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UTG INC - Quarter Report: 2017 June (Form 10-Q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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

 
UTG, INC.
  
 
(Exact name of registrant as specified in its charter)
  
     
     
Delaware
  
20-2907892
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
     
     
 
5250 SOUTH SIXTH STREET
  
 
P.O. BOX 13080
  
 
SPRINGFIELD, IL  62791
  
 
(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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act . (Check one):

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company☒

Yes ☐ No ☒

The number of shares outstanding of the registrant's common stock as of July 31, 2017 was 3,347,611.

UTG, Inc.
(The "Company")

TABLE OF CONTENTS

PART I.   Financial Information
3
Item 1.  Financial Statements
3
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Operations
4
Condensed Consolidated Statements of Comprehensive Income (Loss)
5
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
18
Item 4.  Controls and Procedures
23
 
PART II.  Other Information
 
23
Item 1.  Legal Proceedings
23
Item 1A. Risk Factors
23
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
23
Item 3.  Defaults Upon Senior Securities
23
Item 4.  Mine Safety Disclosures
23
Item 5.  Other Information
23
Item 6.  Exhibits
24
 
Signatures
 
25
 
Exhibit Index
 
26

Part 1.   Financial Information.

Item 1.  Financial Statements.

UTG, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

   
June 30,
2017
    
December 31,
2016*
  
ASSETS
  
Investments:
            
Investments available for sale:
            
Fixed maturities, at fair value (amortized cost $168,088,959 and $170,595,860)
  
$
189,392,628
    
$
187,239,718
  
Equity securities, at fair value (cost $38,166,461 and $37,014,712)
    
52,929,758
      
51,707,103
  
Trading securities, at fair value (cost $0 and $70,690)
    
-
      
2,500
  
Mortgage loans on real estate at amortized cost
    
18,378,499
      
18,577,372
  
Investment real estate
    
53,077,397
      
57,138,980
  
Notes receivable
    
18,618,464
      
16,876,485
  
Policy loans
    
9,764,728
      
10,070,134
  
Total investments
    
342,161,474
      
341,612,292
  
                 
Cash and cash equivalents
    
12,506,426
      
15,156,548
  
Accrued investment income
    
2,542,560
      
2,872,850
  
Reinsurance receivables:
                
Future policy benefits
    
26,592,514
      
26,974,819
  
Policy claims and other benefits
    
4,165,149
      
3,952,465
  
Cost of insurance acquired
    
6,847,844
      
7,267,397
  
Property and equipment, net of accumulated depreciation
    
1,341,019
      
1,564,944
  
Income tax recoverable
    
1,298,756
      
1,223,682
  
Other assets
    
1,446,782
      
1,476,356
  
Total assets
  
$
398,902,524
    
$
402,101,353
  
                 
LIABILITIES & SHAREHOLDERS' EQUITY
  
Liabilities:
                
Policy liabilities and accruals:
                
Future policyholder benefits
  
$
261,052,800
    
$
263,844,559
  
Policy claims and benefits payable
    
4,799,231
      
3,889,572
  
Other policyholder funds
    
454,177
      
428,769
  
Dividend and endowment accumulations
    
14,527,876
      
14,504,583
  
Deferred income taxes
    
16,294,785
      
15,459,049
  
Notes payable
    
1,450,000
      
2,900,000
  
Trading securities, at fair value (proceeds $0 and $181,159)
    
-
      
1,439
  
Other liabilities
    
6,348,264
      
6,771,540
  
Total liabilities
    
304,927,133
      
307,799,511
  
                 
Shareholders' equity:
                
Common stock - no par value, stated value $.001 per share.  Authorized 7,000,000 shares - 3,349,736 and 3,349,927 shares outstanding
    
3,349
      
3,350
  
Additional paid-in capital
    
37,870,021
      
37,878,712
  
Retained earnings
    
31,702,183
      
34,230,307
  
Accumulated other comprehensive income (loss)
    
23,373,129
      
20,353,692
  
Total UTG shareholders' equity
    
92,948,682
      
92,466,061
  
                 
Noncontrolling interests
    
1,026,709
      
1,835,781
  
Total shareholders' equity
    
93,975,391
      
94,301,842
  
Total liabilities and shareholders' equity
  
$
398,902,524
    
$
402,101,353
  

* Balance sheet audited at December 31, 2016.
See accompanying notes.

