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 June 30, 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 jurisdictio (IRS 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 July 31, 1997:
54,585
Common stock, par value $1 per share
<PAGE>
FIRST COMMONWEALTH CORPORATION
(The "Company")
TABLE OF CONTENTS
Part 1: Financial Information 3
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the six months
and three months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information 15
Item 5. Other information 15
Item 6. Exhibits 15
Signatures 16
2
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
June 30, December 31,
ASSETS 1997 1996
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $185,386,442 and $181,815,225) $ 184,003,757 $ 179,535,861
Investments held for sale:
Fixed maturities, at market (cost
$1,838,367 and $1,984,661) 1,827,692 1,961,166
Equity securities, at market (cost
$1,912,766 and $2,086,159) 2,531,349 1,794,405
Mortgage loans on real estate at
amortized cost 10,188,023 11,022,792
Investment real estate, at cost, net
of accumulated depreciation 10,346,081 10,268,490
Real estate acquired in satisfaction
of debt, at cost net of accumulated
depreciation 3,846,946 3,846,946
Policy loans 14,095,270 14,438,120
Short term investments 400,000 400,000
227,239,118 223,267,780
Cash and cash equivalents 12,432,940 16,801,288
Investment in parent 350,000 350,000
Indebtedness of affiliates, net 28,223 (36,933)
Accrued investment income 3,512,459 3,424,546
Reinsurance receivables:
Future policy benefits 38,172,599 38,745,093
Policy claims and other benefits 3,547,330 3,856,124
Other accounts and notes receivable 827,962 894,321
Deferred policy acquisition costs 17,865,038 18,162,356
Cost of insurance acquired 19,398,610 19,886,494
Costs in excess of net assets purchased,
less accumulated amortization 9,402,303 9,624,135
Other assets 1,935,999 1,626,987
Total assets $ 334,712,581 $ 336,602,191
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 254,247,279 $ 252,718,388
Policy claims and benefits payable 2,218,158 3,193,806
Other policyholder funds 2,544,335 2,784,967
Dividend and endowment accumulations 14,193,182 13,647,676
Income taxes payable:
Current 10,805 60,044
Deferred 2,871,985 3,043,775
Notes payable 18,241,601 18,999,853
Other liabilities 4,158,999 5,088,785
Total liabilities 298,486,344 299,537,294
Minority interests in consolidated
subsidiaries 1,597,362 1,586,246
Shareholders' Equity:
Common stock - $1 par value per share.
Authorized 62,500 shares - 54,585
and 59,920 shares issued after deducting
treasury shares of 930 and 930 54,585 59,920
Additional paid-in capital 51,877,533 52,406,190
Unrealized depreciation of investments
held for sale (225,949) (305,715)
Accumulated deficit (17,077,294) (16,681,744)
Total shareholders' equity 34,628,875 35,478,651
Total liabilities and shareholders'
equity $ 334,712,581 $ 336,602,191
</TABLE>
See accompanying notes.
3
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FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Premium income $ 7,975,216 $ 8,749,389 $16,143,254 $17,677,871
Reinsurance premium (1,031,186) (1,072,667) (2,127,314) (2,363,646)
Other considerations 910,982 876,639 1,815,340 1,762,138
Other considerations
paid to reinsurers (46,230) (39,186) (96,112) (80,677)
Net investment income 3,839,187 3,919,715 7,698,804 7,901,983
Realized investment gains
and (losses), net (22,436) (268,867) (27,364) (248,734)
Other income 62,038 13,336 63,791 84,043
11,687,571 12,178,359 23,470,399 24,732,978
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 6,474,044 6,847,948 13,365,823 12,608,603
Reinsurance benefits
and claims (533,072) (535,825) (966,248) (775,703)
Annuity 395,099 427,441 751,353 838,596
Dividends to
policyholders 1,024,504 1,066,184 2,152,006 2,275,487
Commissions and
amortization of deferred
policy acquisition costs 690,913 1,033,174 2,057,323 2,527,024
Amortization of cost of
insurance acquired 304,627 448,927 548,946 897,854
Operating expenses 2,747,749 2,719,974 5,304,405 6,001,534
Interest expense 400,290 422,767 805,605 862,310
11,504,154 12,430,590 24,019,213 25,235,705
Income (loss) before
income taxes and
minority interest 183,417 (252,231) (548,814) (502,727)
Credit (provision) for
income taxes (352,740) 156,028 160,985 753,754
Minority interest in gain
of consolidated
subsidiaries (32,952) (26,279) (7,721) (43,933)
Net income (loss) $ (202,275) $ (122,482) $ (395,550) $ 207,094
Net income (loss) per
common share $ (3.54) $ (2.01) $ (6.76) $ 3.40
Weighted average common
shares outstanding 57,106 60,850 58,505 60,850
</TABLE>
See accompanying notes.
