Consolidated revenues for 1996 were $596.4 million, up 7.9% over the $552.8 million reported for 1995. The increase occurred primarily because of the 8.3% growth in earned premiums.
Income before income taxes decreased 3.4% to $71.3 million from $73.8 million for 1995. The decrease was due primarily to the highest ever wind and hail losses for the year ended December 31, 1996. Wind and hail losses increased 36.4% to $39.1 million from $28.7 million in 1995.
Net income for the year ended December 31, 1996 was down 2.5% to $51.1 million, lowering fully diluted earnings per share to $2.31 from $2.35 in 1995. Fully diluted earnings per share excluding net realized investment gains were $2.30 for 1996 compared with $2.33. On a fully diluted basis, the impact of wind and hail losses was $1.23 per share versus $0.90 in 1995.
Investment income for 1996 was $42.3 million compared with $39.1 million. The pretax yield on invested assets was 6.3%, down from 6.4% one year earlier. Investment income increased due to a larger average balance of invested assets in 1996, which more than offset the decrease experienced in the pretax yield. Realized investment gains for 1996 were $180,000 compared with $236,000. Other income increased slightly to $7 million from $6.9 million in 1995.
The subsidiary's invested assets rose 8.3% from the previous year-end to $104.4 million at December 31, 1996. Investment income increased 7% to $6.2 million from $5.8 million because a larger average balance of invested assets more than offset a 30 basis-point decline in the pretax yield to 6.4% from last year's 6.7%. Realized investment gains were $2,000 compared with losses of $136,000 for 1995.
Revenues for the noninsurance operations (including investment services, data processing, and employee lease fees from affiliates) decreased 8.8% to $147.2 million from $161.3 million in 1995. The decrease was primarily due to a decline in data processing revenues from affiliates. Income before income taxes was $3.8 million for the year ended December 31, 1996 compared with $5.1 million in 1995. Effective March 1, 1996, certain personnel of ALLIED previously providing computer-related services to a certain affiliate were employed by the affiliate. Since the effective date, those employees have been paid directly by the affiliate.
The investment policy for the Company's insurance segments requires that the fixed maturity portfolio be invested primarily in debt obligations rated investment grade (BBB) or higher by Standard & Poor's Corporation or a recognized equivalent at the time of acquisition. The policy also states that equity securities are to be of United States and Canadian corporations listed on established exchanges or publicly traded in the over-the-counter market. Preferred stocks are to be comprised primarily of issues rated at least A3/A- by Standard & Poor's Corporation or Moody's. At December 31, 1996 the Company's investment portfolios consisted almost exclusively of fixed income securities; 99.7% were rated investment grade or higher. The portfolios contained no real estate or mortgage loans at December 31, 1996.
The Company's effective income tax rate was 28.4% compared with 29.1% for 1995. The decrease in the effective rate was due primarily to a higher percentage of income from tax-exempt securities. The income tax expense for 1996 decreased 5.8% to $20.2 million.
Consolidated revenues for 1995 were $552.8 million, up 8.9% over the $507.4 million reported for 1994. Excluding realized investment gains, revenues grew 9.5% for 1995. The increase occurred primarily because of the 10.4% growth in earned premiums.
Income before income taxes was up 10.7% to $73.8 million from $66.7 million for 1994 primarily because of revenue growth and improved underwriting margins for the property-casualty segment. The property-casualty segment was the dominant contributor, generating operating income of $63.9 million.
Net written premiums for the pool (including ALLIED Mutual) totaled $692.6 million, a 9.4% increase over 1994 production. The average premium per policy for personal lines was up 3.4% to $586 while the policy count grew 6.5%. The average premium per policy for commercial lines increased 2% to $1,086, and policy count was up 5.3%. Earned premiums for the property-casualty segment were 65.7% personal lines and 34.3% commercial lines. The business mix for 1994 was 65.4% personal and 34.6% commercial lines.
Income before income taxes increased to $63.9 million from $54.2 million primarily as a result of lower underwriting expenses in 1995 and an increase in earned premiums. Investment income was $39.1 million compared with $35.3 million. The pretax yield on invested assets was 6.4%, down from 6.6% one year earlier.
