SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997
Commission File No. 0-5392
FIRST COMMONWEALTH CORPORATION
(Exact Name of Registrant as specified in its Charter)
5250 South Sixth Street
P.O. Box 5147
Springfield, IL 62705
(Address of principal executive offices, including zip code)
Virginia 54-0832816
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
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
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at April 30, 1997:
23,967,885
Class A common, par value $1 per share.<PAGE>
<PAGE>
FIRST COMMONWEALTH CORPORATION
(the "Company")
INDEX
Part I: Financial Information
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 5
Notes to Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II: Other Information
Item 5. Other Information 15
Item 6. Exhibits 15
Signatures 16
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
March 31, December 31,
ASSETS 1997 1996
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $181,564,148 and $181,815,225) $ 182,375,765 $ 179,535,861
Investments held for sale:
Fixed maturities, at market
(cost $1,984,661 and $1,984,661) 1,950,874 1,961,166
Equity securities at market
(cost $2,086,159 and $2,086,159) 1,786,301 1,794,405
Mortgage loans on real estate at amortized cost 10,483,654 11,022,792
Investment real estate, at cost,
net of accumulated depreciation 10,293,907 10,268,490
Real estate acquired in satisfaction
of debt, at cost 3,846,946 3,846,946
Policy loans 14,214,256 14,438,120
Short term investments 400,000 400,000
225,351,703 223,267,780
Cash and cash equivalents 15,114,549 16,801,288
Investment in parent 350,000 350,000
Accrued investment income 3,871,152 3,424,546
Reinsurance receivables:
Future policy benefits 38,612,664 38,745,093
Policy claims and other benefits 3,614,387 3,856,124
Other accounts and notes receivable 861,106 894,321
Deferred policy acquisition costs 17,665,697 18,162,356
Cost of insurance acquired 19,703,237 19,886,494
Cost in excess of net assets purchased,
net of accumulated amortization 9,513,219 9,624,135
Other assets 2,083,019 1,626,987
Total assets $ 336,740,733 $ 336,639,124
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 254,322,393 $ 252,718,388
Policy claims and benefits payable 2,377,785 3,193,806
Other policyholder funds 2,822,880 2,784,967
Dividend and endowment accumulations 14,028,423 13,647,676
Income taxes payable:
Current 3,750 60,044
Deferred 2,526,300 3,043,775
Notes payable 18,999,853 18,999,853
Indebtedness to (from) affiliates, net (75,139) 36,933
Other liabilities 4,903,405 5,088,785
Total liabilities 299,909,650 299,574,227
Minority interests in consolidated subsidiaries 1,560,354 1,586,246
Shareholders' Equity:
Common stock - $1 par value per share. Authorized
25,000,000 shares - 23,967,885 and 23,967,885
shares issued after deducting treasury shares
of 372,166 and 372,166 23,967,749 23,967,749
Additional paid-in capital 28,498,361 28,498,361
Unrealized depreciation of investments
held for sale (320,362) (305,715)
Accumulated deficit (16,875,019) (16,681,744)
Total shareholders' equity 35,270,729 35,478,651
Total liabilities and
shareholders' equity $ 336,740,733 $ 336,639,124
</TABLE>
See accompanying notes.
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<PAGE>
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
March 31, March 31,
1997 1996
<S> <C> <C>
Revenues:
Premium income $ 8,168,038 $ 8,928,482
Reinsurance premium (1,096,128) (1,290,979)
Other considerations 904,358 885,499
Other considerations paid to reinsurers (49,882) (41,491)
Net investment income 3,859,617 3,982,268
Realized investment gains and (losses), net (4,928) 20,133
Other income 1,753 70,707
11,782,828 12,554,619
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 6,514,158 5,760,655
Reinsurance benefits and claims (55,555) (239,878)
Annuity 356,254 411,155
Dividends to policyholders 1,127,502 1,209,303
Commissions and amortization of deferred policy
acquisition costs 1,366,410 1,493,850
Amortization of cost of insurance acquired 244,319 448,927
Operating expenses 2,556,656 3,281,560
Interest expense 405,315 439,543
12,515,059 12,805,115
Loss before income taxes
and minority interest (732,231) (250,496)
Credit (provision) for income taxes 513,725 597,726
Minority interest in gain
of consolidated subsidiaries 25,231 (17,654)
Net income (loss) $ (193,275) $ 329,576
Net income (loss) per common share $ (0.01) $ 0.01
Weighted average common
shares outstanding 23,967,749 23,967,885
</TABLE>
See accompanying notes.
