UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 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 No. 0-16867 UNITED TRUST GROUP, INC. (Exact name of registrant as specified in its charter) ILLINOIS 37-1172848 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5250 SOUTH SIXTH STREET P.O. BOX 5147 SPRINGFIELD, IL 62705 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (217) 241-6300 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 [ ] The number of shares outstanding of the registrant's common stock as of April 30, 2003, was 4,005,085. UNITED TRUST GROUP, INC. AND SUBSIDIARIES (The "Company") TABLE OF CONTENTS Part 1. Financial Information................................................3 ITEM 1. FINANCIAL STATEMENTS...............................................3 Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002....3 Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002...........................................4 Consolidated Statement of Changes in Shareholders' Equity for the period ended March 31, 2003..............................................5 Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002..................................................6 Notes to Consolidated Financial Statements................................7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........17 ITEM 4. CONTROLS AND PROCEDURES ..........................................17 PART II. OTHER INFORMATION..................................................18 ITEM 1. LEGAL PROCEEDINGS.................................................18 ITEM 2. CHANGE IN SECURITIES..............................................18 ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............18 ITEM 5. OTHER INFORMATION.................................................18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................18 SIGNATURES....................................................................19 CERTIFICATIONS................................................................20 EXHIBIT INDEX.................................................................22 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) - --------------------------------------------------------------------------------------------------------------- March 31, December 31, ASSETS 2003 2002* ------------------ ------------------ Investments: Fixed maturities at amortized cost (market $56,033,123 and $60,517,065) $ 53,939,130 $ 58,327,663 Investments held for sale: Fixed maturities, at market (cost $115,207,807 and $105,244,887) 118,319,987 108,704,518 Equity securities, at market (cost $8,142,662 and $4,122,887) 8,445,630 4,883,870 Mortgage loans on real estate at amortized cost 22,925,327 23,804,827 Investment real estate, at cost, net of accumulated depreciation 16,909,345 17,503,812 Policy loans 13,260,642 13,346,504 Short-term investments 326,562 377,676 ------------------ ------------------ 234,126,623 226,948,870 Cash and cash equivalents 16,629,741 24,050,485 Accrued investment income 2,379,932 2,452,840 Reinsurance receivables: Future policy benefits 32,940,377 33,039,036 Policy claims and other benefits 3,722,366 3,770,285 Cost of insurance acquired 22,785,678 23,156,164 Deferred policy acquisition costs 2,294,026 2,462,487 Property and equipment, net of accumulated depreciation 2,142,297 2,203,408 Income taxes receivable, current 203,323 245,132 Other assets 307,022 574,263 ------------------ ------------------ Total assets $ 317,531,385 $ 318,902,970 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 235,166,458 $ 234,762,656 Policy claims and benefits payable 2,640,605 1,834,952 Other policyholder funds 1,248,240 1,176,359 Dividend and endowment accumulations 12,638,105 12,628,294 Deferred income taxes 12,044,704 12,239,060 Notes payable 2,289,776 2,995,275 Other liabilities 4,361,330 4,943,507 ------------------ ------------------ Total liabilities 270,389,218 270,580,103 ------------------ ------------------ Shareholders' equity: Common stock - no par value, stated value $.02 per share Authorized 7,000,000 shares - 3,507,845 and 3,536,311 shares issued after deducting treasury shares of 156,073 and 147,607 70,156 70,726 Additional paid-in capital 42,679,379 42,976,344 Retained earnings 2,009,732 2,503,856 Accumulated other comprehensive income 2,382,900 2,771,941 ------------------ ------------------ Total shareholders' equity 47,142,167 48,322,867 ------------------ ------------------ Total liabilities and shareholders' equity $ 317,531,385 $ 318,902,970 ================== ================== *Balance sheet audited at December 31, 2002 See accompanying notes. UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) - -------------------------------------------------------------------------------------------------------- Three Months Ended March 31, March 31, 2003 2002 ----------------- ----------------- Revenues: Premiums and policy fees $ 4,567,277 $ 4,994,227 Reinsurance premiums and policy fees (684,274) (717,366) Net investment income 2,750,690 3,307,478 Realized investment gains, net 242,281 4,696 Other income 171,781 204,006 ----------------- ----------------- 7,047,755 7,793,041 Benefits and other expenses: Benefits, claims and settlement expenses: Life 5,451,065 5,328,814 Reinsurance benefits and claims (477,644) (1,026,833) Annuity 277,191 268,675 Dividends to policyholders 270,308 264,450 Commissions and amortization of deferred policy acquisition costs 173,653 302,521 Amortization of cost of insurance acquired 370,486 386,097 Operating expenses 1,169,440 1,530,433 Interest expense 41,416 72,210 ----------------- ----------------- 7,275,915 7,126,367 Income (loss) before income taxes, minority interest and equity in earnings of investees (228,160) 666,674 Income tax expense (265,964) (83,880) Minority interest in income of consolidated subsidiaries 0 (105,760) ----------------- ----------------- Net income (loss) $ (494,124) $ 477,034 ================= ================= Basic income (loss) per share from continuing operations and net income (loss) $ (0.14) $ 0.14 ================= ================= Diluted income (loss) per share from continuing operations and net income (loss) $ (0.12) $ 0.14 ================= ================= Basic weighted average shares outstanding 3,519,191 3,528,436 ================= ================= Diluted weighted average shares outstanding 4,019,191 3,528,436 ================= ================= See accompanying notes. UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity For the Period ended March 31, 2003 (Unaudited) - ------------------------------------------------------------------------------------------------------- Common stock Balance, beginning of year $ 70,726 Issued during year 0 Retired common shares (400) Purchase treasury shares (170) ------------------ Balance, end of period 70,156 ------------------ Additional paid-in capital Balance, beginning of year 42,976,344 Issued during year 0 Retired common shares (238,400) Purchase treasury shares (58,565) ------------------ Balance, end of period 42,679,379 ------------------ Retained earnings Balance, beginning of year 2,503,856 Net loss (494,124) $ (494,124) ------------------ ------------------ Balance, end of period 2,009,732 ------------------ Accumulated other comprehensive income Balance, beginning of year 2,771,941 Other comprehensive income Unrealized holding loss on securities and reclassification adjustment (389,041) (389,041) ------------------ ------------------ Comprehensive income $ (883,165) ================== Balance, end of period 2,382,900 ------------------ Total shareholders' equity, end of period $ 47,142,167 ================== See accompanying notes. UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, March 31, 2003 2002 --------------- -------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $ (494,124)$ 477,034 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization/accretion of fixed maturities 168,017 97,202 Realized investment gains, net (242,281) (4,696) Policy acquisition costs deferred (8,000) (17,000) Amortization of deferred policy acquisition costs 176,461 272,108 Amortization of cost of insurance acquired 370,486 386,097 Depreciation 121,233 151,597 Minority interest 0 105,760 Change in accrued investment income 72,908 376,308 Change in reinsurance receivables 146,578 395,590 Change in policy liabilities and accruals 1,075,409 (859,384) Charges for mortality and administration of universal life and annuity products (2,116,380) (2,234,743) Interest credited to account balances 1,381,828 1,475,314 Change in income taxes 198,753 55,161 Change in other assets and liabilities, net (1,199) (813,541) --------------- -------------- Net cash provided by (used in) operating activities 849,689 (137,193) Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 12,329,492 8,420,000 Fixed maturities matured 12,136,686 6,885,707 Mortgage loans 3,643,730 2,483,750 Real estate 766,905 486,592 Policy loans 656,512 757,831 Short-term 51,114 50,000 --------------- -------------- Total proceeds from investments sold and matured 29,584,439 19,083,880 Cost of investments acquired: Fixed maturities held for sale (26,771,651) (14,970,384) Fixed maturities (3,436,538) 0 Equity securities (4,000,000) (185,075) Mortgage loans (2,764,230) (3,654,685) Real estate (259,059) (63,981) Policy loans (570,650) (623,959) Short-term 0 (1,450) --------------- -------------- Total cost of investments acquired (37,802,128) (19,499,534) Purchase of property and equipment 0 (8,051) --------------- -------------- Net cash used in investing activities (8,217,689) (423,705) Cash flows from financing activities: Policyholder contract deposits 2,658,689 2,746,397 Policyholder contract withdrawals (1,708,399) (2,267,119) Payments of principal on notes payable (705,499) (777,199) Proceeds from line of credit 0 600,000 Retirement of common stock (238,800) 0 Purchase of treasury stock (58,735) (298,665) --------------- -------------- Net cash provided by (used in) financing activities (52,744) 3,414 --------------- -------------- Net decrease in cash and cash equivalents (7,420,744) (557,484) Cash and cash equivalents at beginning of period 24,050,485 15,477,348 --------------- -------------- Cash and cash equivalents at end of period $ 16,629,741 $ 14,919,864 =============== ============== See accompanying notes. UNITED TRUST GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements have been prepared by United Trust Group, Inc. ("UTG") and its consolidated subsidiaries ("Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes the disclosures are adequate to make the information presented not be misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto presented in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2002. The information furnished reflects, in the opinion of the Company, all adjustments (which include only normal and recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. Operating results for interim periods are not necessarily indicative of operating results to be expected for the year or of the Company's future financial condition. This document at times will refer to the Registrant's largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll. Mr. Correll holds a majority ownership of First Southern Funding LLC, a Kentucky corporation, ("FSF") and First Southern Bancorp, Inc. ("FSBI"), a financial services holding company that owns 100% of First Southern National Bank ("FSNB"), which operates out of 14 locations in central Kentucky. Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG's largest shareholder through his ownership control of FSF, FSBI and affiliates. At March 31, 2003 Mr. Correll owns or controls directly and indirectly approximately 60% of UTG's outstanding stock. At March 31, 2003, consolidated subsidiaries of United Trust Group, Inc. were as depicted on the following organizational chart. For an explanation of contemplated future changes to the organizational structure, please refer to note 10 to the consolidated financial statements.