Realized investment gains were $236,000 compared with $3 million. Realized investment gains for 1994 included $2.6 million from the sale of the segment's 20% interest in a savings and loan holding company. Other income increased to $6.9 million from $6.1 million in 1994.
Income before income taxes for 1995 decreased 3.2% to $4.8 million from $5 million. The decrease was due primarily to poor loss development. Realized investment losses were $136,000 compared with losses of $24,000 for 1994.
Income before income taxes was $5.1 million for the year ended December 31, 1995 compared with $7.5 million in 1994. Fees paid to data processing for processing and product maintenance services were lowered during 1995 to approximate more closely the cost for providing such services to the property-casualty segment's companies.
Consolidated investment income increased 15% to $47.2 million from $41.1 million in 1994. The increase was due primarily to a larger average balance of invested assets. The tax-equivalent yield was down in 1995 to 7.8% compared with 7.9% one year earlier. The aftertax yield for 1995 and 1994 was 5.1%.
Recently, the insurance regulatory framework has received increased scrutiny from various states, the federal government, and the National Association of Insurance Commissioners (NAIC). The NAIC has recommended to the states for adoption and implementation several regulatory initiatives. None of these is expected to be significant to the Company.
California was the source of approximately 25% of the pool's direct written premiums for the past ten years. Proposition 103, approved by California voters in 1988, provides for a rollback of rates on premiums collected in calendar year 1989 to the extent that the insurer's return on equity for each Proposition 103 line of business exceeded 10%. The rollback liability, if any, has not been finalized. Management continues to believe the insurance subsidiaries will not be liable for any material rollback of premiums.
Substantial cash inflows for the Company are generated from premiums, pool administration fees, investment income, and proceeds from maturities of investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, and income taxes and the purchase of fixed income and equity securities. In developing its strategy, the Company establishes a level of cash and highly liquid short- and intermediate-term securities that, combined with expected cash flow, is believed adequate to meet anticipated short-term and long-term payment obligations.
In 1996, operating activities generated cash flows of $95.1 million; in 1995, the total was $97.9 million; in 1994, the total was $85.5 million. For each year, the primary source of funds was premium growth in the property-casualty insurance operations. In each of the years, funds generated from operating activities were primarily used to purchase investment grade fixed income securities, accounting for the majority of cash used in investing activities. The net cash used in investing activities in 1996, 1995, and 1994 was $65.7 million, $88.8 million, and $69.5 million, respectively. In 1996, 1995, and 1994, ALLIED paid dividends of $16.3 million, $13.5 million, and $12.7 million, respectively.
During 1996, ALLIED received dividend payments of $23.7 million from the property-casualty subsidiaries and $916,000 from noninsurance subsidiaries. During 1995 and 1994, the property-casualty subsidiaries paid ALLIED dividends of $12 million and $7.8 million, respectively; noninsurance subsidiaries paid dividends of $974,000 and $1.1 million, respectively.
In 1996 and 1994, ALLIED also used funds to repurchase $16.5 million and $6.4 million of its common stock, respectively. No shares were repurchased in 1995. During 1996, ALLIED repurchased 443,000 shares of its common stock on the open market at an average price per share of $37.31, which, reflecting the November 1996 stock split, was 664,500 shares at $24.87 per share. Pursuant to SEC Rule 10b-18, the Board of Directors (Board) authorized stock repurchase programs on December 14, 1994 and July 16, 1996, each for 250,000 shares (375,000 shares on a post-split basis). The stock repurchase program the Board approved on December 14, 1994 was completed on July 15, 1996. The stock repurchase program the Board approved on July 16, 1996 is not complete; 57,000 shares remain to be repurchased. During 1994, ALLIED repurchased 250,000 shares (375,000 shares on a post-split basis) of its common stock at an average price per share of $25.44 ($16.96 on a post-split basis) under a stock repurchase program the Board approved on February 11, 1994, which was completed in November 1994.