UTG, Inc.

Condensed Consolidated Statements of Operations(Unaudited)

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
    
June 30,
    
June 30,
  
   
2017
    
2016
    
2017
    
2016
  
Revenue:
                        
Premiums and policy fees
  
$
2,670,468
    
$
3,040,968
    
$
5,373,222
    
$
5,815,731
  
Ceded reinsurance premiums and policy fees
    
(843,636
)
    
(736,897
)
    
(1,570,290
)
    
(1,504,198
)
Net investment income
    
2,816,417
      
3,210,481
      
5,852,901
      
7,228,972
  
Other income
    
95,578
      
110,351
      
211,537
      
295,547
  
Revenues before realized gains (losses)
    
4,738,827
      
5,624,903
      
9,867,370
      
11,836,052
  
Realized investment gains (losses), net:
                                
Other-than-temporary impairments
    
-
      
-
      
-
      
-
  
Other realized investment gains, net
    
1,042,751
      
655,564
      
544,060
      
4,067,797
  
   Total realized investment gains (losses), net
    
1,042,751
      
655,564
      
544,060
      
4,067,797
  
Total revenue
    
5,781,578
      
6,280,467
      
10,411,430
      
15,903,849
  
                                 
Benefits and other expenses:
                                
Benefits, claims and settlement expenses:
                                
Life
    
4,860,950
      
5,567,327
      
9,828,602
      
11,382,479
  
Ceded Reinsurance benefits and claims
    
(703,666
)
    
(910,789
)
    
(989,776
)
    
(1,506,070
)
Annuity
    
294,813
      
298,677
      
538,210
      
627,576
  
Dividends to policyholders
    
107,914
      
121,555
      
221,200
      
249,234
  
Commissions and amortization of deferred policy acquisition costs
    
(41,103
)
    
(39,176
)
    
(77,084
)
    
(71,942
)
Amortization of cost of insurance acquired
    
209,777
      
218,246
      
419,553
      
436,492
  
Operating expenses
    
1,758,608
      
1,904,102
      
3,804,665
      
3,678,339
  
Total benefits and other expenses
    
6,487,293
      
7,159,942
      
13,745,370
      
14,796,108
  
                                 
                                 
Income (loss) before income taxes
    
(705,715
)
    
(879,475
)
    
(3,333,940
)
    
1,107,741
  
Income tax (expense) benefit
    
196,624
      
307,193
      
710,214
      
(492,487
)
                                 
Net income (loss)
    
(509,091
)
    
(572,282
)
    
(2,623,726
)
    
615,254
  
                                 
Net (income) loss attributable to noncontrolling interests
    
(45,632
)
    
(140,540
)
    
95,602
      
(45,973
)
                                 
Net income (loss) attributable to common shareholders
  
$
(554,723
)
  
$
(712,822
)
  
$
(2,528,124
)
  
$
569,281
  
                                 
Amounts attributable to common shareholders'
                                
Basic income (loss) per share
  
$
(0.17
)
  
$
(0.19
)
  
$
(0.75
)
  
$
0.15
  
                                 
Diluted income (loss) per share
  
$
(0.17
)
  
$
(0.19
)
  
$
(0.75
)
  
$
0.15
  
                                 
Basic weighted average shares outstanding
    
3,355,850
      
3,673,545
      
3,353,416
      
3,686,968
  
                                 
Diluted weighted average shares outstanding
    
3,355,850
      
3,673,545
      
3,353,416
      
3,686,968
  

See accompanying notes.