2. INVESTMENTS As of March 31, 2003 and December 31, 2002, fixed maturities and fixed maturities held for sale represented 74% of total invested assets. As prescribed by the various state insurance department statutes and regulations, the insurance companies' investment portfolio is required to be invested in investment grade securities to provide ample protection for policyholders. In light of these statutes and regulations, and the Company's business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments. As of March 31, 2003, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. The investments held for sale are carried at market, with changes in market value directly charged to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired since 2000 as available for sale. 3. NOTES PAYABLE At March 31, 2003 and December 31, 2002, the Company had $2,289,776 and $2,995,275 in long-term debt outstanding, respectively. The notes payable were incurred in April 2001 to facilitate the repurchase of common stock owned primarily by James E. Melville and Larry E. Ryherd, two former officers and directors of the UTG, and members of their respective families. These notes bear interest at the fixed rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal annual installments. In January 2003 the balance of an advance principal payment in the amount of $705,499 was made on these notes. The collective scheduled principal reductions on these notes for the next five years is as follows: Year Amount 2003 $ 0 2004 763,259 2005 763,259 2006 763,258 2007 0 A. Lines of Credit On November 15, 2001, UTG was extended a $3,300,000 line of credit ("LOC") from the First National Bank of the Cumberlands ("FNBC") located in Livingston, Tennessee. The FNBC is owned by, Millard V. Oakley, who is a former Director of UTG. The line of credit was for a one-year term from the date of issue. Upon maturity the Company renewed the LOC for an additional one-year term. The interest rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates as published in the Wall Street Journal, with any interest rate adjustments to be made monthly. At March 31, 2003, the Company had no outstanding borrowings attributable to this LOC. On April 1, 2002, UTG was extended a $5,000,000 line of credit ("LOC") from an unaffiliated third party, Southwest Bank of St. Louis. The LOC was for a one-year term from the date of issue. Upon maturity the Company renewed the LOC for an additional one-year term from the date of issue. As collateral for any draws under the line of credit, the former FCC, which has now merged into UTG, pledged 100% of the common stock of its insurance subsidiary UG. Borrowings under the LOC will bear interest at the rate of .25% in excess of Southwest Bank of St. Louis' prime rate. At March 31, 2003, the Company had no outstanding borrowings attributable to this LOC. 4. CAPITAL STOCK TRANSACTIONS A. Stock Repurchase Program On June 5, 2001, the board of directors of UTG authorized the repurchase from time to time in the open market or in privately negotiated transactions of up to $1 million of UTG's common stock. Repurchased shares will be available for future issuance for general corporate purposes. From inception of the plan through April 30, 2003, UTG has spent $716,422 in the acquisition of 102,004 shares under this program. B. Earnings Per Share Calculations Earnings per share are based on the weighted average number of common shares outstanding during each period, retroactively adjusted to give effect to all stock splits, in accordance with Statement of Financial Accounting Standards No. 128. At March 31, 2003, UTG had an obligation to issue to FSF or its assigns 500,000 shares of UTG common stock, as a result of a failed earnings covenant (See note 4C to the consolidated financial statements below). As such, the computation of diluted earnings per share differs from basic earnings per share at March 31, 2003. At March 31, 2002, diluted earnings per share is the same as basic earnings per share since the Company had no dilutive instruments outstanding. C. Shares Acquired by FSF and Affiliates with Options Granted On November 20, 1998, FSF and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $10,999,995 and certain shareholders of UTG $999,990 in cash. Included in the stock acquisition agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates will have future earnings of at least $30,000,000 for a five-year period beginning January 1, 1998. Such earnings are computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment is to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. Should UTG not meet the covenant requirements, any shortfall will first be reduced by the actual average tax rate for UTG for the period, then will be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiaries. This result will then be reduced by $250,000. The remaining amount will be paid by UTG in the form of UTG common stock valued at $15.00 per share with a maximum number of shares to be issued of 500,000. However, there shall be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. For the five-year period starting January 1, 1998 and ending December 31, 2002, the Company had total earnings of $16,970,883 applicable to this covenant. Therefore, UTG did not meet the earnings requirements stipulated, and pursuant to the covenant based on a final accounting, the Company issued 500,000 previously unissued shares of UTG common stock to FSF on April 30, 2003. 