Historically, the insurance subsidiaries have generated sufficient funds from operations to pay their claims. While the property-casualty and excess & surplus lines insurance companies have maintained adequate investment liquidity, they have in the past required additional capital contributions to support premium growth. Industry guidelines suggest that a property-casualty insurer's annual net written premiums should not exceed approximately 300% of statutory surplus. At December 31, 1996, the property-casualty and excess & surplus lines segments' net written premiums were 173% and 85% of their statutory surplus, respectively.
Management anticipates that short-term and long-term capital expenditures, cash dividends, and operating cash needs will be met from existing capital and internally generated funds. In 1994, additional funds of $9.4 million were generated from the sale of the 20% interest in a savings and loan holding company. In 1996, the Company received an additional $620,000 as the final payment on that 1994 sale. The payment represents the Company's share of the contingent purchase price that was distributed when all known claims were settled. As of December 31, 1996, the Company had no material commitments for capital expenditures. Future debt and stock issuance will be considered as additional capital needs arise. The method of funding will depend upon financial market conditions.
At its March 4, 1997 meeting, the Board of Directors approved a first-quarter 1997 common stock dividend of $0.17 per share. The dividend is $0.02 per share (13.3%) higher than the amount paid in the fourth quarter of 1996.
The management of ALLIED Group, Inc. is responsible for the integrity and fair presentation of the consolidated financial statements, related notes, and all other information presented herein. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best estimates and judgments.
/s/ Jamie H. Shaffer - --------------------------------- Jamie H. Shaffer Chief Financial Officer
/s/ KPMG Peat Marwick LLP - ---------------------------------- KPMG Peat Marwick LLP Des Moines, Iowa February 3, 1997
ALLIED Group, Inc. and Subsidiaries Statements of Stockholders' Equity (in thousands)
The Company's property-casualty segment operates through three subsidiaries: AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company (ALLIED Property and Casualty), and Depositors Insurance Company (Depositors), which underwrite personal lines (primarily automobile and homeowners) and small commercial lines. The property-casualty segment operates exclusively in the United States and primarily in central and western states. Iowa and California accounted for 21.7% and 24.5%, respectively, of 1996 direct written premiums. The property-casualty segment sells its products through three distribution systems: independent agencies, exclusive agencies, and direct response marketing. The property-casualty segment accounted for 86.5% of 1996 consolidated revenues.
Western Heritage Insurance Company (Western Heritage) is the excess & surplus lines subsidiary, which primarily underwrites commercial lines. The excess & surplus lines segment operates exclusively in the United States. In 1996, the segment accounted for 5.6% of consolidated revenues.
The noninsurance subsidiaries are ALLIED Group Mortgage Company (ALLIED Mortgage), The Freedom Group, Inc. (Freedom Group), ALLIED Group Information Systems, Inc. (AGIS), Midwest Printing Services, Ltd., and ALLIED General Agency Company.
During 1996, the Board of Directors authorized a 3-for-2 stock split issuable November 29, 1996 to stockholders of record on November 15, 1996. All fractional shares were paid in cash. All weighted average shares outstanding, per share amounts, and references in the footnotes to share information have been restated retroactively to reflect the stock split.
The carrying values of all investments in fixed maturities are reviewed for impairment on an ongoing basis. If this review indicates that a decline in fair value below cost is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value and a specific write-down is taken. Such reductions in carrying value are recognized as realized losses and charged to income. Realized gains and losses on disposition of investments are based on specific identification of the investments sold.
Equity securities are carried at fair value with any unrealized appreciation and depreciation reported net of deferred income taxes as a separate component of stockholders' equity. All short-term investments are recorded at cost, which approximates fair value. Other investments are reported using the equity method. Other investments at December 31, 1996 and 1995 included a 20% ownership in an abstract and title holding company. In 1996, the investment was written down to zero.
Policy acquisition costs such as commissions, premium taxes, and certain other underwriting and agency expenses that vary with and are directly related to the production of business have been deferred. Such deferred policy acquisition costs are being amortized as premium revenue is recognized. The method followed in computing deferred policy acquisitions costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjusting expenses, and certain other costs expected to be incurred as the premium is earned.
