability of Employee (within the meaning of, and pursuant to which he begins actually to receive disability benefits under, the long-term disability plan in effect for senior executives of the Company immediately prior to the Change in Control), or (iii) the retirement of Employee after he attains age 65 (the occurrence of any event as set forth in subsections (i), (ii) or (iii) above shall constitute a termination of this Agreement only if such event occurs (a) before the occurrence of a Change in Control or (b) after the occurrence of a Change in Control but before a termination of employment by the Company pursuant to Section 2 or a termination of employment by the Employee pursuant to Section 3), then Employee shall be entitled to the following 82 5 payments and benefits in lieu of any further payments to Employee for periods subsequent to the effective date of such termination: (a) Payment of three times the amount of Employee's annualized base salary at the rate in effect immediately prior to such Change in Control (or such higher rate in effect prior to such termination), paid in the form of an un-discounted lump sum payment within 10 business days after the effective date of such termination; plus (b) Payment of an amount equal to three times the amount of Employee's highest annual bonus earned by Employee (whether the bonus was payable in cash, restricted stock or otherwise) during the three prior Company fiscal years immediately ended prior to the Change in Control (or such higher annual bonus for the fiscal year ended immediately prior to the date of the termination), paid in the form of an undiscounted lump sum payment within ten (10) business days after the effective date of such termination; plus (c) Continuation of the life and medical insurance coverage and the short-term and long-term disability coverage provided to Employee by the Company immediately before the effective date of such termination, in each case at the level otherwise in effect just prior to the effective date of termination (or such higher level immediately prior to the Change in Control), for two years from the effective date of termination at the Company's expense, or, if earlier, until Employee obtains employment and comparable coverage 83 6 elsewhere; and Employee's COBRA-benefit continuation rights shall commence on the first day following the date of termination of the extended coverage rights provided hereunder. If the plans maintained by the Company do not permit continuation of coverage as contemplated hereby, the Company shall be obligated to obtain comparable coverage elsewhere at no increased cost to Employee; plus (d) Any other rights and benefits provided to Employee under employee benefit plans and programs of the Company as in effect immediately prior to his termination (or such greater rights and benefits immediately prior to the Change in Control), determined in accordance with the applicable terms and provisions of such plans and programs; provided, however, notwithstanding anything to the contrary contained in this Agreement, in any agreement evidencing a grant to Employee of restricted shares or options to acquire stock in the Company, or in any plan of the Company, immediately upon the occurrence of a Change in Control, (i) any rightstheretofore granted to the Employee to purchase stock in the Company upon the exercise of an option, and any corresponding appreciation rights, will become exercisable in full, and in the event of the termination of employment of Employee for any reason, any option may be exercised within three (3) months after such termination, or if longer, such period as may be specified in the applicable agreement or plan, (ii) any risks of forfeiture and prohibitions or restrictions on transfer pertaining to any 84 7 restricted shares theretofore granted to Employee will lapse, and (iii) any risks of forfeiture pertaining to any deferred compensation or supplemental retirement arrangement theretofore granted to the Executive will lapse; and provided, further, that such deferred compensation shall be payable as provided in the deferred compensation or supplemental retirement benefits arrangement, commencing on the date which would have been his Normal Retirement Date or such earlier date as he shall die or become disabled, and with an annual benefit determined as if Employee had continued employment with the Company until the Normal Retirement Date; plus (e) Certain Additional Payments by the Company: (i) Anything in this Agreement to the contrary notwithstanding, in the event that this Agreement shall become operative and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (individually and collectively a "Payment"), would be 85 8 subject to the excise tax imposed by Section 4999 of the Code (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment or payments (individually and collectively, a "Gross-Up Payment") (provided, however, that no Gross-Up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i)). The Gross-Up Payment shall be in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. 86 9 (ii) Subject to the provisions of Section 2(e)(vi), all determinations required to be made under this Section 2(e), including whether an Excise Tax is payable by the Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by Employee in his sole discretion. Employee shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Employee within thirty (30) calendar days after the termination date of Employee's employment, if applicable, and any such other time or times as may be requested by the Company or the Employee. If the Accounting Firm determines that any Excise Tax is payable by Employee, the Company shall pay the required Gross-Up Payment to Employee within five business days after receipt of such determination and calculations with respect to any Payment to Employee. The federal tax returns filed by Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Employee. If the Accounting Firm determines that any Excise Tax is payable by Employer, the Company shall pay the required Gross-Up 87 10 Payment to Employer within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Employer. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall, at the same time as it makes such determination, furnish the Company and Employee an opinion that Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 2(e)(vi) hereof and Employee thereafter is required to make a payment of any Excise Tax, Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Employee within five business days after receipt of such determination and 88 11 calculations. (iii) The Company and Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 2(e). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Employee. (iv) The federal, state and local income or other tax returns filed by Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Employee. Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company,provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Employee's federal income tax return, or corresponding state or local tax 89 12 return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Employee shall within five (5) business days pay to the Company the amount of such reduction. (v) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 2(e) shall be borne by the Company. If such fees and expenses are initially paid by Employee, the Company shall reimburse Employee the full amount of such fees and expenses within five business days after receipt from Employee of a statement therefor and reasonable evidence of his payment thereof. (vi) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after Employee actually receives notice of such claim and Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Employee). Employee shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the 90 13 date that any payment of amount with respect to such claim is due. If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (A) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including without limitation interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless Employee, on an after-tax basis, for and against any Excise Tax or income tax, including without 91 14 limitation interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 2(e)(vi), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 2(e)(vi) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that Employee may participate therein at his own cost and expense) and may, at its option, either direct Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to Employee on an interest-free basis and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax, including without limitation interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations 92 15 relating to payment of taxes for the taxable year of Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (vii) If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 2(e)(vi) hereof, Employee receives any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of Section 2(e)(vi) hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 2(e)(vi) hereof, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such 93 16 advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Employee pursuant to this Section 2(e). (f) No Mitigation Obligation: The Company hereby acknowledges that it will be difficult, and may be impossible, for Employee to find reasonably comparable employment following the date of termination of his employment. Accordingly, the parties hereto expressly agree that the payments and benefits to be provided by the Company to Employee in accordance with the terms of this Agreement will be liquidated damages, and that Employee shall not be required to mitigate the amount of any payment or other benefit provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Employee hereunder or otherwise, except as expressly provided in Section 2(c). Further, the Company shall have no right of offset with respect to payments and other benefits due by it hereunder. 3. TERMINATION BY EMPLOYEE FOR "GOOD REASON" FOLLOWING A CHANGE IN CONTROL. If Employee is in the employ of Company at the time of a Change in Control, and in the event of termination of Employee's employment by Employee for "Good Reason"(as defined below) prior to the second anniversary of the first 94 17 occurrence of a Change in Control, and subject to Section 1(d), Employee shall be entitled to the same payments and other benefits that are provided under Section 2. For purposes of this Section 3, Employee shall be entitled to terminate his employment for "Good Reason" if: (a) Without Employee's written consent, one or more of the following events occurs: (i) For reasons other than job promotion, Employee is not appointed to or is otherwise removed from his position, or a substantially equivalent position, as the case may be, held immediately prior to the Change in Control for any reason other than for Cause or Employee's disability; (ii) The Company reduces Employee's base salary and/or the dollar amount of Employee's target annual bonus opportunity, in each case for any reason other than for Cause or Employee's disability; (iii) Employee is required to relocate his office more than 25 miles from its current location, excluding business travel reasonably consistent with the level of travel prior to the Change in Control; (iv) For any reason other than for Cause, Employee suffers a significant reduction in the authority, duties or responsibilities associated with his senior executive position; (v) For any reason other than for Cause, the Company asserts the 95 18 intention to reduce or materially reduces Employee's life insurance and other benefit coverages provided below the levels applicable immediately prior to such Change of Control; (vi) Any individual or entity acquiring the Company through purchase of assets, or by merger, or otherwise fails to expressly assume the Company's obligations hereunder, provided that such individual or entity has had at least ten (10) business days' prior written notice of the existence of this Agreement and this provision; (vii) The Company otherwise materially breaches this Agreement; and/or (viii) A determination is made by Employee in good faith that as a result of a Change in Control and a change in circumstances thereafter significantly affecting his position, including without limitation a change in the scope of the business or other activities for which he was responsible immediately prior to a Change in Control, he has been rendered substantially unable to carry out, has been substantially hindered in the performance of, or has suffered a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by Employee immediately prior to the Change in Control, which situation is not remedied within 10 calendar days after written notice to the Company from Employee of such determination. 