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<PAGE>
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
March 31, March 31,
1997 1996
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (193,275) $ 329,576
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
net of changes in assets and liabilities resulting
from the sales and purchases of subsidiaries:
Amortization/accretion of fixed maturities 156,927 239,098
Realized investment (gains) losses, net 4,928 (20,133)
Policy acquisition costs deferred (234,000) (509,000)
Amortization of deferred acquisition costs 703,659 773,843
Amortization of cost of insurance acquired 244,319 448,927
Amortization of costs in excess of net
assets purchased 110,916 111,666
Depreciation 103,757 123,489
Minority interest (25,231) 17,654
Change in accrued investment income (446,606) (391,337)
Change in reinsurance receivables 374,166 324,147
Change in policy liabilities and accruals 219,281 88,100
Charges for mortality and administration of
universal life and annuity products (2,632,738) (2,537,539)
Interest credited to account balances 1,840,372 1,724,414
Change in income taxes payable (573,769) (609,755)
Change in indebtedness (to) from
affiliates, net (112,072) (47,888)
Change in other assets and liabilities,
net (235,637) 636,716
Net cash provided by (used in) operating activities (695,003) 701,978
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale matured 0 134,283
Fixed maturities sold 0 0
Fixed maturities matured 953,856 11,242,187
Equity securities 0 8,990
Mortgage loans 539,138 386,844
Real estate 159,705 1,123,088
Policy loans 954,692 1,049,195
Short term 0 0
Total proceeds from investments sold and matured 2,607,391 13,810,304
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (3,947,561) (11,337,342)
Equity securities 0 0
Mortgage loans 0 (50,724)
Real estate (252,742) (208,574)
Policy loans (1,178,553) (1,035,474)
Short term 0 0
Total cost of investments acquired (5,378,856) (12,632,114)
Net cash provided by (used in)
investing activities (2,771,465) 1,178,190
Cash flows from financing activities:
Policyholder contract deposits 5,190,761 6,472,538
Policyholder contract withdrawals (3,411,032) (4,553,787)
Proceeds from notes payable 0 400,000
Payments of principal on notes payable 0 (1,501,492)
Net cash provided by (used in) financing activities 1,779,729 817,259
Net increase (decrease) in cash
and cash equivalents (1,686,739) 2,697,427
Cash and cash equivalents at beginning of period 16,801,288 11,979,637
Cash and cash equivalents at end of period $ 15,114,549 $ 14,677,064
</TABLE>
See accompanying notes
5
<PAGE>
FIRST COMMONWEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by First Commonwealth Corporation and its consolidated subsidiaries
(the "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, 1996.
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.
At March 31, 1997, the parent, significant subsidiaries and affiliates
of First Commonwealth Corporation were as depicted on the following
organizational chart.
6
<PAGE>
ORGANIZATIONAL CHART
AS OF MARCH 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI
owns 53% of United Trust Group ("UTG") and 30% of United Income, Inc.
("UII"). UII owns 47% of UTG. UTG owns 72% of First Commonwealth
Corporation ("FCC") and FCC owns 100% of Universal Guaranty Life
Insurance Company ("UG"). UG owns 100% of United Security Assurance
Company ("USA"). USA owns 84% of Appalachian Life Insurance Company
("APPL") and APPL owns 100% of Abraham Lincoln Insurance Company
("ABE").