Ceded reinsurance amounts with unaffiliated reinsurers relating to reinsurance receivables for paid and unpaid losses and loss adjusting expenses and prepaid reinsurance are reported on the balance sheets on a gross basis. Amounts ceded to ALLIED Mutual relating to the affiliated reinsurance pooling agreement and the property catastrophe reinsurance agreement have not been grossed up because the contracts provide that receivables and payables may be offset upon settlement.
The liabilities for losses and loss adjusting expenses are considered adequate to cover the ultimate cost of losses and claims incurred to date net of estimated salvage and subrogation recoverable. Since the provisions are necessarily based on estimates, the ultimate liability may be more or less than such provisions.
based on the fair value of those rights. ALLIED Mortgage stratifies its mortgage servicing portfolio on the basis of certain risk characteristics, including loan type and note rate, and determines fair value based upon the present value of estimated future cash flows. Impairment is recognized through a valuation allowance for each impaired stratum. The total valuation allowance for capitalized mortgage servicing rights was $2.7 million as of December 31, 1996 and $1.4 million at December 31, 1995. The fair value of capitalized mortgage servicing rights as of December 31, 1996 was approximately $44.2 million. Capitalized mortgage servicing rights are amortized over twelve years using the straight-line method, which management believes approximates the realization of the related net servicing income. Amortization of servicing rights for the years ended December 31, 1996, 1995, and 1994 was $5.4 million, $4.7 million, and $3.5 million, respectively.
Equipment and software are included in other assets at historic cost net of accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are provided primarily on the straight-line basis over the estimated useful lives of the assets, ranging from two to seven years. Accelerated depreciation methods are utilized for income tax purposes.
Primary and fully diluted earnings per share calculations are based on the weighted average number of shares of common stock and common stock equivalents outstanding for a period. Securities that are in substance equivalent to common stock (primarily stock options) are referred to as common stock equivalents. To calculate primary earnings per share, net income is reduced by dividends on the preferred stock. For fully diluted earnings per share, net income is reduced by dividends on the 6-3/4% Series preferred stock.
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
The Financial Accounting Standards Board (FASB) issued SFAS 123, "Accounting for Stock-Based Compensation," in October of 1995. SFAS 123 specifies a fair value method of accounting for stock-based compensation plans and recognizes compensation cost over the vesting period of the option granted. An entity is permitted to determine its net income by continuing to apply Accounting Principles Board Opinion 25 (APB 25), "Accounting for Stock Issued to Employees," but must comply with the disclosure requirements of SFAS 123. The Company adopted the disclosure requirements of SFAS 123 (note 12) for the year ended December 31, 1996, but accounts for stock-based compensation plans under APB 25.
Mortgage loans held for sale--The fair value is estimated using quoted market prices and includes commitments to extend credit and forward sales commitments (note 14).
Other financial instruments--Due to their short-term nature, their carrying amount approximates fair value.
The following table presents the carrying value and estimated fair value of the financial instruments at December 31, 1996 and 1995.
The estimated fair values presented herein are based on pertinent information available to management as of December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued for purposes of these financial statements since those dates; current estimates of fair value may differ significantly from the amounts presented herein.
A summary of net investment income for the years ended December 31, 1996, 1995, and 1994 follows:
Pursuant to the terms of the Intercompany Operating Agreement, ALLIED leases employees to its subsidiaries and ALLIED Mutual and certain of its subsidiaries. Each company that leases employees is charged a fee based upon costs incurred for salaries, related benefits, taxes, and expenses associated with the employees it leases. For the years ended December 31, 1996, 1995, and 1994, ALLIED received revenues of $2.5 million, $2.5 million, and $2.4 million, respectively, for employees leased to affiliates which are included in income from affiliates and in eliminations and other within segment information.
The Company and its affiliates deposit their excess cash into a short-term investment fund. The fund was established to concentrate short-term cash in a single account to maximize yield. AID Finance Services, Inc., a wholly owned
subsidiary of ALLIED Mutual, is the administrator of the fund. At December 31, 1996 and 1995, the Company had $3.4 million and $7.8 million, respectively, invested in the fund. The Company also had three unsecured notes payable to the fund at December 31, 1996 totaling $2.4 million. Interest rates ranged from 5.6% to 8.5%, and the notes mature in January of 1997. At December 31, 1995 the Company had two unsecured notes payable totaling $3.5 million to the investment fund.
prior years, the provision for losses and loss adjusting expenses decreased $680,000 in 1996, increased $2 million in 1995, and decreased $1.6 million in 1994. Development for losses and loss adjusting expenses on prior years is immaterial to the financial statements taken as a whole.