5. Commitments and Contingencies The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company cannot predict the effect that these lawsuits may have on the Company in the future. Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength. Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements, though the Company has no control over such assessments. The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a "small face amount policy" as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund "excess premiums" to insureds or beneficiaries of insureds. The Company's insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed. On October 26, 2001, President Bush signed into law the "USA PATRIOT" Act of 2001 ("the Patriot Act"). This Law, enacted in response to the terrorist attacks of September 11, 2001, strengthens our Nation's ability to combat terrorism and prevent and detect money-laundering activities. Under Section 352 of the Patriot Act, financial institutions (definition includes insurance companies) are required to develop an anti-money laundering program. The practices and procedures implemented under the program should reflect the risks of money laundering given the entity's products, methods of distribution, contact with customers and forms of customer payment and deposits. In addition, Section 326 of the Patriot Act creates minimum standards for financial institutions regarding the identity of their customers in connection with the purchase of a policy or contract of insurance. Final regulations regarding the aforementioned Patriot Act, are to be issued by the Department of the Treasury sometime this spring. In anticipation of the final regulations, the Company has instituted an anti-money laundering program to comply with Section 352, and has communicated this program throughout the organization. The Company is currently working on a database program to facilitate compliance with Section 326. The Company will monitor the release of the final regulations and make any adjustments needed for continued compliance at that time. On July 30, 2002, President Bush signed into law the "SARBANES-OXLEY" Act of 2002 ("the Act"). This Law, enacted in response to several high-profile business failures, was developed to provide meaningful reforms that protect the public interest and restore confidence in the reporting practices of publicly traded companies. The implications of the Act to public companies, (which includes UTG) are vast, widespread, and evolving. Many of the new requirements will not take effect or full effect until after calendar-year-end companies have completed their 2002 annual reports. The Company has implemented requirements affecting the current reporting period, and is continually monitoring, evaluating, and planning implementation of requirements that will need to be taken into account in future reporting periods. On April 25, 2003 the Company entered into an agreement with Fiserv for the conversion of the two TPA client companies to the "ID3" system. The conversion will begin in May 2003 and is expected to be completed by February 2004. The conversion will be performed utilizing Company personnel with onsite training and guidance provided by Fiserv. The conversion is expected to cost approximately $600,000. Following the conversion of these blocks of business the Company anticipates immediately starting the conversion of the remaining insurance business to the "ID3" software system. Fiserv LIS is a unit of Fiserv, Inc. (Nasdaq: FISV) which is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin. David A. Morlan, individually and on behalf of all others similarly situated v. Universal Guaranty Life Ins., United Trust Assurance Co., United Security Assurance Co., United Trust Group, Inc. and First Commonwealth Corporation, (U.S. District Court for the Southern District of Illinois) On April 26, 1999, the above lawsuit was filed by David Morlan and Louis Black in the Southern District of Illinois against Universal Guaranty Life Insurance Company ("UG") and United Trust Assurance Company ("UTAC") (merged into UG in 1992). After the lawsuit was filed, the plaintiffs, who were former insurance salesmen, amended their complaint, dropped Louis Black as a plaintiff, and added United Security Assurance Company ("USAC") (merged into UG in 1999) and UTG as defendants. The plaintiffs are alleging that they were employees of UG, UTAC or USAC rather than independent contractors. The plaintiffs have asked to recover various employee benefits, costs and attorneys' fees, as well as monetary damages based on the defendants' alleged failure to withhold certain taxes. A trial date has been currently set for August 26, 2003. The Company continues to believe that it has meritorious grounds to defend this lawsuit, and it intends to defend the case vigorously. The Company believes that the defense and ultimate resolution of the lawsuit should not have a material adverse effect upon the business, results of operations or financial condition of the Company. Nevertheless, if the lawsuit were to be successful, it is likely that such resolution would have a material adverse effect on the Company's business, results of operations and financial condition. At March 31, 2003, the Company maintains a liability of $225,000 to cover estimated legal costs associated with the defense of this matter. UTG and its subsidiaries are named as defendants in a number of legal actions arising as a part of the ordinary course of business relating primarily to claims made under insurance policies. Those actions have been considered in establishing the Company's liabilities. Management is of the opinion that the settlement of those actions will not have a material adverse effect on the Company's financial position or results of operations. 