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<PAGE>
2. FIXED MATURITIES
As of March 31, 1997, fixed maturities and fixed maturities held for
sale represented 82% 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
primarily in investment grade securities to provide ample protection
for policyholders. The Company does not invest in so-called "junk
bonds" or derivative investments. The liabilities of the insurance
companies are predominantly long term in nature and therefore, the
companies invest primarily in long term fixed maturity investments.
The Company has analyzed its fixed maturities portfolio and
reclassified those securities expected to be sold prior to maturity as
investments held for sale. The investments held for sale are carried
at market. Management has the intent and ability to hold its fixed
maturity portfolio to maturity and as such carries these securities at
amortized cost. As of March 31, 1997, 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.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $10,484,000 in mortgage loans and
$14,141,000 in real estate holdings, including real estate acquired in
satisfaction of debt, which represent 5% and 6% of total invested
assets of the Company, respectively. All mortgage loans held by the
Company are first position loans. The Company has $645,000 in
mortgage loans net of a $10,000 reserve allowance, which are in
default or in the process of foreclosure representing approximately 6%
of the total portfolio.
Letters are sent to each mortgagee when the loan becomes 30 days or
more delinquent. Loans 90 days or more delinquent are placed on a
non-performing status and classified as delinquent loans. Reserves
for loan losses on delinquent loans are established based on
management's analysis of the loan balances and what is believed to be
the realizable value of the property should foreclosure take place.
Loans are placed on a non-accrual status based on a quarterly case by
case analysis of the likelihood of repayment.
The following tables show the distribution of mortgage loans and real
estate by type.
MORTGAGE LOANS AMOUNT % OF TOTAL
FHA/VA $ 630,361 6%
Commercial $ 1,657,545 16%
Residential $ 8,195,748 78%
REAL ESTATE AMOUNT % OF TOTAL
Home Office $ 2,624,128 19%
Commercial $ 2,376,406 17%
Residential development $ 5,293,373 37%
Foreclosed real estate $ 3,846,946 27%
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<PAGE>
4. NOTES PAYABLE
At March 31, 1997, the Company has $19,000,000 in notes payable.
Notes payable is comprised of the following components:
Senior debt $ 8,400,000
Subordinated 10 yr. notes 5,370,000
Subordinated 20 yr. notes 3,830,000
Other notes payable 1,400,000
$ 19,500,000
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The refinanced debt bears interest at
a rate equal to the "base rate" plus nine-sixteenths of one percent.
The Base rate is defined as the floating daily, variable rate of
interest determined and announced by First of America Bank from time
to time as its "base lending rate." The base rate at issuance of the
loan was 8.25%, and has increased to 8.5% on March 25, 1997. Interest
is paid quarterly. Principal payments of $1,000,000 are due in May of
each year beginning in 1997, with a final payment due May 8, 2005. On
November 8, 1996, the Company prepaid $500,000 of the May 8, 1997
principal payment.
The credit agreement contains certain covenants with which the Company
must comply. These covenants contain provisions common to a loan of
this type and include such items as; a minimum consolidated net worth
of FCC to be no less than 400% of the outstanding balance of the debt;
Statutory capital and surplus of Universal Guaranty Life Insurance
Company be maintained at no less than $6,500,000; an earnings covenant
requiring the sum of the pre-tax earnings of Universal Guaranty Life
Insurance Company and its subsidiaries (based on Statutory Accounting
Practices) and the after-tax earnings plus non-cash charges of FCC
(based on parent only GAAP practices) shall not be less than two
hundred percent (200%) of the Company's interest expense on all of its
debt service. The Company is in compliance with all of the covenants
of the agreement and does not foresee any problem in maintaining
compliance in the future.
United Income, Inc. and First Fidelity Mortgage Company through an
assignment from United Trust, Inc. owned a participating interest of
$700,000 and $300,000 respectively of the previous senior debt. At
the date of refinance, these obligations were converted from
participations of senior debt to promissory notes. These notes bear
interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the
prime rate. Interest is payable quarterly with principal due at
maturity on May 8, 2006.