In establishing reserves, management considers exposure the Company may have to environmental claims. Because reported claim activity levels are minimal and the emphasis of the property-casualty business is primarily on personal lines and small commercial business, management believes exposure to material liability on such claims to be remote as of December 31, 1996. The Company routinely reviews its overall reserve position and reserving techniques as they relate to its exposure to environmental claims.
In the ordinary course of business the property-casualty and excess & surplus lines subsidiaries cede insurance to other insurers for the purpose of limiting their maximum loss exposure through diversification of their risks. See note 4 for discussion of reinsurance contracts with ALLIED Mutual. Reinsurance contracts do not relieve the Company from its obligations to policyholders as the primary insurer. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. As of December 31, 1996, reinsurance receivables and prepaid reinsurance premiums associated with three nonaffiliated reinsurers aggregated approximately $12.8 million, which represented a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and loss adjusting expenses. The property-casualty subsidiaries also assume insurance as members of various pools and associations.
The short-term notes payable to nonaffiliated companies include line of credit agreements used by ALLIED Mortgage primarily to finance its mortgage loans held for sale. At December 31, 1996 and 1995, ALLIED Mortgage had borrowed $19.7 million and $22.5 million, respectively, under mortgage loan warehousing agreements with three different commercial banks; the agreements expire in May and June of 1997. Under the terms of the agreements, ALLIED Mortgage can borrow up to the lesser of $67 million or 98% of the mortgage credit borrowing base, which includes related sublines. At December 31, 1996, the outstanding borrowings of ALLIED Mortgage under these line of credit agreements were secured by mortgage loans held for sale of $12.1 million, mortgage servicing rights on loans with a principal balance of $2.8 billion, and foreclosure loans of $5.4 million. Interest rates applicable to these borrowing arrangements vary with the level of investable deposits maintained at the respective commercial banks.
The Company paid interest to nonaffiliates of $1.5 million, $1.6 million, and $2.2 million in 1996, 1995, and 1994, respectively.
On July 12, 1990, the ESOP Trust issued Remarketed Floating Rate Notes (FRN) totaling $35 million with a final maturity of July 12, 2005. The proceeds from the FRN were used to acquire Series A ESOP Convertible Preferred Stock. During 1995, the ESOP Trust refinanced its $28.2 million of FRN under the terms of a Term Credit Agreement and Guaranty (Credit Agreement) with two separate commercial banks. The loans mature July 12, 2005, and interest rates applicable to the borrowings are adjusted at the beginning of each interest period. The interest periods may be one, three, or six months at the discretion of the ESOP Trust.
ALLIED has guaranteed on an unsecured basis the ESOP Trust's reimbursement obligations under the Credit Agreement. The guarantee has been recorded in the consolidated balance sheets as a liability under the caption, "Guarantee of ESOP obligations." At December 31, 1996 and 1995, ALLIED had an outstanding guarantee of principal of $24.4 million, and $26.3 million, respectively. Contributions to the ESOP Trust plus dividends on leveraged shares held by the ESOP Trust are used to meet interest and principal payments on the notes. As principal payments are made, the recorded ESOP guarantee is reduced.
ALLIED is party to an interest rate swap agreement with a broker-dealer to reduce the financial statement impact of fluctuations in the Credit Agreement interest rate. The interest rate resets at the beginning of each interest period. The interest rate swap involves the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amount. As of December 31, 1996, the amount of principal covered under the swap agreement was $17.6 million with a fixed interest rate of 7.4%. The amount of principal covered under the swap agreement reduces over time; the final swap maturity date is December 12, 1997. During 1996, the actual Credit Agreement interest rate ranged from 6% to 6.6%. During 1995 and 1994, the actual interest rates ranged from 6% to 6.8% and from 2.9% to 6.3%, respectively. Though nonperformance of the broker-dealer is not expected, ALLIED is exposed to credit loss should such an event occur.