UTG, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
    
June 30,
    
June 30,
  
   
2017
    
2016
    
2017
    
2016
  
Net income (loss)
  
$
(509,091
)
  
$
(572,282
)
  
$
(2,623,726
)
  
$
615,254
  
                                 
Other comprehensive income (loss):
                                
                                 
Unrealized holding gains (losses) arising during period, pre-tax
    
384,871
      
19,065,483
      
4,855,895
      
30,868,008
  
Tax (expense) benefit on unrealized holding gains (losses) arising during the period
    
(134,705
)
    
(6,672,919
)
    
(1,699,563
)
    
(10,803,803
)
Unrealized holding gains (losses) arising during period, net of tax
    
250,166
      
12,392,564
      
3,156,332
      
20,064,205
  
                                 
Less reclassification adjustment for gains included in net income
    
(224,951
)
    
(442,220
)
    
(210,607
)
    
(696,673
)
Tax expense  for gains included in net income
    
78,732
      
154,777
      
73,712
      
243,836
  
Reclassification adjustment for gains included in net income, net of tax
    
(146,219
)
    
(287,443
)
    
(136,895
)
    
(452,837
)
Subtotal:  Other comprehensive income (loss), net of tax
    
103,947
      
12,105,121
      
3,019,437
      
19,611,368
  
                                 
Comprehensive income (loss)
    
(405,144
)
    
11,532,839
      
395,711
      
20,226,622
  
                                 
Less comprehensive (income) loss attributable to noncontrolling interests
    
(45,632
)
    
(140,540
)
    
95,602
      
(45,973
)
                                 
Comprehensive income (loss) attributable to UTG, Inc.
  
$
(450,776
)
  
$
11,392,299
    
$
491,313
    
$
20,180,649
  

See accompanying notes.

UTG, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2017
    
2016
  
Cash flows from operating activities:
            
Net income attributable to common shareholders
  
$
(2,528,124
)
  
$
569,281
  
Adjustments to reconcile net income to net cash used in operating activities:
                
Amortization (accretion) of investments
    
178,699
      
(658,331
)
Realized investment gains, net
    
(544,060
)
    
(4,067,797
)
Unrealized trading (gains) losses included in income
    
111,531
      
(39,476
)
Realized trading (gains) included in income
    
(110,470
)
    
-
  
Amortization of cost of insurance acquired
    
419,553
      
436,492
  
Depreciation
    
349,582
      
412,472
  
Net income (loss) attributable to noncontrolling interest
    
(95,602
)
    
45,973
  
Charges for mortality and administration of universal life and annuity products
    
(3,324,867
)
    
(1,107,778
)
Interest credited to account balances
    
2,181,552
      
867,663
  
Change in accrued investment income
    
330,290
      
(101,071
)
Change in reinsurance receivables
    
169,621
      
160,739
  
Change in policy liabilities and accruals
    
(321,400
)
    
(1,764,350
)
Change in income taxes receivable (payable)
    
(75,074
)
    
(133,218
)
Change in other assets and liabilities, net
    
(1,153,065
)
    
(1,701,843
)
Net cash used in operating activities
    
(4,411,834
)
    
(7,081,244
)
                 
Cash flows from investing activities:
                
Proceeds from investments sold and matured:
                
     Fixed maturities available for sale
    
9,585,460
      
21,633,273
  
Equity securities available for sale
    
2,126,149
      
1,195,793
  
Trading securities
    
0
      
72,279
  
Mortgage loans
    
562,792
      
2,000,374
  
Real estate
    
5,083,776
      
8,002,596
  
Notes receivable
    
305,874
      
2,682,590
  
Policy loans
    
1,087,870
      
1,300,996
  
Total proceeds from investments sold and matured
    
18,751,921
      
36,887,901
  
Cost of investments acquired:
                
     Fixed maturities available for sale
    
(7,141,692
)
    
(6,139,596
)
Equity securities available for sale
    
(2,424,875
)
    
(1,463,409
)
Trading securities
    
0
      
(70,690
)
Mortgage loans
    
(354,306
)
    
(2,694,686
)
Real estate
    
(1,678,891
)
    
(8,668,777
)
Notes receivable
    
(2,047,853
)
    
(7,047,843
)
Policy loans
    
(782,464
)
    
(1,182,883
)
Total cost of investments acquired
    
(14,430,081
)
    
(27,267,884
)
Net cash provided by investing activities
    
4,321,840
      
9,620,017
  
                 
Cash flows from financing activities:
                
Policyholder contract deposits
    
2,470,129
      
772,689
  
Policyholder contract withdrawals
    
(2,838,813
)
    