In February 1996, FCC borrowed $400,000 from affiliates to provide
additional cash for liquidity. The notes bear interest at the rate of
1% over prime as published in the Wall Street Journal, with interest
payments due quarterly and principal due upon maturity of the note on
June 1, 1999.
The subordinated debt was incurred June 16, 1992 as a part of an
acquisition. The 10 year notes bear interest at the rate of 7 1/2%
per annum, payable semi-annually beginning December 16, 1992. These
notes provide for principal payments equal to 1/20th of the principal
balance due with each interest installment beginning June 16, 1997,
with a final balloon payment due June 16, 2002. The 20 year notes
bear interest at the rate of 8 1/2% per annum, payable semi-annually
beginning December 16, 1992, with a lump sum principal payment due
June 16, 2012.
9
<PAGE>
Scheduled principal reductions on the Company's debt for the next five
years are as follows:
Year Amount
1997 $ 1,037,000
1998 1,537,000
1999 1,937,000
2000 1,537,000
2001 1,537,000
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.
Under 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. Those mandatory
assessments may be partially recovered through a reduction in future
premium taxes in some states. The Company does not believe such
assessments will be materially different from amounts already provided
for in the financial statements.
The Company and its subsidiaries are named as defendants in a number
of legal actions arising primarily from claims made under insurance
policies. Those actions have been considered in establishing the
Company's liabilities. Management and its legal counsel are 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. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF
UNITED TRUST, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group,
Inc. ("LaSalle"), whereby LaSalle was to acquire certain authorized
but unissued shares of UTI and UII and additional outstanding shares
in privately negotiated transactions so that LaSalle would own not
less than 51% of the outstanding common stock of UTI and indirectly
control 51% of UII.
LaSalle had not performed its obligations under the terms of the
contract, and the Company felt it should be free to negotiate with
other interested parties in becoming an equity partner.
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<PAGE>
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
financial condition, changes in financial condition and results of
operations which reflect the performance of the Company. The
information in the consolidated financial statements and related notes
should be read in conjunction with this section.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal
needs for cash - the insurance companies contractual obligations to
policyholders, the payment of operating expenses and servicing of its
long-term debt. Cash and cash equivalents as a percentage of total
assets were 4.5% and 5.0% as of March 31, 1997, and December 31, 1996,
respectively. Fixed maturities as a percentage of total invested
assets were 81% and 80% as of March 31, 1997 and December 31, 1996,
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 a sufficient return to cover these obligations. Most of the
insurance company assets, other than policy loans, are invested in
fixed maturities and other investments, substantially all of which are
readily marketable. Although there is no present need or intent to
dispose of such investments, the life companies could liquidate
portions of their investments if such a need arose. The Company has
the ability and intent to hold these investments to maturity;
consequently, the Company's investment in long term fixed maturities
are 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.
Consolidated operating activities of the Company produced cash flows
of ($695,000) and $702,000 in first quarter of 1997 and 1996,
respectively. The net cash (used in) or provided by operating
activities plus net policyholder contract deposits after the payment
of policyholder withdrawals, equalled $1,085,000 in first quarter of
1997 and $2,621,000 in first quarter of 1996. 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.
Cash provided by (used in) investing activities was ($2,771,000) and
$1,178,000 for first quarter of 1997 and 1996, respectively. The most
significant aspect of cash provided by (used in) investing activities
is the fixed maturity transactions. Fixed maturities account for 73%
and 90% of the total cost of investments acquired in first quarter of
1997 and 1996, respectively. The Company has not directed its
investable funds to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $1,780,000 and $817,000
for first quarter of 1997 and 1996, respectively. Policyholder
contract deposits decreased 20% in first quarter of 1997 compared to
first quarter of 1996. The decrease is due to the decline in first
year premium production. Policyholder contract withdrawals has
decreased 25% in first quarter of 1997 compared to first quarter of
1996.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank -Illinois NA
and is subject to a credit agreement. The refinanced debt bears
interest at a rate equal to the "base rate" plus nine-sixteenths of
one percent. The Base rate is defined as the floating daily, variable
rate of interest determined and announced by First of America Bank
from time to time as its "base lending rate." The
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<PAGE>
base rate at issuance of the loan was 8.25%, and has increased to
8.50% on March 25, 1997. Interest is paid quarterly and principal
payments of $1,000,000 are due in May of each year beginning in 1997,
with a final payment due May 8, 2005. The Company satisfied its
$1,000,000 principal obligation for 1997 by prepaying $500,000 on
November 8, 1996 and a payment of $500,000 on May 8, 1997. The next
scheduled principal payment is $1,000,000 due on May 8, 1998.