ALLIED is authorized to issue 7,500,000 shares of preferred stock without par value. The preferred stock may be issued from time to time by the Board of Directors in one or more series with such dividend rights, conversion rights, voting rights, redemption provisions, liquidation preferences, and other rights and restrictions as the Board of Directors may determine.
The 6-3/4% Series preferred stock (6-3/4% Series), issued to ALLIED Mutual at a value of $28.50 per share, is perpetual, nonconvertible, voting, and cumulative with respect to dividends. The 6-3/4% Series has no preemptive rights and is not registered or traded. Upon any transfer by ALLIED Mutual, the 6-3/4% Series is callable under certain conditions and becomes nonvoting. Each share of the 6-3/4% Series has 2-1/4 votes. The annual dividend rate is 6-3/4% of the liquidation preference of $28.50 ($1.92 per share) and is payable quarterly.
ALLIED entered into a Stock Rights Agreement with ALLIED Mutual to grant both parties certain rights in terms of registration, transfer, voting, board nominations, and other matters. Pursuant to the Stock Rights Agreement executed July 5, 1990, ALLIED Mutual is entitled to nominate for election to ALLIED's Board of Directors a number of director nominees that most closely approximates the same percentage of the total number of members of ALLIED's Board of Directors as is equal to ALLIED Mutual's percentage ownership of the total number of shares of ALLIED voting stock.
ALLIED has reserved 2,025,000 shares of common stock to be issued through the ALLIED Group, Inc. Dividend Reinvestment and Stock Purchase Plan. Any stockholder of record may participate in the plan and have cash dividends reinvested in additional shares of common stock. The plan also provides for optional cash payments. During 1996, 61,447 shares, purchased on the open market, were issued at a weighted average price per share of $26.48. During 1995 and 1994, 64,058 and 75,458 shares, purchased on the open market, were issued at the weighted average prices per share of $20.01 and $17.37, respectively. At December 31, 1996, 878,967 shares were available for issuance.
During 1996, 2,992,710 ESOP Series shares were converted to 6,733,598 shares of common stock and the ESOP Trust purchased 24,381 shares at an average price per share of $32.89. As of December 31, 1996, the ESOP Trust was the holder of 6,482,223 shares, or 31.8% of ALLIED's common stock. The Trustee is entitled to vote the shares held in the ESOP Trust on all matters submitted to a vote of the holders of the common stock of ALLIED. The ESOP Trust generally provides that each ESOP participant is entitled to direct the Trustee how to vote (or whether to tender or exchange) the shares allocated to the participant's account.
The dividend rate per common share was $0.59, $0.45, and $0.40 for 1996, 1995, and 1994, respectively.
The issuance of SARs and restricted stock under the Incentive Plan reduces the number of options available for future issuance. During 1996 and 1995, 6,387 and 19,967 shares of restricted stock were awarded at $28.75 per share and $18.25 per share, respectively. During 1996, the restriction was lifted on 417 shares and 173 restricted shares were canceled. In 1995, 609 restricted shares were canceled. At December 31, 1996, 25,586 restricted shares were outstanding. The following table presents SAR activity and prices for the years ended December 31, 1996, 1995, and 1994:
ALLIED has reserved 1,125,000 and 562,500 shares of common stock for issuance under the ALLIED Group, Inc. Employee Stock Purchase Plan (ESPP) and the ALLIED Group, Inc. Outside Director Stock Purchase Plan (DSPP), respectively. Under the plans, participants pay 85% of the fair market value of the shares issued which are fully vested on the dates purchased. During 1996, 41,631 shares were issued at a weighted average price per share of $21.93. During 1995 and 1994, 46,043 and 49,252 shares were issued at a weighted average price per share of $17.09 and $15.17, respectively. At December 31, 1996, 385,893 and 529,313 shares were available for issuance under the ESPP and DSPP, respectively.
The proforma amounts presented are not necessarily indicative of future amounts; SFAS 123 does not apply to awards granted prior to 1995.
