UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 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, 2005, was 3,953,486. 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, 2005 and December 31, 2004....3 Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004...............................................4 Consolidated Statement of Changes in Shareholders' Equity for the three months ended March 31, 2005......................................5 Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004...............................................6 Notes to Consolidated Financial Statements................................7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........15 ITEM 4. CONTROLS AND PROCEDURES...........................................16 PART II. OTHER INFORMATION..................................................17 ITEM 1. LEGAL PROCEEDINGS.................................................17 ITEM 2. CHANGE IN SECURITIES..............................................17 ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............17 ITEM 5. OTHER INFORMATION.................................................17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................17 SIGNATURES....................................................................18 EXHIBIT INDEX.................................................................20 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) - --------------------------------------------------------------------------------------------------------------------------------- March 31, December 31, ASSETS 2005 2004* ------------------- ------------------- Investments: Fixed maturities at amortized cost (market $10,508,714 and $12,097,708) $ 10,481,093 $ 11,973,415 Investments held for sale: Fixed maturities, at market (cost $140,434,800 and $147,217,453) 139,179,791 148,193,887 Equity securities, at market (cost $15,216,214 and $15,216,214) 25,910,996 24,399,172 Mortgage loans on real estate at amortized cost 27,039,487 20,722,415 Investment real estate, at cost, net of accumulated depreciation 28,170,465 28,192,081 Policy loans 12,743,446 12,844,748 Short-term investments 39,132 39,489 ------------------- ------------------- 243,564,410 246,365,207 Cash and cash equivalents 8,040,924 11,859,472 Securities of affiliate 4,000,000 4,000,000 Accrued investment income 1,770,269 1,678,393 Reinsurance receivables: Future policy benefits 32,269,999 32,422,529 Policy claims and other benefits 3,931,167 3,959,569 Cost of insurance acquired 12,281,969 12,747,532 Deferred policy acquisition costs 1,610,789 1,685,263 Property and equipment, net of accumulated depreciation 2,120,554 2,172,636 Income taxes receivable, current 230,310 181,683 Other assets 3,663,828 795,800 ------------------- ------------------- Total assets $ 313,484,219 $ 317,868,084 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 235,763,374 $ 235,592,973 Policy claims and benefits payable 1,939,294 1,879,566 Other policyholder funds 1,341,992 1,323,668 Dividend and endowment accumulations 12,528,016 12,526,390 Deferred income taxes 8,261,263 8,561,010 Other liabilities 4,140,308 7,405,434 ------------------- ------------------- Total liabilities 263,974,247 267,289,041 ------------------- ------------------- Minority interests in consolidated subsidiaries 6,133,499 6,127,938 ------------------- ------------------- Shareholders' equity: Common stock - no par value, stated value $.02 per share Authorized 7,000,000 shares - 3,955,002 and 3,965,533 shares issued after deducting treasury shares of 238,160 and 227,709 79,106 79,315 Additional paid-in capital 42,530,719 42,590,820 Retained earnings (5,444,140) (4,897,572) Accumulated other comprehensive income 6,210,788 6,678,542 ------------------- ------------------- Total shareholders' equity 43,376,473 44,451,105 ------------------- ------------------- Total liabilities and shareholders' equity $ 313,484,219 $ 317,868,084 =================== =================== * Balance sheet audited at December 31, 2004. See accompanying notes. UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) - -------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, March 31, 2005 2004 ----------------- ----------------- Revenues: Premiums and policy fees $ 4,204,960 $ 4,620,958 Reinsurance premiums and policy fees (692,265) (746,813) Net investment income 2,433,259 1,831,077 Realized investment losses, net (18,058) (92,135) Other income 268,837 220,260 ----------------- ----------------- 6,196,733 5,833,347 Benefits and other expenses: Benefits, claims and settlement expenses: Life 4,870,047 4,873,078 Reinsurance benefits and claims (304,296) (266,963) Annuity 250,068 280,695 Dividends to policyholders 276,007 285,232 Commissions and amortization of deferred policy acquisition costs 17,371 25,416 Amortization of cost of insurance acquired 465,563 467,868 Operating expenses 1,256,884 1,397,448 Interest expense 13 25,634 ----------------- ----------------- 6,831,657 7,088,408 Loss before income taxes, minority interest and equity in earnings of investees (634,924) (1,255,061) Income tax credit 93,903 121,508 Minority interest in income of consolidated subsidiaries (5,547) 259,358 ----------------- ----------------- Net loss $ (546,568)$ (874,195) ================= ================= Basic loss per share from continuing operations and net loss $ (0.14)$ (0.22) ================= ================= Diluted loss per share from continuing operations and net loss $ (0.14)$ (0.22) ================= ================= Basic weighted average shares outstanding 3,955,082 3,999,331 ================= ================= Diluted weighted average shares outstanding 3,955,082 3,999,331 ================= ================= See accompanying