4
<PAGE>
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
June 30, June 30,
1997 1996
<S> <C> <C>
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net income (loss) $ (395,550) $ 207,094
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 309,261 461,195
Realized investment (gains) losses, net 27,364 248,734
Policy acquisition costs deferred (825,000) (977,000)
Amortization of deferred policy
acquisition costs 1,122,318 1,176,686
Amortization of cost of insurance acquired 548,946 897,854
Amortization of costs in excess of net
assets purchased 221,832 223,332
Depreciation 212,431 255,613
Minority interest 7,721 43,933
Change in accrued investment income (87,913) (35,888)
Change in reinsurance receivables 881,288 46,476
Change in policy liabilities and accruals (514,544) 828,236
Charges for mortality and administration
of universal life and annuity products (4,736,072) (5,133,997)
Interest credited to account balances 3,679,554 3,503,500
Change in income taxes payable 221,029 (873,888)
Change in indebtedness (to) from
affiliates, net (65,156) (48,092)
Change in other assets and liabilities,
net (1,760,409) (379,841)
Net cash provided by (used in) operating
activities (1,152,900) 443,947
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale matured 140,000 500,583
Fixed maturities sold 0 0
Fixed maturities matured 3,492,302 15,982,534
Equity securities 42,801 8,990
Mortgage loans 834,769 1,086,205
Real estate 234,073 2,225,127
Policy loans 2,441,970 2,177,694
Short term 100,000 400,000
Total proceeds from investments sold
and matured 7,285,915 22,381,133
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (8,262,020) (18,713,187)
Equity securities (710,388) 0
Mortgage loans 0 (119,924)
Real estate (466,770) (385,147)
Policy loans (2,099,120) (2,262,305)
Short term (100,000) (300,000)
Total cost of investments acquired (11,638,298) (21,780,563)
Net cash provided by (used in) investing
activities (4,352,383) 600,570
Cash flows from financing activities:
Policyholder contract deposits 9,997,553 12,108,411
Policyholder contract withdrawals (7,568,374) (8,023,342)
Payment for fractional shares from
reverse stock split (533,992) 0
Proceeds from issuance of notes payable 204,267 400,000
Payments of principal on notes payable (962,519) (1,502,996)
Net cash provided by financing activities 1,136,935 2,982,073
Net increase in cash and cash equivalents (4,368,348) 4,026,590
Cash and cash equivalents at beginning
of period 16,801,288 11,979,637
Cash and cash equivalents at end of period $ 12,432,940 $ 16,006,227
</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 Cpompany's Annual Report on Form 10-K filed with the
Securities and Exchange Commossion 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 June 30, 1997, the parent, significant subsidiaries and affiliates of
First Commonwealth Corporation were as depicted on the following
organizational chart.
United Trust, Inc. ("UTI") is the ultimate controlling copmany. UTI owns
53.0% of United Trust Group ("UTG") and 29.9% of United Income, Inc. ("UII").
UII owns 47.0% of UTG. UTG owns 79.3% 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 83.9% of
Appalachian Life Insurance Company ("APPL") and APPL owns 100% of Abraham
Lincoln Insurance Company ("ABE").
6
<PAGE>
2. Fixed Maturities
As of June 30, 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 regulation, 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 maturity
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 costs. As of June 30, 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 $10,188,000 in mortgage loans and $14,143,000
in real estate holdings, including real estate acquired in satisfaction of
debt, which represent 4% and 6% of total invested assets of the Company,
respectively. All mortgage loans held by the Company are first position
loans. The Company has $541,000 in mortgage loans net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure representing
approximately 5% 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 $ 549,248 5%
Commercial $1,638,366 16%
Residential $8,000,409 79%
Real Estate Amount % of Total
Home Office $2,615,014 18%
Commercial $2,255,421 16%
Residential development $5,475,646 39%
Foreclosed real estate $3,846,946 27%
7
<PAGE>
4. Notes Payable
At June 30, 1997, the Company has $18,242,000 in notes payable. Notes
payable is comprised of the following components:
Senior debt $ 7,900,000
Subordinated 10 yr. Notes 4,907,000
Subordinated 20 yr. Notes 4,035,000
Other notes payable 1,400,000
$18,242,000
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The 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 June 30, 1997 was 8.5%. 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.