6. Other Cash Flow Disclosure On a cash basis, the Company paid $41,416 and $71,898 in interest expense during the first quarter of 2003 and 2002, respectively. The Company paid $0 and $290 in federal income tax during the first quarter of 2003 and 2002, respectively. At March 31, 2003, the Company had acquired $19,775 in equity securities for which the cash had not yet been paid. The payable for these securities is included in the line item other liabilities on the balance sheet. 7. CONCENTRATION OF CREDIT RISK The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Jesse T. Correll, the Company's CEO and Chairman. In aggregate at March 31, 2003 these accounts hold approximately $5,000,000 for which there are no pledges or guarantees outside FDIC insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. 8. COMPREHENSIVE INCOME Tax Before-Tax (Expense) Net of Tax March 31, 2003 Amount or Benefit Amount ---------------------------------------------- ---------------- ----------------- --------------- Unrealized holding losses during Period $ (597,903) $ 209,266 $ (388,637) Less: reclassification adjustment for gains realized in net income (621) 217 (404) ---------------- ----------------- --------------- Net unrealized losses (598,524) 209,483 (389,041) ---------------- ----------------- --------------- Other comprehensive income $ (598,524) $ 209,483 $ (389,041) ================ ================= =============== 9. RELATED PARTY TRANSACTIONS On February 20, 2003, UG purchased $4,000,000 of a trust preferred security offering issued by an upstream affiliate, First Southern Bancorp, Inc. The security has a mandatory redemption after 30 years with a call provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. This security is currently caried at cost, pending valuation by the National Association of Insurance Commissioners' Securities Valuation Office. 10. MERGER OF LIFE INSURANCE SUBSIDIARIES The ABE, APPL, and UG Boards approved merger transactions at the March 2003 meeting whereby ABE and APPL would each be merged with and into UG. The mergers will require the approval of the insurance departments of the States of Ohio and Illinois prior to completion. The Company does not anticipate any delays with the approval process and expects the mergers to be completed by July 2003. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze the Company's consolidated results of operations, financial condition and liquidity and capital resources. This analysis should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at March 31, 2003. Cautionary Statement Regarding Forward-Looking Statements Any forward-looking statement contained herein or in any other oral or written statement by the Company or any of its officers, directors or employees is qualified by the fact that actual results of the Company may differ materially from any such statement due to the following important factors, among other risks and uncertainties inherent in the Company's business: 1. Prevailing interest rate levels, which may affect the ability of the Company to sell its products, the market value of the Company's investments and the lapse ratio of the Company's policies, notwithstanding product design features intended to enhance persistency of the Company's products. 2. Changes in the federal income tax laws and regulations which may affect the relative tax advantages of the Company's products. 3. Changes in the regulation of financial services, including bank sales and underwriting of insurance products, which may affect the competitive environment for the Company's products. 4. Other factors affecting the performance of the Company, including, but not limited to, market conduct claims, insurance industry insolvencies, insurance regulatory initiatives and developments, stock market performance, an unfavorable outcome in pending litigation, and investment performance. Results of Operations (a) Revenues Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 9% when comparing the first quarter of 2003 to the same period in 2002. The Company currently writes little new business. Unless the Company acquires a block of in-force business or significantly increases its marketing, management expects premium revenue to continue to decline at a similar rate, which is consistent with prior experience. Several of the customer service representatives of the Company have become licensed insurance agents, allowing them to offer products within the Company's portfolio to existing customers. The Company is currently implementing a new product referred to as "the Legacy" to be used by the licensed customer service representatives when selling insurance on new lives, or attempting to conserve insurance on existing business. Since the implementation of the new product is just starting, results of this effort are yet to be seen. The Company is in the early stages of moving forward with a marketing opportunity with First Southern National Bank ("FSNB") an affiliate of UTG's largest shareholder, Chairman and CEO, Jesse T. Correll. Management has considered various products including annuity type products, mortgage protection products and existing insurance products, as potential products that could be marketed to banking customers. This marketing opportunity has potential and is believed to be a viable niche. The Company has recently designed the "Horizon" annuity product as well as the aforementioned "Legacy" life product, which are both to be used in marketing efforts through FSNB. Although premium writings through FSNB and by the customer service representatives of the Company are not expected to be significant to Company revenue in the near future, management believes it is a start in their attempt to slow down the yearly decline in premium revenue. Net investment income decreased 17% when comparing the first quarter of 2003 to the same period in 2002. The national prime rate has continued its decline