(594,960
)
Payments of principal on notes payable/line of credit
    
(1,450,000
)
    
0
  
Purchase of treasury stock
    
(8,692
)
    
(455,645
)
Non controlling contributions (distributions) of consolidated subsidiary
    
(732,752
)
    
(49,893
)
Net cash used in financing activities
    
(2,560,128
)
    
(327,809
)
                 
Net increase in cash and cash equivalents
    
(2,650,122
)
    
2,210,964
  
Cash and cash equivalents at beginning of period
    
15,156,548
      
11,822,615
  
Cash and cash equivalents at end of period
  
$
12,506,426
    
$
14,033,579
  

See accompanying notes.

UTG, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The accompanying Condensed Consolidated Balance Sheet as of December 31, 2016, which has been derived from audited consolidated financial statements, and the unaudited interim Condensed Consolidated Financial Statements include the accounts of UTG, Inc. (the "Parent") and its subsidiaries (collectively with the Parent, the "Company").  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8 of regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements.  The information furnished includes all adjustments and accruals of a normal recurring nature, which in the opinion of Management, are necessary for a fair presentation of the results for the interim periods.  The unaudited Condensed Consolidated Financial Statements included herein and these related notes should be read in conjunction with the Company's consolidated financial statements, and the notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.  The Company's results of operations for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other future period.

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 ("FSF"), a Kentucky corporation, and First Southern Bancorp, Inc. ("FSBI"), a financial services holding company.  FSBI operates through its 100% owned subsidiary bank, First Southern National Bank ("FSNB").  Banking activities are conducted through multiple locations within south-central and western 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 June 30, 2017, Mr. Correll owns or controls directly and indirectly approximately  63.94% of UTG's outstanding stock.

UTG's life insurance subsidiary, Universal Guaranty Life Insurance Company ("UG"), has several wholly-owned and majority-owned subsidiaries.  The subsidiaries were formed to hold certain real estate investments.  The real estate investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.

Note 2 – Recently Issued Accounting Standards

During the six months ended June 30, 2017, there were no additions to or changes in the critical accounting policies disclosed in the 2016 Form 10-K.

Note 3 – Investments

Available for Sale Securities – Fixed Maturity and Equity Securities

The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment.

Investments in available for sale securities are summarized as follows:

June 30, 2017
  
Original or Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Estimated Fair Value
  
Investments available for sale:
                        
Fixed maturities
                        
U.S. Government and govt. agencies and authorities
  
$
7,677,783
    
$
51,149
    
$
(71,452
)
  
$
7,657,480
  
U.S. special revenue and assessments
    
9,998,384
      
840,533
      
(8,973
)
    
10,829,944
  
All other corporate bonds
    
150,412,792
      
20,946,796
      
(454,384
)
    
170,905,204
  
     
168,088,959
      
21,838,478
      
(534,809
)
    
189,392,628
  
Equity securities
    
38,166,461
      
16,885,577
      
(2,122,280
)
    
52,929,758
  
Total
  
$
206,255,420
    
$
38,724,055
    
$
(2,657,089
)
  
$
242,322,386
  

December 31, 2016
  
Original or Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Estimated Fair Value
  
Investments available for sale:
                        
Fixed maturities
                        
U.S. Government and govt. agencies and authorities
  
$
9,058,210
    
$
74,581
    
$
(96,981
)
  
$
9,035,810
  
U.S. special revenue and assessments
    
10,145,531
      
1,002,789
      
(14,043
)
    
11,134,277
  
All other corporate bonds
    
151,392,119
      
17,234,691
      
(1,557,179
)
    
167,069,631
  
     
170,595,860
      
18,312,061
      
(1,668,203
)
    
187,239,718
  
Equity securities
    
37,014,712
      
15,214,862
      
(522,471
)
    
51,707,103
  
Total
  
$
207,610,572
    
$
33,526,923
    
$
(2,190,674
)
  
$
238,946,821
  

The amortized cost and estimated market value of debt securities at June 30, 2017, by contractual maturity, is shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fixed Maturities Available for Sale
June 30, 2017
  