On a parent only basis, FCC's cash flow is dependent on revenues from
its life insurance subsidiaries from management and cost sharing
arrangements and through dividends. At March 31, 1997, substantially
all of the consolidated shareholders equity represents net assets of
its subsidiaries. Cash requirements of FCC primarily relate to
servicing its long-term debt. The payment of cash dividends to
shareholders is not legally restricted. However, insurance company
dividend payments are regulated by the state insurance department
where the company is domiciled. UG's dividend limitations are
described below.
Ohio domiciled insurance companies require 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 of b) 10% of statutory capital and
surplus. For the year ended December 31, 1996, UG had a statutory
gain from operations of $8,006,000. At December 31, 1996, UG's
statutory capital and surplus amounted to $10,227,000. 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 its financial obligations.
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 7% when
comparing first quarter 1997 to the first quarter of 1996. The
decrease is primarily attributed to the reduction in new business
production. The Company's primary product is the "Century 2000"
universal life insurance product. Universal life and interest
sensitive insurance products contribute only the risk charge to
premium income, however traditional insurance products contribute all
monies received to premium income. Since the Company does not
actively market traditional life insurance products, it is expected
that premium income will continue to decrease in future periods as a
result of expected lapses of business in force.
Other considerations, net of reinsurance, increased approximately 1%
compared to one year ago. Other considerations consist of
administrative charges on universal life and interest sensitive life
insurance products. The insurance in force relating to these types of
products continues to increase as marketing efforts are focused on
universal life insurance products.
Net investment income decreased 3% when comparing the first quarter of
1997 to 1996. The decrease is the result of a smaller invested asset
base from one year ago. During the fourth quarter 1996, the Company
transferred approximately $22,000,000 in assets as part of a
coinsurance agreement with First International Life Insurance Company
("FILIC"). The overall investment yields for first quarter 1997 and
1996, are 7.28% and 7.12%, respectively. The improvement in
investment yield is primarily attributed to the fixed maturity
portfolio. The Company has invested financing cash flows generated by
cash received through sales of universal life insurance products.
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 minimum interest spread between
earned and credited rates is 1% on the "Century 2000" universal life
insurance product, the Company's primary product. The Company
monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted spreads.
It is expected
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that the monitoring of the interest spreads by management will provide
the necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the future.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, increased 17%
in the first quarter of 1997 compared to 1996. The increase in life
benefits is attributed to an increase in mortality. There is no
single event that caused mortality to increase. Policy claims vary
from year to year and therefore, fluctuations in mortality are to be
expected and are not considered unusual by management.
Commissions and amortization of deferred policy acquisition costs
decreased 9% in first quarter 1997 compared to first quarter 1996.
The decrease was due to the decline in first year premium production.
Amortization of cost of insurance acquired decreased 46% in first
quarter 1997 compared to 1996. The decrease is attributed to the
coinsurance agreement with First International Life Insurance Company
("FILIC") as of September 30, 1996. Under the terms of the agreement,
UG ceded to FILIC substantially all of its paid-up life insurance
policies. Paid-up life insurance generally refers to anon-premium
paying life insurance policy. Cost of insurance acquired is amortized
in relation to expected future profits, including direct charge-offs
for any excess of the unamortized asset over the projected future
profits. The Company did not have any charge-offs during the periods
covered by this report.