going from 4.75% at March 31, 2002 to 4.25% at March 31, 2003. The declining interest rates over the last couple of years has resulted in lower earnings on short-term funds as well as on longer-term investments acquired. Should this economic climate continue, net investment income should continue to decline as the Company, along with others in the insurance industry, seeks adequate returns on investments, while staying within the conservative investment guidelines set forth by insurance regulations. Management has shortened the length of the Company's portfolio and maintained a conservative investment philosophy. This approach hurts investment earnings in the short run, but the Company has not had to write off any investment losses due to excessive risk, and management feels we are in a better position for an economic up-turn. The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads, ranging from 1% to 2%. At the March 2002 Board of Directors meeting, the Boards of the insurance subsidiaries lowered all remaining rate-adjustable products to their guaranteed minimum rates. The guaranteed minimum crediting rates on these products range from 3% to 5.5%. These adjustments were in response to the continued declines in interest rates in the marketplace. Policy interest crediting rate changes become effective on an individual policy basis on the next policy anniversary. If interest rates continue to decline, the Company won't be able to lower rates, and both net investment income and net income will be impacted negatively. The Company had net realized investment gains of $242,281 in the first quarter of 2003 compared to net realized investment gains of $4,696 for the same period in 2002. Approximately $240,000 of the net realized gains in the first quarter of 2003 were attributable to the sale of two separate parcels of land held for investment purposes in Springfield, Illinois. Other income decreased 16% when comparing the first quarter of 2003 to the same period in 2002. The majority of the revenue in this line item comes from the Company performing administrative work as a third party administrator ("TPA") for an unaffiliated life insurance company, and as such, receives monthly fees based on policy in force counts and certain other activity indicators such as number of premium collections performed. During the first quarter of 2003 and 2002, the Company received $117,260 and $124,635 respectively, for this work. These TPA revenue fees are included in the line item "other income" on the Company's consolidated statements of operations. The Company intends to pursue other TPA arrangements, and in 2002 entered into an alliance with Fiserv Life Insurance Solutions (Fiserv LIS), to provide TPA services to insurance companies seeking business process outsourcing solutions. Fiserv LIS will be responsible for the marketing and sales function for the alliance, as well as providing the datacenter operations. UTG will staff the administration effort. Although still in its early stages, management believes this alliance with Fiserv LIS positions the Company to generate additional revenues by utilizing the Company's current excess capacity and administrative services. Fiserv LIS is a unit of Fiserv, Inc. (Nasdaq: FISV) which is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin. (b) Expenses Life benefits, claims and settlement expenses net of reinsurance benefits and claims, increased 16% in the first quarter of 2003 compared to the same period in 2002. This increase is due to a reduction in reinsurance benefits and claims incurred in the current quarter. The Company reinsures its risks as to not retain more than $125,000, including accidental death benefits, on any one life. Therefore, the amount of reinsurance benefit incurred is determined by the size of an insured's policy when a claim for benefit is made. Aside from the effect of reinsurance, direct death benefits and policy surrenders remained at comparable levels when comparing the first quarter of 2003 to the same period in 2002. Commissions and amortization of deferred policy acquisition costs decreased 43% in the first quarter of 2003 compared to the same period in 2002. The most significant factor in the decrease is attributable to the Company paying fewer commissions, since the Company writes very little new business and renewal premiums on existing business continue to decline. Another factor of the decrease is attributable to normal amortization of the deferred policy acquisition costs asset. The Company reviews the recoverability of the asset based on current trends and known events compared to the assumptions used in the establishment of the original asset. No impairments were recorded in the two periods reported. Operating expenses decreased 24% in the first quarter of 2003 compared to the same period in 2002. Expense reductions have been made in the normal course of business, as the Company simplifies its organizational structure and continually monitors expenditures looking for savings opportunities. Subsequent to the reporting period, on April 25, 2003 the Company entered into an agreement with Fiserv for the conversion of the two TPA client companies to the "ID3" system. The conversion will begin in May 2003 and is expected to be completed by February 2004. The conversion will be performed utilizing Company personnel with onsite training and guidance provided by Fiserv. The conversion is expected to cost approximately $600,000. Interest expense decreased 43% in the first quarter of 2003 compared to the same period in 2002. The Company has used dividend payments from its life insurance subsidiary UG to reduce long term debt outstanding from $4,223,471 at March 31, 2002 to $2,289,776 at March 31, 2003. All remaining debt was incurred in April 2001 to facilitate the repurchase of common stock owned primarily by