96 19 (b) In the case of Sections 3(a)(ii), 3(a)(iv) and 3(a)(v), within 90 days following the date on which the occurrence of such event becomes known to Employee, Employee notifies the Company in writing of the occurrence of such event and of his intent to treat such event as "Good Reason" under this Section 3; within 30 days (or such shorter period provided in Section 3(a)) following receipt of such written notice, the Company does not cure such event and deliver to Employee a written statement that it has done so; and within 60 days following the expiration of such 30-day (or shorter) period (without the occurrence of a cure and written notice thereof), Employee voluntarily terminates his employment with the Company; (c) In the case of Sections 3(a)(i), 3(a)(iii), 3(a)(vi), 3(a)(vii), or 3(viii), Employee voluntarily terminates his employment with the Company; and (d) Termination of Employee's employment with the Company by reason of his (i) death, (ii) permanent disability (within the meaning of, and pursuant to which he begins actually to receive disability benefits under, the long-term disability plan in effect for senior executives of the Company immediately prior to the Change in Control), or (iii) retirement after he attains age 65 shall not be "Good Reason" for purposes of this Section 3. 4. CHANGE OF CONTROL DEFINITION. (a) For purposes of this Agreement, the term Change in Control shall mean 97 20 the happening of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding any 10% or larger shareholder of record of the Company as of January 1, 1995, directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities which are entitled to vote with respect to the election of the directors of the Company; (ii) When, during any period of 24 consecutive months, the individuals who, at the beginning of such period, constitute the Board of Directors of the Company (the "Incumbent Directors") cease for any reason other than death or disability to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either 98 21 actually (because they were directors at the beginning of such 24-month period) or by prior operation of this provision; (iii) The acquisition of the Company or all or substantially all of the Company's assets by an entity other than the Company (or a 50% or more owned subsidiary of the Company) through purchase of assets, or by merger, or otherwise, except in the case of a transaction pursuant to which, immediately after the transaction, the Company's shareholders immediately prior to the transaction own immediately after the transaction at least a majority of the combined voting power of the surviving entity's then outstanding securities which are entitled to vote with respect to the election of the directors of such entity; or (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K, Form 10-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction. Notwithstanding the foregoing provisions of this Section 4, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company (the "Board"), a "Change in Control" shall not be deemed to have occurred for purposes of 99 22 this Agreement solely because (A) the Company, (B) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (C) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of voting stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. (b) Upon the occurrence of a Change in Control at any time during the Term, this Agreement shall become immediately operative. 5. CAUSE DEFINITION. The term Cause as used herein shall mean intentional gross dishonesty or intentional gross misconduct by Employee, either of which is materially harmful to the business or reputation of the Company or any of its subsidiaries as determined by the Board in the reasonable, good faith exercise of its business judgment and discretion. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for Cause hereunder unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board then in office at a 100 23 meeting of the Board called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with his counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Employee had committed an act set forth in this Section 5 and specifying the particulars thereof in detail. Nothing herein shall limit the right of Employee or his beneficiaries to contest the validity or propriety of any such determination. 6. TAX WITHHOLDING. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to Employee shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payments of taxes, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 7. DISPUTES: ENFORCEMENT OF RIGHTS. (a) Legal and Other Fees. All reasonable legal and other fees and expenses incurred by Employee in connection with any disputed claim regarding any right or benefit provided for in this Agreement or in otherwise pursuing any disputed claim relating to this Agreement shall be paid by 101 24 the Company, to the extent permitted by law, provided that Employee is successful in whole or in part as to such disputed claim as the result of litigation, arbitration or settlement. (b) Interest on Unpaid Amounts. In the event that the Company refuses or otherwise fails to make a payment when due and it is ultimately determined that Employee is entitled to such payment, such payment shall be increased to specify an interest equivalent for the period of delay, compounded annually, equal to the prime rate in effect as of the date the payment was first due and as such rate may thereafter change from time to time. For this purpose, the prime rate shall be based on the rate identified by Hibernia National Bank from time to time as its prime rate as of the relevant date. 8. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs and assigns. No rights or obligations of Employee under this Agreement may be assigned or transferred by Employee other than his rights to benefits hereunder, which may be transferred only by will or operation of law and subject to the limitations of this Agreement. 102 25 No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company, except pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, and in which such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. 9. ENTIRE AGREEMENT; AMENDMENT OR WAIVER. This Agreement and any schedules attached hereto (which are incorporated herein and which shall be treated as part hereof), together with the benefits referred to herein, contain the entire agreement between the parties hereto concerning the subject matter hereof and supersede all prior agreements, understandings, discussions, negotiations and undertaking, whether written or oral, between the Company and Employee with respect thereto. No provision in this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing and signed by Employee and a duly authorized officer of the Company. No waiver by either party hereto of any breach by the other party or any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. 103 26 10. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable, in whole or in part, for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 11. GOVERNING LAW. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Louisiana, without reference to conflict of law principles. 