Operating expenses decreased 22% when comparing first quarter of 1997
to first quarter of 1996. The decrease in operating expenses is
attributable to the settlement of certain litigation in the fourth
quarter of 1996. The Company incurred elevated legal fees in the
previous year due to the litigation. Operating expenses were further
reduced from a restructuring of the home office personnel completed in
late 1996.
Interest expense decreased 8% in first quarter of 1997 compared to
1996. On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinanced debt bears interest to a rate equal to the "base rate"
plus nine-sixteenths of one percent. Prior to refinancing, the
interest rate was equal to the base rate plus one percent. The
decrease in interest rate and principal reductions made during the
last year, provided the decrease in interest expense for the first
quarter of 1997.
(c) NET INCOME (LOSS)
The Company had a net loss of ($193,000) for the first quarter of 1997
compared to a net income of $330,000 for the first quarter of 1996.
The net loss for the current period is primarily due to the increase
in mortality and the decrease in premium income.
FINANCIAL CONDITION
The financial condition of the Company changed very little since
December 31, 1996. The most significant changes to occur is a
decrease in cash and cash equivalents and the corresponding increase
in fixed maturities. Future policy benefits increased as expected due
to the aging in force business.
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 and
the Company's business and investment strategy, the Company generally
seeks to invest in United States government and government agency
securities and corporate securities rated investment grade by
established nationally recognized rating organizations.
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The liabilities are predominantly long term in nature and therefore,
the Company invests in long term fixed maturity investments which are
reported in the financial statements at their amortized cost. The
Company has the ability and intent to hold these investments to
maturity; consequently, the Company does not expect to realize any
significant loss from these investments. The Company does not own any
derivative investments or "junk bonds". As of March 31, 1997, 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.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which
have financial resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years,the
industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement
savings products. Management believes that the Company's ability to
compete is dependent upon, among other things, its ability to attract
and retain agents to market its insurance products and its ability to
develop competitive and profitable products.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
REVERSE STOCK SPLIT
On March 25, 1997, the Board of Directors voted to have a reverse
stock split of FCC's common stock whereby one new share of common
stock will be issued for each 400 shares that are currently held by
each shareholder. Fractional shares will receive a cash payment on
the basis of $.25 for each old share. The reverse split will be
effective to shareholders of record on May 12, 1997.
PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to
recommend to the shareholders a merger of the two companies. Under
the Plan of Merger, UTI would be the surviving entity with UTI issuing
one share of its stock (after its reverse stock split of one share for
each ten shares) for each share held by UII shareholders (after its
reverse stock split of one share for every 14.2857 shares).
UTI stock currently trades on NASDAQ. The reverse stock split should
increase the price at which the Company's stock trades, enabling it to
meet new NASDAQ requirements regarding eligibility to remain listed.
UTI owns 53% of United Trust Group, Inc., an insurance holding
company, and UII owns 47% of United Trust Group, Inc. Neither UTI nor
UII have any other significant holdings or business dealings. The
Board of Directors of each company thus concluded a merger of the two
companies would be in the best interests of the shareholders. The
merger will result in certain cost savings, primarily related to costs
associated with maintaining a corporation in good standing in the
states in which it transacts business.
ITEM 6. EXHIBITS
The Company hereby incorporates by reference the exhibits as reflected
in the Index to Exhibits of the Company's Form 10-K for the year ended
December 31, 1996.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FIRST COMMONWEALTH CORPORATION
(Registrant)
Date: May 13, 1997 By /s/ Thomas F. Morrow
Thomas F. Morrow
Chief Operating Officer, Vice
Chairman and Treasurer
Date: May 13, 1997 By /s/ James E. Melville
James E. Melville
Senior Executive Vice President
and Chief Financial Officer
15
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
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<INVESTMENT-INCOME> 3,859,617 3,982,268
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<UNDERWRITING-AMORTIZATION> 1,366,410 1,493,850
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<INCOME-PRETAX> (732,231) (250,496)
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