James E. Melville and Larry E. Ryherd, two former officers and directors of UTG, and members of their respective families. The notes bear interest at the fixed rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal annual installments. In January 2003 the balance of an advance principal payment in the amount of $705,499 was made on these notes. The future collective scheduled principal reductions on these notes are due as follows: $763,259 on April 1, 2004, $763,259 on April 1, 2005 and $763,258 due on April 1, 2006. Management believes overall sources available are adequate to service this debt. These sources are include current cash balances of UTG, and expected future dividends from its life insurance subsidiary UG. (c) Net income The Company had a net loss of $(494,124) in the first quarter of 2003 compared to net income of $477,034 for the same period in 2002. Total revenues decreased approximately $745,000, which was primarily attributable to a 17% decrease in investment income and a 9% decrease in premium revenues. Income tax expense increased approximately $180,000, which was primarily attributable to a shift in the Company's deferred tax liability. Partially offsetting the above decreases to net income, the minority interest liability of approximately $106,000 held at March 31, 2002, was retired with the merger of First Commonwealth Corporation (a then 82% owned subsidiary of UTG) with and into UTG on June 12, 2002. Financial Condition The financial condition of the Company has retreated slightly since December 31, 2002. Total shareholders' equity decreased approximately $1,181,000 as of March 31, 2003 compared to December 31, 2002. The decrease was mainly attributable to a net loss of $494,124, the purchase of treasury shares and retirement of common stock in the amount $297,535, and unrealized losses of $389,041 on investments held for sale. Investments represent approximately 74% and 71% of total assets at March 31, 2003 and December 31, 2002, respectively. Accordingly, investments are the largest asset group of the Company. The Company's insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make, and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, the majority of the Company's investment portfolio is invested in high quality low risk investments. As of March 31, 2003, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. The Company has identified securities it may sell and classified them as "investments held for sale". Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired since 2000 as available for sale. Liquidity and Capital Resources The Company has three principal needs for cash - the insurance companies' contractual obligations to policyholders, the payment of operating expenses and the servicing of its long-term debt. Cash and cash equivalents as a percentage of total assets were approximately 5% and 8% as of March 31, 2003, and December 31, 2002, respectively. Fixed maturities as a percentage of total invested assets were approximately 74% as of March 31, 2003 and December 31, 2002. Future policy benefits are primarily long-term in nature and therefore, the Company's investments are predominantly in fixed maturity investments such as bonds and mortgage loans which provide sufficient return to cover these obligations. The Company has the ability and intent to hold these investments to maturity; consequently, the Company's investment in fixed maturities held to maturity is reported in the financial statements at their amortized cost. Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds. With respect to such products, surrender charges are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. Cash provided by (used in) operating activities was $849,689 and $(137,193) for the periods ending March 31, 2003 and March 31, 2002, respectively. The net cash provided by operating activities plus net policyholder contract deposits after the payment of policyholder withdrawals equaled $1,799,979 for the first quarter of 2003 and $342,085 for the same period in 2002. Management utilizes this measurement of cash flows as an indicator of the performance of the Company's insurance operations, since reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. Cash used in investing activities was $8,217,689 and $423,705, for the periods ending March 31, 2003 and March 31, 2002, respectively. The most significant aspect of cash used in investing activities are the fixed maturity transactions. Fixed maturities account for 80% and 77% of the total cost of investments acquired in the first quarter of 2003 and for the same period in 2002, respectively. Net cash provided by (used in) financing activities was $(52,744) and $3,414 for the periods ending March 31, 2003 and March 31, 2002, respectively. Policyholder contract deposits decreased 3% for the first quarter of 2003 compared to the same period in 2002. Policyholder contract withdrawals decreased 25% for the first quarter of 2003 compared to the same period in 2002. In addition, as of March 31, 2002, the Company had purchased $58,735 in treasury stock under the stock repurchase program and retired $238,800 in common stock from a former employee of the Company, originally issued under the employee and director stock purchase program. At March 31, 2003, the Company had a total of $2,289,776 in long-term debt outstanding. All remaining debt is owed to two former officers and directors of the Company and their respective families as a result of an April 2001 stock purchase transaction. These notes bear interest at the fixed rate of 7% per annum (paid quarterly), with remaining principal payments of $763,259 due annually in 2004 and 2005 and $763,258 due in 2006. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and payment of dividends from the Company's life subsidiary, UG. In January 2003, UTG paid the balance of an advance principal payment in the amount of $705,499 completing the remaining 2003 principal payment. UTG is a holding company that has no day-to-day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the company in good standing with states in which it does business, are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on management fees received from its subsidiaries and earnings received on cash balances. At March 31, 2003, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries. The Company's insurance subsidiaries have maintained adequate statutory capital and surplus and have not used surplus relief or financial reinsurance, which have come under scrutiny by many state insurance departments. The payment of cash dividends to shareholders is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UG is an Ohio domiciled insurance company, which requires five days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. At December 31, 2002 UG's total statutory capital and surplus amounted to $16,030,200. At December 31, 2002, UG had a statutory gain from operations of $2,062,744. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid an ordinary dividend of $600,000 to UTG in April 2003. Management believes the overall sources of liquidity available will be sufficient to satisfy the Company's financial obligations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk relates, broadly, to changes in the value of financial instruments that arise from adverse movements in interest rates, equity prices and foreign exchange rates. The Company is exposed principally to changes in interest rates which affect the market prices of its fixed maturities available for sale and its variable rate debt outstanding. The Company's exposure to equity prices and foreign currency exchange rates is immaterial. The information presented below is in U.S. dollars, the Company's reporting currency. Interest rate risk The Company could experience economic losses if it were required to liquidate fixed income securities available for sale during periods of rising and/or volatile interest rates. The Company attempts to mitigate its exposure to adverse interest rate movements through a staggering of the maturities of its fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Tabular presentation The following table provides information about the Company's long term debt that is sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The Company has no derivative financial instruments or interest rate swap contracts. In January 2003 the balance of an advance principal payment in the amount of $705,499 was made on these notes. - -------------------------------------------------------------------------------------------------- March 31, 2003 - -------------------------------------------------------------------------------------------------- Expected maturity date - -------------------------------------------------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter Total Fair value - ------------------ -------- -------- -------- -------- -------- ----------- ---------- ----------- Long term debt - ------------------ -------- -------- -------- -------- -------- ----------- ---------- ----------- Fixed rate 0 763,259 763,259 763,258 0 0 2,289,776 2,406,156 - ------------------ -------- -------- -------- -------- -------- ----------- ---------- ----------- Avg. int. rate 0 7.0% 7.0% 7.0% 0 0 7.0% 0 - ------------------ -------- -------- -------- -------- -------- ----------- ---------- ----------- Variable rate 0 0 0 0 0 0 0 0 - ------------------ -------- -------- -------- -------- -------- ----------- ---------- ----------- Avg. int. rate 0 0 0 0 0 0 0 0 - ------------------ -------- -------- -------- -------- -------- ----------- ---------- ----------- ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the filing date of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management, including the President and Chief Executive Officer (the "CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company's periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. NONE ITEM 2. CHANGE IN SECURITIES. NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE ITEM 5. OTHER INFORMATION. NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description 99.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to 18 U.S.C. Section 1350 99.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to 18 U.S.C. Section 1350 99.3 United Trust Group Whistle Blower Policy (b) Reports on Form 8-K No reports on Form 8-K were filed by UTG during the quarterly period ended March 31, 2003. SIGNATURES Pursuant to the requirements 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. UNITED TRUST GROUP, INC. (Registrant) Date: May 13, 2003 By /s/ Randall L. Attkisson Randall L. Attkisson President, Chief Operating Officer and Director Date: May 13, 2003 By /s/ Theodore C. Miller Theodore C. Miller Senior Vice President and Chief Financial Officer CERTIFICATIONS I, Jesse T. Correll, Chairman of the Board and Chief Executive Officer of United Trust Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, United Trust Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 By /s/ Jesse T. Correll Chairman of the Board and Chief Executive Officer CERTIFICATIONS I, Theodore C. Miller, Senior Vice President, Corporate Secretary and Chief Financial Officer of United Trust Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, United Trust Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 By /s/ Theodore C. Miller Senior Vice President, Corporate Secretary and Chief Financial Officer EXHIBIT INDEX Exhibit Number Description 99.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to 18 U.S.C. Section 1350 99.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to 18 U.S.C. Section 1350 99.3 United Trust Group Whistle Blower Policy