12. NOTICES. Any notice given to either party to this Agreement shall be in writing and shall be deemed to have been given when delivered personally or three business days after sent by certified or registered mail, postage prepaid, return receipt requested, in each case duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently give notice of: If to the Company or to the Board: United Companies Financial Corporation 4041 Essen Lane Baton Rouge, LA 70809 Attention: Secretary 104 27 with a copy to the Chairman of the Compensation Committee of the Board; If to Employee: ----------------------------------- ----------------------------------- ----------------------------------- 13. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts (each of which need not be executed by each of the parties), all of which together shall constitute one and the same agreement. WHEREOF, the undersigned have executed this Agreement as of the date first written above. United Companies Financial Corporation By: ----------------------------------- Its: ---------------------------------- -------------------------------------- 105 28 Employee -------------------------------------- Name: --------------------------------- 106 EX-10.23 3 SUPPLEMENTAL RETIREMENT AGREEMENT 1 EXHIBIT 10.23 SUPPLEMENTAL RETIREMENT AGREEMENT This Agreement made and entered into this _______ day of _______________19__, by and between UNITED COMPANIES FINANCIAL CORPORATION, a corporation organized and existing under the laws of the State of Louisiana, hereinafter called the "Company", represented herein by its duly authorized undersigned ____________ and __________, a resident of the lawful age of majority of the Parish of East Baton Rouge, State of Louisiana, hereinafter called the "Executive", provides as follows: WHEREAS, the Executive has been employed as an executive officer of the Company and/or one or more of its subsidiaries, and is presently employed by the Company as __________________________________________________ and WHEREAS, the Executive's service has contributed significantly to the success and growth of the Company; and WHEREAS, the ability and experience of the Executive are of such value to the Company that the Company wishes to adequately compensate the Executive for his past and future services by providing special retirement benefits to him; and NOW, THEREFORE, in consideration of the Executive's past and future services and the mutual promises and covenants set forth herein, the Company and the Executive agree as follows: SCOPE OF AGREEMENT The Executive will continue in the employ of the Company in such capacity, with such duties and responsibilities, and with such compensation as set forth in the Employment Agreement. The benefits provided by this Agreement are granted by the Company as additional benefits to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these additional benefits. 107 2 RETIREMENT BENEFIT If the Executive continues in the employment of the Company until attaining age 55 and terminates employment for any reason other than death on or after attaining age 55 but prior to or upon attaining age 65 ("Normal Retirement Date"), the Company shall pay to him, an annual amount stated in Appendix A based on his last attained age, payable monthly for a period of ten (10) years. The first monthly payments will be due on the first day of the month following his Normal Retirement Date and the remaining monthly payments will be due on the first day of each month thereafter. If the Executive continues employment beyond age 65, payments will not begin until his actual termination of employment which occurs for any reason other than death ("Late Retirement Date"). At the Late Retirement Date, the annual benefit payable at age 65 under Appendix A will be adjusted, assuming a simple interest rate of 6%, compounded annually from the date the Executive attained age 65 until his Late Retirement Date. The Company shall pay to him the adjusted amount monthly for a period of ten (10) years beginning on the first day of the month following the Executive's Late Retirement Date and the remaining monthly payments will be due on the first day of each month thereafter. Notwithstanding the foregoing, if the Executive continues in the employment of the Company until attaining age 70, the last day of the month in which the Executive attains age 70 will be deemed to be his Late Retirement Date for purposes of this Agreement, and payments will begin under this section on the first day of the month following such date as if the Executive had retired, even if he is still employed by the Company. If the Executive dies after the applicable retirement date under Section 2.1 or 2.2, but prior to the completion of payment of the 120 monthly payments specified therein, the remaining payments shall be continued to such beneficiary or beneficiaries as the Executive may have designated in a written beneficiary designation executed by him and filed with the Company. In the absence of any effective written beneficiary designation filed with the Company, any such monthly payments remaining unpaid at the death of the Executive shall be payable to the duly qualified executor or administrator of the Executive's estate. 108 3 CONSULTING SERVICES It is mutually agreed that, during the ten (10) year period beginning on the day following his retirement from active service, the Executive shall, at the request of the Company, be available at reasonable times to render services to the Company in an advisory or consulting capacity similar to the services rendered by the Executive prior to retirement. The Executive may be required to travel from whatever place he may then be living or staying for the purpose of such consultation and all expenses incurred by him for such travel shall be paid by the Company. A request for consulting services made by the Company must be reasonable with respect to time, place, notice and scope and shall be limited to locations within the continental United States. The Executive shall not be considered in default hereof if he is unable to consult because of a mental or physical disability. DEATH PRIOR TO RETIREMENT In the event the Executive dies while employed by the Company at any time after the date of this Agreement but prior to his Normal Retirement Date or Late Retirement Date, whichever is applicable, no benefit will be payable under this Agreement. 