The credit agreement contains certain covenants with which the Company must
comply. The 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 complies 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 December 16, 1997, with a final balloon
payment due June 16, 2002. In June 1997, the Company refinanced $204,267
of its subordinated 10-year notes to subordinated 20-year notes bearing
interest at the rate of 8.75%. The repayment terms of these notes are
identical to the original subordinated 20-year notes. The 20-year notes
bear interest at the rate of 8 1/2% per annum, on $3,530,000 and 8.75%
per annum on $505,000, payable semi-annually beginning December 16, 1992,
with a lump sum principal payment due June 16, 2012.
8
<PAGE>
Scheduled principal reductions on the Company's debt for the next five
years are as follows:
Year Amount
1997 $ 0
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 award
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 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.
7. Reverse Stock Split
On May 13, 1997, the Company affected a 1 for 400 reverse stock split.
Fractional shares received a cash payment based on $0.25 for each old
share. The Company maintained a significant number of shareholder
accounts with less than $100 of market value of stock. The reverse split
enabled these smaller shareholders to receive cash for their shares without
incurring broker costs and will save the Company administrative costs
associated with maintaining these accounts. Prior period numbers have
been restated to give effect of the reverse split.
9
<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 3.7% and
5.0% as of June 30, 1997, and December 31, 1996, respectively. Fixed
maturities as a percentage of total invested assets were 81% and 80% as
of June 30, 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 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.
Consolidated operating activities of the Company produced cash flows of
($1,153,000) and $444,000 for the first six months 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, equaled $1,276,000 for the first six months of 1997 and
$4,529,000 for the first six months of 1996. Management uses 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. Dollar volume of new business production is
down 33% when comparing the first half of 1997 to the first half of 1996.
New business production suffered in 1997 from a combination of the
uncertainty generated by the pending change of control of the Company
(See Note 6), and modifications to certain products in the Company's
life insurance portfolio. The modifications to the product required
retraining of the Company's agency force.
Cash provided by (used in) investing activities was ($4,352,000) and
$601,000 for the first six months 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 71% and
86% of the total cost of investments acquired for the first six months 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 $1,137,000 and $2,982,000
for the first six months of 1997 and 1996, respectively. Policyholder
contract deposits decreased 17% for the first six months of 1997 compared
to the first six months of 1996. The decrease is due to the decline in
new business production. Policyholder contract withdrawals decreased 6%
for the first six months of 1997 compared to the first six months 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 base
10
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rate at June 30, 1997 was 8.5%. 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 June 30, 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 or 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
Year-to-date 1997 compared to 1996:
(a) Revenues
Premium income, net of reinsurance premium, decreased 8% when comparing the
first six months of 1997 to the first six months of 1996. The Company's
primary product is the "Century 2000" universal life insurance product.
Universal life and interest sensitive life 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 2%
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 focus on universal life insurance products.
Net investment income decreased 3% when comparing the first six months 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
annualized investment yields for the first six months of 1997 and 1996
are 7.2% and 7.0%, respectively. The improvement in investment yield is
primarily attributed to the fixed maturity protfolio. The Company has
invested excess cash and financing activities 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 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.
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(b) Expenses
Life benefits, net of reinsurance benefits and claims, increased 6% in
the first six months of 1997 compared to 1996. The increase in life
benefits is attributed to an increase in mortality. Mortality increased
21% in the first six months of 1997 compared to 1996. 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. The Company experienced a decline
of 33% in dollar volume of new business production. This decline results
in less of an increase in reserves from new business as compared to the
previous year.
Commissions and amortization of deferred policy acquisition costs decreased
19% for the first six months of 1997 compared to the first six months of
1996. The decrease was due to the decline in new business production.
Amortization of cost of insurance acquired decreased $349,000 for the
first six months of 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 a non-
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 12% when comparing the first six months of 1997
to the first six months of 1996. The decrease in operating expenses is
attributed 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 7% for the first six months 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 six months of 1997.
(c) Net income (loss)
The Company had a net loss of ($396,000) for the first six months of 1997
compared to a net income of $207,000 for the first six months of 1996.
The net loss for the current period is primarily due to the increase in
mortality.