Amortized Cost
    
Estimated Fair Value
  
Due in one year or less
  
$
6,156,866
    
$
6,276,044
  
Due after one year through five years
    
31,184,767
      
43,957,336
  
Due after five years through ten years
    
44,147,980
      
48,599,782
  
Due after ten years
    
86,599,346
      
90,559,466
  
Total
  
$
168,088,959
    
$
189,392,628
  

The fair value of investments with sustained gross unrealized losses at June 30, 2017 and December 31, 2016 are as follows:

June 30, 2017
  
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
  
U.S. Government and govt. agencies and authorities
  
$
6,605,409
    
$
(71,452
)
  
$
-
    
$
-
    
$
6,605,409
    
$
(71,452
)
U.S. special revenue and assessments
    
979,770
      
(8,974
)
    
-
      
-
      
979,770
      
(8,974
)
All other corporate bonds
    
18,527,248
      
(325,616
)
    
1,863,740
      
(128,767
)
    
20,390,988
      
(454,383
)
Total fixed maturities
  
$
26,112,427
    
$
(406,042
)
  
$
1,863,740
      
(128,767
)
  
$
27,976,167
      
(534,809
)
                                                 
Equity securities
  
$
5,128,555
    
$
(2,122,280
)
  
$
-
    
$
-
    
$
5,128,555
    
$
(2,122,280
)

December 31, 2016
  
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
  
U.S. Government and govt. agencies and authorities
  
$
6,578,248
    
$
(96,981
)
  
$
0
    
$
0
    
$
6,578,248
    
$
(96,981
)
U.S. special revenue and assessments
    
974,250
      
(14,043
)
    
0
      
0
      
974,250
      
(14,043
)
All other corporate bonds
    
50,161,487
      
(1,408,828
)
    
4,023,510
      
(148,351
)
    
54,184,997
      
(1,557,179
)
Total fixed maturities
  
$
57,713,985
    
$
(1,519,852
)
  
$
4,023,510
      
(148,351
)
  
$
61,737,495
      
(1,668,203
)
                                                 
Equity securities
  
$
4,703,033
    
$
(522,471
)
  
$
0
    
$
0
    
$
4,703,033
    
$
(522,471
)

Additional information regarding investments in an unrealized loss position is as follows:

   
Less than 12 months
    
12 months or longer
    
Total
  
As of June 30, 2017
                  
Fixed maturities
    
14
      
1
      
15
  
Equity securities
    
4
      
-
      
4
  
As of December 31, 2016
                        
Fixed maturities
    
25
      
3
      
28
  
Equity securities
    
3
      
-
      
3
  

Substantially all of the unrealized losses on fixed maturities available for sale and equity securities at  June 30, 2017 and December 31, 2016 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.  Based upon the Company's expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company's evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of  June 30, 2017 and December 31, 2016.

Other-Than-Temporary Impairments

The Company regularly reviews its investment securities for factors that may indicate that a decline in fair value of an investment is other than temporary.  The factors considered by Management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support, whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions, including the effect of changes in market interest rates.  If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to other-than-temporary losses in the Condensed Consolidated Statements of Operations.

Equity securities may experience other-than-temporary impairments in the future based on the prospects for full recovery in value in a reasonable period of time and the Company's ability and intent to hold the security to recovery.  If a decline in fair value is judged by Management to be other-than-temporary or Management does not have the intent or ability to hold a security, a loss is recognized by a charge to other-than-temporary impairment losses in the Condensed Consolidated Statements of Operations.

Management regularly reviews its real estate portfolio in comparison to appraisal valuations and current market conditions for indications of other-than-temporary impairments. If a decline in value is judged by Management to be other-than-temporary, a loss is recognized by a charge to other-than-temporary impairment losses in the Consolidated Statements of Operations.

Based on Management's review of the investment portfolio, the Company did not record any losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations for the six-month period ended June 30, 2017 and 2016.

Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Condensed Consolidated Statements of Operations.  Trading securities include exchange-traded equities and exchange-traded options.  Trading securities carried as liabilities are securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.  The fair value of derivatives included in trading security assets and trading security liabilities as of   June 30, 2017 was $0 and $0, respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of  December 31, 2016 was $2,500 and $(1,439), respectively.  Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only.