109 4 CONDITIONS GOVERNING RECEIPT OF BENEFITS In the event that, at any time prior to the date the Executive attains age 55, the employment of the Executive with the Company shall be terminated (a)_because of his voluntary resignation or other voluntary termination, or (b)_"for cause" under the terms of the Employment Agreement, this Agreement shall terminate on the date his employment is so terminated, and no benefits or payments of any kind shall made hereunder. In the event that, at any time prior to the date the Executive attains age 65, the employment of the Executive with the Company shall be terminated involuntarily for any reason other than death, disability or "for cause" under the terms of the Employment Agreement, he shall be entitled to receive the benefit payable under Section 2.1, when he attains age 65 except that in the event that such payment is subject to the provisions of Section 280G of the Internal Revenue Code ("Code") of 1986 the amount payable under this Agreement shall be reduced, if necessary, to the amount which is deductible under Chapter 1 of the Code. If the Executive becomes disabled prior to attaining age 65, the benefits set forth in Section 2.1 shall become payable at the time the Executive attains age 65 in the manner indicated under that section, provided he is still so disabled at that time. If the Executive becomes disabled and entitled to benefit under this section, but returns to full-time employment with the Company, this section shall have no effect unless the Executive again becomes disabled while in the employment of the Company prior to attaining age 65 and qualifies for the deferred benefit under this section. For purposes of this Article, the Executive is considered disabled only if he is eligible for disability benefits under any long-term disability plan maintained by the Company; however, the Employment Agreement between the Executive and the Company shall not be considered a disability plan maintained by the Company. In the event that there is no such long-term disability plan, the Executive shall be considered disabled if he is unable to perform the essential duties of his position and if such inability to perform is expected to result in death or to be for a long and indefinite duration, as determined by a physician selected by the Company. 110 5 UNFUNDED AND UNSECURED The rights of the Executive and his beneficiary(ies) under this Agreement are purely contractual and shall not be funded or secured in any way. Payments to the Executive or his beneficiary(ies) hereunder shall be made only from the general assets of the Company, and no person, other than the Company, shall have, by virtue of this Agreement, any interest in such assets. Such assets are available to satisfy the claims of the Company's general creditors and, to the extent any person acquires a right to receive payments from the Company under the terms of this Agreement, such rights shall be no greater than the right of any unsecured general creditor of the Company. The Company, in its discretion, may acquire an insurance policy or policies insuring the life of the Executive from which it can satisfy its obligation to make benefit payments pursuant to this Agreement. However, it is expressly understood that any such policy, if acquired, does not create any account or fund separate from the ordinary assets of the Company, and neither the Executive nor his beneficiary(ies) may look to any such policy(ies) as the fund from which benefits hereunder are to be paid. Any such policy so acquired for the convenience of the Company may be the sole and exclusive property of the Company, with the Company named as applicant, owner, and beneficiary thereof; provided further, any such policy shall not be held in trust or as collateral security for the benefit of the Executive or his beneficiary(ies), nor is any representation made herein that such policy, if acquired, will be used to provide benefits under this Agreement. Neither the Executive nor his beneficiary(ies) shall have any beneficial ownership interest in, or preferred or other claim against the life insurance policy, if acquired, on account of this Agreement. ADMINISTRATION AND CLAIMS The Company, in its sole discretion, shall make all determinations as to rights to benefits under this Agreement, the interpretation of the terms and provisions of this Agreement and all other issues related to this Agreement. Any decision by the Company denying a claim for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive or his beneficiary(ies) having made such claim. Such decision shall set forth the specific reasons for the denial and shall notify the Executive or his beneficiary(ies), as appropriate, of the opportunity for a full and fair review of the decision denying such claim. Any notice, consent, or demand required or permitted to be given under the terms of this Agreement shall be in writing, and shall be signed by the party giving or making the same. 111 6 The effective date of such notice, consent, or demand as applicable to the addressee shall be the date of receipt by the addressee or date of mailing, if the notice is mailed. If the Executive and the Company are unable to resolve a dispute concerning this Agreement, the dispute shall be reviewed through the arbitration procedure and in accordance with the following: (A) The Company will ask the United States Federal Mediation and Conciliation Service ("FMCS") to provide a list of seven names of neutral and experienced arbitrators who reside in the State of Louisiana. Upon receipt of this list, a single arbitrator will be selected by agreement between the Company and the Executive, or, if no agreement can be reached, by alternatively striking names from the list until a single name remains. The arbitrator will schedule a hearing at which the facts surrounding the dispute can be presented. (B) Upon written request of either the Company or the Executive, the names, addresses and telephone numbers of witnesses who will testify at the hearing and copies of any documents to be presented to the arbitrator at the hearing must be provided to the requesting party within five (5) working days of the other party's receipt of the request. (C) The Executive may retain legal counsel or represent himself at the hearing. Although the fees and expenses of the arbitrator will be paid by the Company in all cases, expenses incurred by the Executive in arbitration, including attorney fees, must be paid by the Executive. (D) During the hearing, both the Company and the Executive will have the opportunity to call witnesses on their behalf, question witnesses presented by the other party, present relevant documentary evidence, make closing arguments to the arbitrator and file briefs as the arbitrator may allow. The rules of procedure of the FMCS and the Federal Arbitration Act will apply, and the arbitrator will have full authority to make any necessary rulings. (E) This arbitration provision and all of its procedures are considered to be the mandatory and exclusive method by which an Executive may dispute a claim under the Agreement. The Company and the Executive accept that this arbitration provision is final and binding, and no other procedure, for example, litigation or an administrative proceeding, may