Second quarter 1997 compared to second quarter 1996:
(a) Revenues
Premium income, net of reinsurance premium, decreased 10% when comparing
second quarter of 1997 to second quarter of 1996. The Company's primary
product is the "Century 2000" universal life insurance product. Universal
life and interest sensitive life 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 3%
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 focus on universal life insurance products.
Net investment income decreased 2% when comparing second 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
12
<PAGE>
approximately $22,000,000 in assets as part of a coinsurance agreement with
First International Life Insurance Company ("FILIC").
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 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, decreased 5% in
second quarter of 1997 compared to 1996. The decrease in life benefits
is due to the decrease in new business production. Although life benefits
decreased, mortality increased $137,000 in second quarter of 1997 compared
to 1996. 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
33% for second quarter of 1997 compared to second quarter of 1996. The
decrease was due to the decline in new business production.
Amortization of cost of insurance acquired decreased $144,000 for second
quarter of 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 a non-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.
Interest expense decreased 5% for second 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. The base lending rate increased a quarter
of a percent in March 1997. This impact was partially offset by principal
reductions made during the last year.
(c) Net income (loss)
The Company had a net loss of ($202,000) for second quarter of 1997 compared
to ($122,000) for second quarter of 1996. The net loss for the current
period is primarily due to income taxes. The change in income taxes is
attributable to temporary differences between Generally Accepted Accounting
Principles ("GAAP") and tax basis.
Financial Condition
The financial condition of the Company changed slightly since December 31,
1996. The most significant changes to occur are 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.
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
13
<PAGE>
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 June 30, 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 securites 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
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 increased
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 of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMONWEALTH CORPORATION
(Registrant)
Date: August 13, 1997 by s/ Thomas F. Morrow
Thomas F. Morrow
Chief Operating Officer, Vice
Chairman and Treasurer
Date: August 13, 1997 By JAMES E. MELVILLE
James E. Melville
Senior Executive Vice
President and Chief
Financial Officer
16
<PAGE>
[ARTICLE] 7
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 6-MOS 6-MOS
[FISCAL-YEAR-END] DEC-31-1997 DEC-31-1996
[PERIOD-END] JUN-30-1997 JUN-30-1996
[DEBT-HELD-FOR-SALE] 1,827,692 2,670,087
[DEBT-CARRYING-VALUE] 184,003,757 192,746,733
[DEBT-MARKET-VALUE] 185,386,442 192,654,841
[EQUITIES] 2,531,349 1,828,003
[MORTGAGE] 10,188,023 12,925,481
[REAL-ESTATE] 14,193,027 14,888,850
[TOTAL-INVEST] 227,239,118 242,406,931
[CASH] 12,432,940 16,006,227
[RECOVER-REINSURE] 41,719,929 14,355,376
[DEFERRED-ACQUISITION] 17,865,038 18,842,042
[TOTAL-ASSETS] 334,712,581 335,458,276
[POLICY-LOSSES] 0 0
[UNEARNED-PREMIUMS] 0 0
[POLICY-OTHER] 254,247,279 246,439,631
[POLICY-HOLDER-FUNDS] 18,955,675 18,095,496
[NOTES-PAYABLE] 18,241,601 19,520,332
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 54,585 59,920
[OTHER-SE] 34,574,290 38,670,162
[TOTAL-LIABILITY-AND-EQUITY] 334,712,581 335,458,276
[PREMIUMS] 14,015,940 15,314,225
[INVESTMENT-INCOME] 7,698,804 7,901,983
[INVESTMENT-GAINS] (27,364) (248,734)
[OTHER-INCOME] 1,783,019 1,765,504
[BENEFITS] 15,302,934 14,946,983
[UNDERWRITING-AMORTIZATION] 2,606,269 3,424,878
[UNDERWRITING-OTHER] 6,110,010 6,863,844
[INCOME-PRETAX] (548,814) (502,727)
[INCOME-TAX] (160,985) (753,754)
[INCOME-CONTINUING] (395,550) 207,094
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] (395,550) 207,094
[EPS-PRIMARY] (6.76) 3.40
[EPS-DILUTED] (6.76) 3.40
[RESERVE-OPEN] 0 0
[PROVISION-CURRENT] 0 0
[PROVISION-PRIOR] 0 0
[PAYMENTS-CURRENT] 0 0
[PAYMENTS-PRIOR] 0 0
[RESERVE-CLOSE] 0 0
[CUMULATIVE-DEFICIENCY] 0 0
</TABLE>