Trading revenue charged to net investment income from trading securities was:

   
Three Months Ended
  
   
June 30,
  
   
2017
    
2016
  
Net unrealized gains (losses)
  
$
-
    
$
24,938
  
Net realized gains (losses)
    
-
      
-
  
Net unrealized and realized gains (losses)
  
$
-
    
$
24,938
  

   
Six Months Ended
  
   
June 30,
  
   
2017
    
2016
  
Net unrealized gains (losses)
  
$
(111,531
)
  
$
39,477
  
Net realized gains (losses)
    
110,470
      
-
  
Net unrealized and realized gains (losses)
  
$
(1,061
)
  
$
39,477
  

Mortgage Loans

The Company, from time to time, acquires mortgage loans through participation agreements with FSNB.  FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market.  The Company is able to receive participations from FSNB for three primary reasons:  1) FSNB has already reached its maximum lending limit to a single borrower, but the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed for a long period that is more suitable for UG given its asset-liability structure; and 3) FSNB's loan growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan growth rather than turning customers away.  For originated loans, the Company's Management is responsible for the final approval of such loans after evaluation.  Before a new loan is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control.  These criteria include, but are not limited to, a credit report, personal financial information such as outstanding debt, sources of income, and personal equity.  Once the loan is approved, the Company directly funds the loan to the borrower.  The Company bears all risk of loss associated with the terms of the mortgage with the borrower.

Approximately 12% of the mortgage loan portfolio consists of discounted commercial mortgage loans as of June 30, 2017 and December 31, 2016. The Company began purchasing discounted commercial mortgage loans in 2009.  Management has extensive background and experience in the analysis and valuation of commercial real estate. The discounted loans are available through the FDIC's sale of assets of closed banks and from banks wanting to reduce their loan portfolios.  The loans are available on a loan by loan bid process.  Once a loan has been acquired, contact is made with the appropriate individuals to begin a dialog with a goal of determining the borrower's willingness to work together.  There are generally three paths a discounted loan will take:  the borrowers pay as required; a settlement is reached with the loan being paid off at a discounted value; or the loan is foreclosed.

During 2017 and 2016, the Company acquired $305,000 and $6,935,273 in mortgage loans, respectively, including both regular participation mortgage loans as well as discounted mortgage loans.  FSNB services the majority of the Company's mortgage loan portfolio.  The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan cost to cover costs incurred by FSNB relating to the processing and establishment of the loan.

During 2017 and 2016, the maximum and minimum lending rates for mortgage loans were:

   
2017
    
2016
  
   
Maximum rate
    
Minimum rate
    
Maximum rate
    
Minimum rate
  
Farm Loans
    
5.00
%
    
5.00
%
    
5.00
%
    
5.00
%
Commercial Loans
    
8.00
%
    
4.00
%
    
8.00
%
    
4.00
%
Residential Loans
    
8.00
%
    
3.94
%
    
8.00
%
    
3.94
%

Most mortgage loans are first position loans.  Loans issued are generally limited to no more than 80% of the appraised value of the property.

The Company has in place a monitoring system to provide Management with information regarding potential troubled loans.  Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent.  Management is provided with a monthly listing of loans that are 60 days or more past due along with a brief description of what steps are being taken to resolve the delinquency.  All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans.  Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified.  Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of foreclosure and/or negative financial impact.

Changes in the current economy could have a negative impact on the loans, including the financial stability of the borrowers, the borrowers' ability to pay or to refinance, the value of the property held as collateral and the ability to find purchasers at favorable prices.  Given the uncertainty of the current market, Management has taken a conservative approach with the discounted mortgage loans and has classified all discounted mortgage loans held as non-accrual.  In such status, the Company is not recording any accrued interest income nor is it recording any accrual of discount on the loans held.  The Company records repayments on loans as discount accrual when the loan basis has been paid in full.