be pursued to redress complaints growing out of this 112 7 Agreement. However, an arbitrator's award may be enforced or set aside in accordance with the Federal Arbitration Act. (F) This provision will be interpreted in accordance with the Federal Arbitration Act and FMCS regulations. NON-ALIENABILITY Neither the Executive nor any beneficiary(ies) under this Agreement shall have any power or right to transfer, assign, anticipate, pledge, mortgage, commute or otherwise encumber in advance any of the benefits payable hereunder, nor shall said benefits be subject to seizure for the payment of any debts or judgments or be transferable by operation of law in the event of bankruptcy, insolvency, or otherwise. PARTICIPATION IN OTHER PLANS Nothing contained in this Agreement shall be construed to alter, abridge, or in any manner affect the rights and privileges of the Executive to participate in any pension, profit-sharing, or other plan or plans the Company may now or hereafter provide. BENEFITS AND BURDENS This Agreement shall be binding on and inure to the benefit of the Executive and his legal representative, and it shall be binding on the Company and any successor organization that shall succeed to substantially all the Company's assets, by merger, consolidation, or otherwise. REVOCABILITY The Company and the Executive may agree, in writing, to amend or revoke this Agreement at any time. 113 8 NOT AN EMPLOYMENT CONTRACT This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision herein restrict the right of the Company to discharge or otherwise terminate the Executive, or restrict the right of the Executive to terminate his employment, in accordance with the terms of the Employment Agreement. GOVERNING LAW, ETC. This Agreement shall be governed by and construed in accordance with the laws of the State of Louisiana, where it is made and is to be performed. It sets forth the entire agreement between the parties concerning the subject matter thereof, and any amendment hereto shall be made only in writing. A waiver of one or more provisions of this Agreement shall not affect any other provisions of this Agreement, such that the remaining provisions will remain in full force and effect. Except as expressly provided to the contrary in this Agreement, each section, paragraph, term or provision of this Agreement, should be considered severable; and if, for any reason, any section, paragraph, term or provision herein is determined to be invalid and contrary to, or in conflict with any existing or future law or regulation of a court or agency having valid jurisdiction, such shall not impair the operation of or affect the remaining sections, paragraphs, terms or provisions of this Agreement, and the latter shall continue to be in full force and effect and bind the parties hereto; in such invalid sections, paragraphs, terms and/or provisions shall be deemed not to be part of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement on the day and year first above written in the presence of the undersigned competent witnesses. WITNESSES: UNITED COMPANIES FINANCIAL CORPORATION BY: - ------------------------- ------------------------------- - ------------------------- ------------------------------- 114 EX-10.24 4 SPLIT DOLLAR AGREEMENT 1 EXHIBIT 10.24 SPLIT-DOLLAR INSURANCE AGREEMENT THIS AGREEMENT, made and entered into this ____ day of _______________, 19__, by and between United Companies Financial Corporation, a corporation organized and existing under the laws of the State of Louisiana (the "Employer), and _____________________ (the "Employee"). WHEREAS, Employee is a valued employee of Employer and Employer wishes to retain him in its employ; and WHEREAS, Employer, as an inducement to such continued employment, wishes to assist Employee with his personal life insurance program. NOW, THEREFORE, the Employer and Employee agree as follows: The life insurance policies covered by this Agreement is Policy Number _________________ (the "Policy") issued by _____________________________________ (the "Insurer") on the life of Employee with a face amount of $___________. Employer shall be the owner of the Policy; and shall have the right to exercise all incidents of ownership in the Policy, except as provided in paragraph 3 below. Employer shall cause the Policy to be endorsed to reflect the respective interests of the parties under this Agreement as follows: The Employer shall be the direct beneficiary of an amount of the proceeds of the Policy equal to the lesser of the cash value of the Policy or premiums paid minus any Policy indebtedness to the Insurer. The balance of the proceeds, if any, shall be payable to the beneficiary designated pursuant to subparagraph 3(c) below. The Employee, or his transferee, shall have the right to designate and change primary and contingent beneficiaries of any portion of the proceeds to which the Employee, or his transferee, may be entitled hereunder, and to elect and change any settlement option that may be permitted under the Policy for such beneficiaries. 115 2 Each premium on the Policy shall be paid by the Employer as it becomes due. The Employee, shall make no premium payments. The Employer shall annually furnish the Employee a statement of the amount of income reportable by the Employee for federal and state income tax purposes, if any, as a result of its payment of the premium. The Employer shall not sell, surrender or transfer ownership of the Policy while this Agreement is in effect without first giving Employee, or his transferee, the option to purchase the Policy for a period of sixty (60) days from written notice of such intention by Employer. The purchase price shall be an amount equal to the aggregate premiums the Employer has paid on said Policy less any policy indebtedness to the Insurer. This provision shall not impair the right of the Employer to terminate this Agreement pursuant to paragraph 6 below. In the event the Employee shall not exercise said option to purchase the Policy and the Employer shall surrender or cancel the Policy prior to the death of the Employee, the Employer's interest shall be equal to the aggregate amount of premiums paid by the Employer, less any Policy indebtedness to the Insurer and other indebtedness secured by the Policy (including interest thereon). This provision shall not apply in the event the Employer purchases a policy of equal or greater value on the life of the Employee which becomes subject to the terms of the Agreement. This Agreement may be terminated, subject to the provisions of paragraphs 7 and 8 below, by either party hereto with or without the consent of the other party by giving notice in writing to the other party. In the event of the termination of Employee's employment with Employer for any reason whatsoever other than Employee's death, this Agreement shall terminate automatically, subject to the provisions of paragraphs 7 and 8 below. This Agreement shall automatically terminate without the requirement that notice be given by either party on the day before the Employee attains age 70. 