notes. UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity For the three months ended March 31, 2005 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ Common stock Balance, beginning of year $ 79,315 Issued during year 0 Retired common shares 0 Purchase treasury shares (209) ------------------ Balance, end of period 79,106 ------------------ Additional paid-in capital Balance, beginning of year 42,590,820 Issued during year 0 Retired common shares 0 Purchase treasury shares (60,101) ------------------ Balance, end of period 42,530,719 ------------------ Retained earnings Balance, beginning of year (4,897,572) Net loss (546,568) $ (546,568) ------------------ ------------------ Balance, end of period (5,444,140) ------------------ Accumulated other comprehensive income Balance, beginning of year 6,678,542 Other comprehensive income Unrealized holding losses on securities net of reclassification adjustment (467,754) (467,754) ------------------ ------------------ Comprehensive loss $ (1,014,322) ================== Balance, end of period 6,210,788 ------------------ Total shareholders' equity, end of period $ 43,376,473 ================== See accompanying notes. UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, March 31, 2005 2004 ---------------- ---------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net loss $ (546,568) $ (874,195) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization/accretion of fixed maturities 144,387 154,891 Realized investment losses 17,589 93,170 Policy acquisition costs deferred (7,000) (24,000) Amortization of deferred policy acquisition costs 81,474 77,345 Amortization of cost of insurance acquired 465,563 467,868 Depreciation 515,885 242,616 Minority interest 5,561 259,358 Change in accrued investment income (91,876) 378,305 Change in reinsurance receivables 180,932 598,490 Change in policy liabilities and accruals 519,575 (165,425) Charges for mortality and administration of universal life and annuity products (2,312,073) (2,389,691) Interest credited to account balances 1,355,719 1,367,913 Change in income taxes payable (97,919) (123,221) Change in other assets and liabilities, net (8,466) (547,302) ---------------- ---------------- Net cash provided by (used in) operating activities 222,783 (483,878) Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 7,472,038 47,326,595 Fixed maturities matured 1,452,531 4,508,407 Mortgage loans 1,158,446 3,227,427 Policy loans 1,093,521 838,683 Short-term 357 0 ---------------- ---------------- Total proceeds from investments sold and matured 11,176,893 55,901,112 Cost of investments acquired: Fixed maturities held for sale (6,964,849) (4,497,188) Equity securities 0 (3,233,053) Mortgage loans (7,445,518) (916,737) Real estate (428,586) (1,216,287) Policy loans (992,219) (539,869) Short-term 0 (1,137) ---------------- ---------------- Total cost of investments acquired (15,831,172) (10,404,271) Purchase of property and equipment (13,600) (4,382) ---------------- ---------------- Net cash provided by (used in) investing activities (4,667,879) 45,492,459 Cash flows from financing activities: Policyholder contract deposits 2,405,966 2,564,851 Policyholder contract withdrawals (1,719,108) (1,984,799) Proceeds from line of credit 0 2,275,000 Purchase of treasury stock (60,310) (31,869) Payments of principal on notes payable 0 (2,289,776) ---------------- ---------------- Net cash provided by financing activities 626,548 533,407 ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (3,818,548) 45,541,988 Cash and cash equivalents at beginning of period 11,859,472 8,749,727 ---------------- ---------------- Cash and cash equivalents at end of period $ 8,040,924 $ 54,291,715 ================ ================ 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, 2004. 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 in the State of 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, 2005 Mr. Correll owns or controls directly and indirectly approximately 66% of UTG's outstanding stock. At March 31, 2005, consolidated subsidiaries of United Trust Group, Inc. were as depicted on the following organizational chart.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued 2. INVESTMENTS As of March 31, 2005 and December 31, 2004, fixed maturities and fixed maturities held for sale represented 61% and 65%, respectively, 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, 2005, 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, 2005 and December 31, 2004, the Company had no long-term debt outstanding. 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 LOC was for a one-year term from the date of issue. Upon maturity the Company has renewed the LOC for additional one-year terms. 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, 2005, 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 Southwest Bank of St. Louis. The LOC expired one-year term from the date of issue and has been renewed for additional terms. As collateral for any draws under the line of credit, UTG pledged 100% of the common stock of its insurance subsidiary, UG. Borrowings under the LOC bear interest at the rate of .25% in excess of Southwest Bank of St. Louis' prime rate. At March 31, 2005, the Company had no outstanding borrowings attributable to this LOC. 4. CAPITAL STOCK TRANSACTIONS A. Employee and Director Stock Purchase Program On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the United Trust Group, Inc. Employee and Director Stock Purchase Plan. The plan's purpose is to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiaries by providing them with an opportunity to invest in shares of UTG common stock. The plan is administered by the Board of Directors of UTG. A total of 400,000 shares of common stock may be purchased under the plan, subject to appropriate