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996 and 1995:
In the normal course of business, ALLIED Mortgage grants mortgage loan commitments to borrowers, subject to normal loan underwriting standards. As of December 31, 1996, ALLIED Mortgage had granted loan commitments of approximately $28.2 million, including floating rate commitments of $10.6 million. To hedge loan commitments, ALLIED Mortgage may enter into options, futures, or cash delivery contracts. As of December 31, 1996, ALLIED Mortgage had commitments to sell mortgage securities totaling approximately $15.4 million and no outstanding options. In connection with its commitments to buy and sell mortgages, ALLIED Mortgage is exposed to credit risk in the event the counterparty is unable to fulfill its contractual obligations.
Although loans serviced for others are not on the accompanying balance sheets, ALLIED Mortgage has credit risk associated with the mortgage servicing portfolio. As the loan servicer, ALLIED Mortgage is required to process delinquent loans through the foreclosure process, thereby incurring certain direct expenses which generally are, but may not be, reimbursed. At December 31, 1996, ALLIED Mortgage had sold loans totaling approximately $16.2 million while retaining recourse risk. ALLIED Mortgage established allowances for losses in connection with these various risks. These are included in other liabilities on the accompanying balance sheets.
California was the source of approximately 25% of the pool's direct written premiums for the past ten years. Proposition 103, approved by California voters in 1988, provides for a rollback of rates on premiums collected in calendar year 1989 to the extent that the insurer's return on equity for each Proposition 103 line exceeded 10%. The rollback liability, if any, has not been finalized. Management of the Company continues to believe that the insurance subsidiaries will not be liable for any material rollback of premiums.
The ESOP established by ALLIED covers all of its employees who meet age and service requirements. Shares of common stock are allocated annually to each employee's account pursuant to a formula and held in trust until the employee's termination, retirement, or death. As shares of common stock are allocated to participants, the cost of such shares is expensed and deducted from "Unearned compensation related to ESOP" included in stockholders' equity.
During 1996, 1995, and 1994, the ESOP Trust received $3.5 million, $2.8 million, and $2.8 million, respectively, from dividends on the leveraged shares used to service debt on the ESOP obligations and to purchase stock for participants. ALLIED made ESOP contributions of $529,000 in 1996, $733,000 in 1995, and $35,000 in 1994. Interest incurred on the ESOP debt, which is included as a component of ESOP expense, was $1.6 million, $1.8 million, and $1.2 million in 1996, 1995, and 1994, respectively. The ESOP shares as of December 31, 1996 and 1995 were as follows:
In 1996, ALLIED and the ESOP Trustee entered into an agreement, whereby ALLIED agreed to release additional shares held by the ESOP Trustee in the event ALLIED pays a dividend on the common stock of less than $0.20 per share per quarter, which is equivalent to $0.13 per share per quarter on a post-split basis. The agreement is in effect from March 7, 1996 through March 7, 2000. The purpose of the agreement is to ensure that the allocated shares in the ESOP Trust receive at least the same amount of dividends that would have been paid on the ESOP Convertible Preferred Shares had they not been converted to common stock.
The following table presents the plan's postretirement benefit obligations as of December 31, 1996 and 1995 reconciled with the plan's funded status and the amount recognized in the Company's consolidated balance sheets:
A 7.5% weighted average discount rate was used to determine the accumulated postretirement benefit obligation at December 31, 1996 and 1995.
Net periodic postretirement benefit cost for the years ended December 31, 1996, 1995, and 1994 included the following:
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1997; the rate was assumed to decrease in equal annual increments to 5% by the year 2000 and to remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation by approximately $430,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $40,000.
Included in income tax expense is state income tax expense of $55,000, $402,000, and $456,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The Company paid federal and state income taxes of $18 million, $19.1 million, and $16.7 million in 1996, 1995, and 1994, respectively.
The IRS is currently examining the 1992 and 1993 income tax returns. Any proposed adjustments are not expected to have a material impact on the Company's financial condition, results of operations, or liquidity.
Caution should be exercised in comparing the results of consecutive quarters.