7. In the event of termination of this Agreement as provided in paragraph 6 above for any reason prior to the date the employee attains age 55, other than (1) the Employee becoming disabled, or (2) the Employee's involuntary termination of employment, the Employee shall have the option to purchase the Policy from the Employer during a period of sixty (60) days from the date of termination of this Agreement. The purchase price of the Policy shall be an amount equal to the aggregate premiums the Employer has paid on said Policy less any policy indebtedness to the Insurer. An Employee shall be disabled and his employment deemed terminated for purposes of this Agreement if he becomes eligible for disability benefits under any long-term disability plan maintained by the Employer other than disability benefits payable under an employment agreement between the Employee and the Employer. In the event that there is no such long-term disability plan, the Employee shall be considered disabled if he is unable to perform the essential duties of his position and if such inability to perform is expected to result in death or to be for a long and indefinite duration, as determined by a physician 116 3 selected by the Employer. If this Agreement terminates for any reason, then subject to the Employee's right to purchase the Policy within sixty (60) days following termination of this Agreement under Paragraph 7, the Employee, or his transferee, agrees to execute any instruments that may be required by the Insurer to vest all rights in the Policy in the Employer. After the execution of such instruments, Employee, or his transferee, shall have no further interest in the Policy or in this Agreement. In the event the Employee shall transfer all of his interest in the Policy, then all of Employee's interest in the Policy and in this Agreement shall be vested in his transferee, who shall be substituted as a party hereunder, and the Employee shall have no further interest in the Policy or in this Agreement. The Insurer shall be bound only by the provisions and endorsements on the Policy, and any payments made or action taken by it in accordance therewith shall fully discharge it from all claims, suits and demands of all persons whatsoever. Except as specifically provided by endorsement on the Policy, it shall in no way be bound by the provisions of this Agreement. Except as otherwise provided in this Agreement, this Agreement may not be canceled, amended, altered or modified, except by a written instrument signed by all of the parties hereto. Any notice, consent or demand required or permitted to be given under the provisions of this Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his, her or its last known address as shown on the records of the Employer. The date of such mailing shall be deemed the date of such mailed notice, consent or demand. This Agreement shall bind Employer, Employee and his heirs, executors, administrators and transferees, and any Policy beneficiary. This Agreement, and the rights of the parties hereunder, shall be governed by and construed pursuant to the laws of the State of Louisiana. A waiver of one or more provisions of this Agreement shall not affect any other provision of this Agreement, such that the remaining provisions will remain in full force and effect. 117 4 This Agreement is the entire agreement between the parties. Except as expressly provided to the contrary in this Agreement, each section, paragraph, term or provision of this Agreement, should be considered severable; and if, for any reason, any section, paragraph, term or provision herein is determined to be invalid and contrary to, or in conflict with any existing or future law or regulation of a court or agency having valid jurisdiction, such shall not impair the operation of or affect the remaining sections, paragraphs, terms or provisions of this agreement, and the latter shall continue to be in full force and effect and bind the parties hereto; in such invalid sections, paragraphs, terms and/or provisions shall be deemed not to be part of this Agreement. If the Employee and the Employer are unable to resolve a dispute concerning this Agreement, the dispute shall be reviewed through the arbitration procedure in accordance with the following: (A) The Employer will ask the United States Federal Mediation and Conciliation Service ("FMCS") to provide a list of seven names of neutral and experienced arbitrators who reside in the State of Louisiana. Upon receipt of this list, a single arbitrator will be selected by agreement between the Employer and the Employee, or, if no agreement can be reached, by alternatively striking names from the list until a single name remains. The arbitrator will schedule a hearing at which the facts surrounding the dispute can be presented. (B) Upon written request of either the Employer or the Employee, the names, addresses and telephone numbers of witnesses who will testify at the hearing and copies of any documents to be presented to the arbitrator at the hearing must be provided to the requesting party within five (5) working days of the other party's receipt of the request. (C) The Employee may retain legal counsel or represent himself at the hearing. Although the fees and expenses of the arbitrator will be paid by the Employer in all cases, expenses incurred by the Employee in arbitration, including attorney fees, must be paid by the Employee. (D) During the hearing, both the Employer and the Employee will have the opportunity to call witnesses on their behalf, question witnesses presented by the other party, present relevant documentary evidence, make closing arguments to the arbitrator and file briefs as the arbitrator may allow. The Employee must prove by a 118 5 preponderance of the evidence that he is entitled to benefits under this Agreement. The rules of procedure of the FMCS and the Federal Arbitration Act will apply, and the arbitrator will have full authority to make any necessary rulings. (E) This arbitration provision and all of its procedures are considered to be the mandatory and exclusive method by which an Employee may dispute a claim under the Agreement. The Employer and the Employee accept that this arbitration provision is final and binding, and no other procedure, for example, litigation or an administrative proceeding, may be pursued to redress complaints growing out of this Agreement. However, an arbitrator's award may be enforced or set aside in accordance with the Federal Arbitration Act. (F) This provision will be interpreted in accordance with the Federal Arbitration Act and FMCS regulations. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. UNITED COMPANIES FINANCIAL CORPORATION BY: ---------------------------------- -------------------------------------- 119 EX-11.1 5 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31, ---------------------------------------------------- 1995 1994 1993 ----------- ---------- ----------- (in thousands, except per share amounts) Primary Earnings Per Share Income available to common shareholders: Income from continuing operations............................ $ 72,959 $ 54,582 $ 28,317 Less: Loss from discontinued operations...................... (3,491) (5,048) (16,742) ----------- ---------- ----------- Net income................................................... 69,468 49,534 11,575 Less: Dividends on preferred stock.......................... - - (333) ----------- ---------- ----------- Total........................................................ $ 69,468 $ 49,534 $ 11,242 =========== ========== ========== Weighted average number of common and common equivalent shares: Average common shares outstanding............................ 27,854 27,298 21,304 Add: Dilutive effect of stock options after application of treasury stock method................. 895 1,192 904 Dilutive effect of preferred stock after application of "if converted" method........... 1,752 - - ----------- ---------- ----------- 30,501 28,490 22,208 =========== ========== ========== Earnings (loss) per share: Income from continuing operations............................ $ 2.39 $ 1.92 $ 1.26 Loss from discontinued operations............................ (.11) (.18) (.75) ----------- ---------- ----------- Total........................................................ $ 2.28 $ 1.74 $ .51 =========== ========== ========== Fully Diluted Earnings Per Share Income available to common shareholders: Income from continuing operations............................ $ 72,959 $ 54,582 $ 28,317 Less: Loss from discontinued operations...................... (3,491) (5,048) (16,742) ----------- ---------- ----------- Total........................................................ $ 69,468 $ 49,534 $ 11,575 =========== ========== ========== Weighted average number of common and all dilutive contingent shares: Average common shares outstanding............................ 27,854 27,298 21,304 Add: Dilutive effect of stock options after application of treasury stock method................. 928 1,192 1,374 Dilutive effect of preferred stock after application of "if converted" method........... 2,121 - 1,028 ----------- ---------- ----------- 30,903 28,490 23,706 =========== ========== ========== Earnings (loss) per share: Income from continuing operations............................ $ 2.36 $ 1.92 $ 1.20 Loss from discontinued operations............................ (.11) (.18) (.71) ----------- ---------- ----------- Total........................................................ $ 2.25 $ 1.74 $ .49 =========== ========== ==========
120 EX-21.1 6 STATEMENTS REGARDING COMPUTATION OF RATIOS 1 EXHIBIT 21.1 UNITED COMPANIES FINANCIAL CORPORATION LIST OF SUBSIDIARIES DECEMBER 31, 1995
State of Name Incorporation United Companies Life Insurance Company.....................................................................Louisiana United Variable Services, Inc. (3)..........................................................................Louisiana United Companies Lending Corporation........................................................................Louisiana Pelican Mortgage Company, Inc. (1)...........................................................................Delaware Adobe, Inc. (2)................................................................................................Nevada UCFC Acceptance Corporation (1).............................................................................Louisiana United Companies Mortgage of Tennessee, Inc. (1)............................................................Tennessee United Companies Second Mortgage Corporation of Minnesota(1)................................................Minnesota United Companies Credit Life Insurance of Nevada, Inc.(1)......................................................Nevada UNICOR MORTGAGE(R), Inc. ...................................................................................Louisiana UNICOR Second Mortgage, Inc. of Minnesota(4)................................................................Minnesota GINGER MAE(R), Inc..........................................................................................Louisiana GINGER MAE Second Mortgage, Inc. of Minnesota(5)............................................................Minnesota Southern Mortgage Acquisition, Inc..........................................................................Louisiana Foster Mortgage Corporation.................................................................................Louisiana United Communications Corporation of Louisiana, Inc.........................................................Louisiana United Companies Management Company, Inc....................................................................Louisiana United Companies Realty and Development Company, Inc........................................................Louisiana United General Title Insurance Company......................................................................Louisiana United Plan Insurance Agency, Inc...........................................................................Louisiana United Companies Lending Group, Inc.........................................................................Louisiana United Companies Funding, Inc...............................................................................Louisiana United Credit Card, Inc.....................................................................................Louisiana
- ------------------------------------ (1) Wholly owned by United Companies Lending Corporation (2) Wholly owned by Pelican Mortgage Company, Inc. (3) Wholly owned by United Companies Life Insurance Company (4) Wholly owned by UNICOR MORTGAGE(R), Inc. (5) Wholly owned by GINGER MAE(R), Inc. 121 EX-23.1 7 CONSENT OF DELOITTE & TOUCHE LLP 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 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 March 15, 1996 122 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 28,087 1,218,353 428,465 14,891 0 0 63,547 24,888 2,366,886 0 255,756 58,604 0 3,910 319,437 2,366,886 0 397,950 0 0 238,853 16,025 28,308 114,764 41,805 72,959 (3,491) 0 0 69,468 2.28 2.25
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