adjustment for stock dividends, stock splits or similar recapitalizations resulting in a change in shares of UTG. The plan is not intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. During 2004 and 2003, the Board of Directors of UTG approved offerings under the plan to qualified individuals. For the years ended December 31, 2004 and 2003, four individuals purchased 14,440 and eight individuals purchased 58,891 shares of UTG common stock, respectively. Each participant under the plan executed a "stock restriction and buy-sell agreement", which among other things provides UTG with a right of first refusal on any future sales of the shares acquired by the participant under this plan. The purchase price of shares repurchased under the stock restriction and buy-sell agreement shall be computed, on a per share basis, equal to the sum of (i) the original purchase price paid to acquire such shares from UTG and (ii) the consolidated statutory net earnings (loss) per share of such shares during the period from the end of the month next preceding the month in which such shares were acquired pursuant to the plan, to the end of the month next preceding the month in which the sale of such shares to UTG occurs. At March 31, 2005, UTG had 89,877 shares outstanding that were issued under this program with a value of $ 11.64 per share pursuant to the above formula. B. Stock Repurchase Program On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $ 1 million of UTG's common stock. On June 16, 2004, an additional $ 1 million was authorized for repurchasing shares. Repurchased shares are available for future issuance for general corporate purposes. Through April 30, 2005, UTG has spent $ 1,201,963 in the acquisition of 184,589 shares under this program. C. 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, 2005, diluted earnings per share were the same as basic earnings per share since the UTG had no dilutive instruments outstanding. 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. On June 10, 2002 UTG and Fiserv formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Fiserv will be responsible for the marketing and sales function for the alliance, as well as providing the operations processing service for the Company. The Company will staff the administration effort. To facilitate the alliance, the Company plans to convert its existing business and TPA clients to "ID3", a software system owned by Fiserv to administer an array of life, health and annuity products in the insurance industry. Fiserv 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. The Company began the conversion of its existing insurance business to the "ID3" software system in February 2004. Also as part of this alliance, a liability exists which is contingent on the completion of future TPA arrangements. The balance remaining of this contingent liability was $ 115,000 on March 31, 2005. Also during June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the "ID3" software system. Under the contract, the Company is required to pay a minimum of $ 12,000 per month in software maintenance costs and $ 5,000 per month in offsite data center costs for a five-year period from the date of the signing. In the normal course of business the Company is involved from time to time in various legal actions and other state and federal proceedings. There were no proceedings pending or threatened as of March 31, 2005. 6. OTHER CASH FLOW DISCLOSURE On a cash basis, the Company paid $ 13 and $ 25,634 in interest expense during the first three months of 2005 and 2004, respectively. The Company paid no federal income tax during the first three months of 2005 and 2004, respectively. 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 UTG, and its largest shareholder, Chairman and CEO, Jesse Correll. The Company holds approximately $ 6,500 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, 2005 Amount or Benefit Amount ---------------------------------------------- ---------------- ----------------- --------------- Unrealized holding losses during period $ (691,841) $ 242,145 $ (449,696) Less: reclassification adjustment for losses realized in net income 27,782 (9,724) 18,058 ---------------- ----------------- --------------- Net unrealized losses (719,623) 251,869 (467,754) ---------------- ----------------- --------------- Other comprehensive loss $ (719,623) $ 251,869 $ (467,754) ================ ================= =============== 9. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has not issued any new pronouncements during the first quarter of 2005. 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, 2005. 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. Update on Critical Accounting Policies In our Form 10-K for the year ended December 31, 2004, we identified the accounting policies that are critical to the understanding of our results of operations and our financial position. They relate to deferred acquisition costs (DAC), cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for investments that are not actively traded. We believe that these policies were applied in a consistent manner during the first three months of 2005. Results of Operations (a) Revenues The Company experienced a nominal decrease in premiums and policy fee revenues, net of reinsurance premiums and policy fees, when comparing the first three months of 2005 to the same period in 2004. 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. The Company's primary source of new business production comes from the conservation effort implemented several years ago. This effort was an attempt to improve the persistency rate of insurance company's policies. Several of the customer service representatives of the Company are also licensed insurance agents, allowing them to offer other products within the Company's portfolio to existing customers. Additionally, stronger efforts have been made in policy retention through more personal contact with the customer including telephone calls to discuss alternatives and reasons for a customer's request to surrender their policy. Previously, the Company's agency force was primarily responsible for conservation efforts. With the decline in the number of agents, their ability to reach these customers diminished, making conservation efforts difficult. The conservation efforts described above have been generally positive. Management will continue to monitor these efforts and make adjustments as seen appropriate to enhance the future success of the program. In 2003, the Company replaced its original universal life product with a new universal life contract referred to as "the Legacy". This product was designed for use with several distribution channels including the Company's own internal agents, bank agent/employees and through personally producing general agents "PPGA". In addition, the Company has introduced other new and updated products in recent periods including the Horizon Annuity and Kid Kare (as single premium, child term policy). The company is currently working on development of a level term and decreasing term product. Management has no current plans to increase marketing efforts. New product development is anticipated to be utilized in conservation efforts and sales to existing customers. Such sales are not expected to be material. The Company has considered the feasibility of a marketing opportunity with First Southern National Bank (FSNB) an affiliate of UTG's largest shareholder, Chairman and CEO, Mr. 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. This potential is in the very early states of consideration. Management will proceed cautiously and may even determine not to proceed. The introduction of new products is not expected to produce significant premium writings. The Company is currently looking at other types of products to compliment the existing offerings. Net investment income increased 33% when comparing the first three months of 2005 to the same period in 2004. There are two primary factors that are driving the overall change in investment income from 2004 to 2005. The first factor is the decrease in the bond income. Gross investment income from bonds actually decreased approximately 11% from 2004 to 2005. Although there has been no significant change in the national prime rate during the last year, the decline in the interest rate environment has resulted in lower earnings on short-term funds as well as on longer-term investments acquired. Management has shortened the length of the Company's portfolio and maintained a conservative investment philosophy. As such, following an analysis of current holdings during the first quarter of 2004, the Company liquidated approximately $ 38,212,000 of its collateralized mortgage obligation bond portfolio in order to limit its interest rate and extension risk. In addition, there were $ 12,420,000 in bonds that matured or were called during the first three months of 2004. The result of these transactions was an excess of cash invested in short-term money market funds. The Company began reinvesting this cash during the second quarter of 2004 primarily in governmental and agency bonds at current lower yields. Although this hurt investment earnings in the short run, the Company did not have to write off any investment losses due to excessive risk. More significant than the change in bond income was the performance of the Company's real estate investments during the first quarter of 2005 compared to 2004. Net income from the Company's primary real estate holding improved more than $ 400,000 in comparing the first quarter of 2005 to 2004. The improvement in real estate investment income is principally due to a higher occupancy rate in Hampshire Plaza. 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%. The Company has lowered all rate-adjustable products to their guaranteed minimums. The guaranteed minimum crediting rates on these products range from 3% to 5.5%. 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 realized investment losses of $ 18,058 in the first three months of 2005 compared to net realized investment losses of $ 92,135 for the same period in 2004. The net realized losses are primarily comprised of net realized losses from the disposal of fixed maturity securities. On April 15, 2005, UG completed an agreement for the sale of 2,216,776 shares of common stock owned of BNL Financial Corporation ("BNL"). These shares represented approximately 10.57% of the current outstanding shares of BNL and represent all shares owned by UG. The shares were reacquired by the issuing entity for an agreed upon sales price of $ 2,300,000. The Company will recognize a realized gain, net of taxes, of approximately $ 1,268,750, or $ 0.32 per common share outstanding during the second quarter. Other income increased 22% when comparing the first three months of 2005 to the same period in 2004. The majority of the revenue in this line item comes from the Company performing administrative work as a third party administrator ("TPA") for unaffiliated life insurance companies, 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 three months of 2005 and 2004, the Company received $ 215,448 and $ 138,140 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 through its alliance with Fiserv Life Insurance Solutions (Fiserv LIS), to provide TPA services to insurance companies seeking business process outsourcing solutions. Fiserv LIS is responsible for the marketing and sales function for the alliance, as well as providing the data center operations. UTG will staff the administration effort. Management believes this alliance with Fiserv LIS positions the Company to generate additional revenues by utilizing the Company's current excess capacity, administrative services, and implementation of the new Fiserv LIS "ID3" software system. In addition, due to ongoing regulatory changes and the fact the Company is repositioning itself for future growth; the Company believes implementation of the "ID3" software system is critical in order to proceed in the Company's new direction of TPA 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, decreased less than 1% in the first three months of 2005 compared to the same period in 2004. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management. Overall, reserves continue to increase on in-force policies as the age of the insured increases. Commissions and amortization of deferred policy acquisition costs decreased 32% for the first three months of 2005 compared to the same period in 2004. 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. Commissions paid will continue to decline as terminated agents discontinue their association with the Company. Depending upon the nature of the contract that the agent has with the Company, the agent may become vested; a process which allows them to continue to receive commissions for a certain period even after the agent has discontinued his association with the Company. Over time, fewer and fewer agents have remained vested, further reducing the commissions payable by the Company. 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 either of the periods reported. Operating expenses decreased 10% in the first three months of 2005 compared to the same period in 2004. Expenses decreased due to expenses incurred in the normal course of business. The Company continues to simplify its organizational structure and monitor expenditures looking for savings opportunities. Interest expense decreased 100% in the first three months of 2005 compared to the same period in 2004. The Company repaid all outside debt in 2004, through operating cash flows and dividends received from its subsidiary UG. At March 31, 2005, UTG had no debt outstanding. (c) Net income The Company had a net loss of $ (546,568) in the first three months of 2005 compared to a net loss of $ (874,195) for the same period in 2004. The net loss in 2005 was mainly attributable to the decrease in income from subsidiaries. Financial Condition Total shareholders' equity decreased approximately $ 1,075,000 as of March 31, 2005 compared to December 31, 2004. The decrease is attributable to a decline in market value of the debt investments of $ 473,000, net of deferred taxes, that was included in the accumulated other comprehensive income. In addition, the Company purchased treasury shares and retired common stock in the amount of $ 60,310, which also decreased shareholders' equity. Investments represent approximately 78% of total assets at March 31, 2005 and December 31, 2004, 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, 2005, 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 two principal needs for cash - the insurance companies' contractual obligations to policyholders and the payment of operating expenses. Cash and cash equivalents as a percentage of total assets were approximately 3% and 4% as of March 31, 2005, and December 31, 2004, respectively. Fixed maturities as a percentage of total assets were approximately 48% and 50% as of March 31, 2005 and December 31, 2004, respectively. Future policy benefits are primarily long-term in nature and therefore, the Company's investments are predominantly in long-term 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. Net cash (used in) provided by operating activities was $ 222,783 and $ (483,878) for the three months ending March 31, 2005 and 2004, respectively. The net cash provided by operating activities plus net policyholder contract deposits after the payment of policyholder withdrawals equaled $ 909,641 for the first three months of 2005 and $ 96,174 the same period in 2004. 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. Net cash provided by (used in) investing activities was $ (4,667,879) and $ 45,492,459 for the three-month periods ending March 31, 2005 and 2004, respectively. The most significant aspect of cash provided by (used in) investing activities is the fixed maturity transactions. Fixed maturities of $ 8,924,569 and $ 51,835,002 were either sold or matured in the first three months of 2005 and 2004, respectively. In addition, the Company purchased $ 6,964,849 and $ 4,497,188 of fixed maturities in 2005 and 2004, respectively. Net cash provided by (used in) financing activities was $ 626,548 and $ 533,407 for the three month periods ending March 31, 2005 and 2004, respectively. Policyholder contract deposits decreased 6% in the first three months of 2005 compared to the same period in 2004. Policyholder contract withdrawals also decreased 13% in the first three months of 2005 compared to the same period in 2004. At March 31, 2005, the Company had no short-term debt outstanding, compared to $ 2,275,000 outstanding at March 31, 2004. 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, 2004, 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, 2004, UG's total statutory capital and surplus amounted to $ 21,860,401. At December 31, 2004, UG had a statutory loss from operations of $ 762,152. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. Management believes the overall sources of liquidity available will be sufficient to satisfy the Company's financial obligations. Regulatory Environment In March 2005, UTG's Board of Directors adopted a proposal to change the state of incorporation of UTG from Illinois to Delaware by merging UTG with and into a wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of Directors and management of UTG believe that reincorporation in Delaware would be beneficial to the Company because Delaware corporate law is more comprehensive, widely used and extensively interpreted than other state corporate laws, including Illinois corporate law. The reincorporation merger would effect only a change in UTG's legal domicile and certain other changes of a legal nature. It would not result in any change in UTG's business, management, fiscal year, assets or liabilities or location of its principal facilities. The Board of Directors intends to submit the reincorporation proposal to its shareholders for approval at the 2005 annual meeting of shareholders to be held on June 15, 2005. If approved by shareholders, UTG expects that the reincorporation merger would be effected as soon as reasonably practicable following the annual meeting. Accounting Developments The Financial Accounting Standards Board ("FASB") has not issued any new pronouncements during the first quarter of 2005. 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's exposure to interest rate changes results from a significant holding of fixed maturity investments and mortgage loans on real estate, all of which comprised approximately 73% of the investment portfolio as of March 31, 2005. These investments are mainly exposed to changes in treasury rates. The fixed maturities investments include U.S. government bonds, securities issued by government agencies, mortgage-backed bonds and corporate bonds. Approximately 80% of the fixed maturities we owned at March 31, 2005 are instruments of the United States government or are backed by U.S. government agencies or private corporations carrying the implied full faith and credit backing of the U.S. government. To manage interest rate risk, the Company performs periodic projections of asset and liability cash flows to evaluate the potential sensitivity of the investments and liabilities. Management assesses interest rate sensitivity with respect to the available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward 100-basis point shifts in the prevailing interest rates. The following tables set forth the potential amount of unrealized gains (losses) that could be caused by 100-basis point upward and downward shifts on the available-for-sale fixed maturities investments as of March 31, 2005: Decreases in Interest Rates Increases in Interest Rates 200 Basis 100 Basis 100 Basis 200 Basis 300 Basis Points Points Points Points Points ----------------------- ------------------ ----------------- ---------------------- ----------------------- $ 6,261,000 $ 3,756,000 $ (7,813,000) $ (13,981,000) $ (19,785,000) ----------------------- ------------------ ----------------- ---------------------- ----------------------- While the test scenario is for illustrative purposes only and does not reflect our expectations regarding future interest rates or the performance of fixed-income markets, it is a near-term change that illustrates the potential impact of such events. Due to the composition of the Company's book of insurance business, management believes it is unlikely that the Company would encounter large surrender activity due an interest rate increase that would force the disposal of fixed maturities at a loss. There are no fixed maturities or other investment that management classifies as trading instruments. At March 31, 2005 and December 31, 2004, there were no investments in derivative instruments. The Company currently has no debt outstanding. 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. In March 2005, UTG's Board of Directors adopted a proposal to change the state of incorporation of UTG from Illinois to Delaware by merging UTG with and into a wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of Directors and management of UTG believe that reincorporation in Delaware would be beneficial to the Company because Delaware corporate law is more comprehensive, widely used and extensively interpreted than other state corporate laws, including Illinois corporate law. The reincorporation merger would effect only a change in UTG's legal domicile and certain other changes of a legal nature. It would not result in any change in UTG's business, management, fiscal year, assets or liabilities or location of its principal facilities. The Board of Directors intends to submit the reincorporation proposal to its shareholders for approval at the 2005 annual meeting of shareholders to be held on June 15, 2005. If approved by shareholders, UTG expects that the reincorporation merger would be effected as soon as reasonably practicable following the annual meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10. Exhibits Exhibit Number Description 31.1 Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302 31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 32.1 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 32.2 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 11. REPORTS ON FORM 8-K On March 21, 2005, UTG filed a report on Form 8-K regarding Item 1.01 Entry into a Material Definitive Agreement. The information reported in the 8-K discussed the agreement for the sale of 2,216,776 shares of common stock owned of BNL Financial Corporation. 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 12, 2005 By /s/ Randall L. Attkisson Randall L. Attkisson President, Chief Operating Officer and Director Date: May 12, 2005 By /s/ Theodore C. Miller Theodore C. Miller Senior Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit Number Description 31.1 Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302 31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 32.1 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 32.2 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