On the remainder of the mortgage loan portfolio, interest accruals are analyzed based on the likelihood of repayment.  In no event will interest continue to accrue when accrued interest along with the outstanding principal exceeds the net realizable value of the property.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

A mortgage loan reserve is established and adjusted based on Management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The Company acquired the discounted mortgage loans at below contract value, and believes that it will fully recover its carrying value upon disposal, therefore no reserve for delinquent loans is deemed necessary.  Those not currently paying are being vigorously worked by Management.  The current discounted commercial mortgage loan portfolio has an average price of  32% of face value as of June 30, 2017 and December 31, 2016.  Management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased.  The mortgage loan reserve was $0 at June 30, 2017 and December 31, 2016.

The following table summarizes the number of loans held in the discounted mortgage loan portfolio and the carrying value of the loans:

June 30, 2017
Payment Frequency
  
Number of Loans
    
Carrying Value
  
No payments received
    
8
    
$
-
  
One-time payment received
    
1
      
-
  
Irregular payments received
    
2
      
20,834
  
Periodic payments received
    
5
      
2,119,854
  
Total
    
16
    
$
2,140,688
  

December 31, 2016
Payment Frequency
  
Number of Loans
    
Carrying Value
  
No payments received
    
8
    
$
-
  
One-time payment received
    
1
      
-
  
Irregular payments received
    
2
      
20,834
  
Periodic payments received
    
5
      
2,168,062
  
Total
    
16
    
$
2,188,896
  

The following table summarizes the mortgage loan holdings of the Company for the periods ended:

   
June 30, 2017
    
December 31, 2016
  
In good standing
  
$
16,237,810
    
$
16,388,477
  
Overdue interest over 90 days
    
20,834
      
20,834
  
Restructured
    
55,827
      
60,827
  
In process of foreclosure
    
2,064,028
      
2,107,234
  
Total mortgage loans
  
$
18,378,499
    
$
18,577,372
  
Total foreclosed loans during the year
  
$
-
    
$
735,000
  

Investment Real Estate

Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the Consolidated Statements of Operations. Based upon Management's evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any declines in estimated fair value. Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Consolidated Statements of Operations.

Notes Receivable

Notes receivable represent collateral loans and promissory notes issued by the Company and are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. The valuation allowance as of  June 30, 2017 and December 31, 2016 was $0. Interest accruals are analyzed based on the likelihood of repayment.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.
 
Before a new note is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control.  Once the note is approved, the Company directly funds the note to the borrower. Several of the notes have participation agreements in place, whereas the Company has reduced its investment in the note receivable by participating a portion of the note to a third party.

Similar to the mortgage loans, FSNB services several of the notes receivable. The Company, and the participants in the notes, share in the risk of loss associated with the terms of the note with the borrower, based upon their ownership percentage in the note.  The Company has in place a monitoring system to provide Management with information regarding potential troubled loans. 

Note 4 – Fair Value Measurements

The Company measures its assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets based on the framework set forth in the GAAP fair value accounting guidance.  The framework establishes a fair value hierarchy of three levels based upon the transparency of information used in measuring the fair value of assets or liabilities as of the measurement date.  The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three categories.

Level 1 – Valuation is based upon quoted prices for identical assets or liabilities in active markets that the Company is able to access.  Level 1 fair value is not subject to valuation adjustments.

Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active. In addition, the Company may use various valuation techniques or pricing models that use observable inputs to measure fair value.

Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company's own assumptions about the inputs that market participants would use in pricing the asset or liability.

The Company determines the existence of an active market for an asset or liability based on its judgment as to whether transactions for the asset or liability occur in such market with sufficient frequency and volume to provide reliable pricing information.  If the Company concludes that there has been a significant decrease in the volume and level of activity for an investment in relation to normal market activity for such investment, adjustments to transactions and quoted prices are made to estimate fair value.
The inputs used in the valuation techniques employed by the Company are provided by nationally recognized pricing services, external investment managers and internal resources.  To assess these inputs, the Company's review process includes, but is not limited to, quantitative analysis including benchmarking, initial and ongoing evaluations of methodologies used by external parties to calculate fair value, and ongoing evaluations of fair value estimates based on the Company's knowledge and monitoring of market conditions.

The Company periodically reviews the pricing service provider's policies and procedures for valuing securities.  The assumptions underlying the valuations from external service providers, including unobservable inputs, are generally not readily available as this information is often deemed proprietary.  Accordingly, the Company is unable to obtain comprehensive information regarding these assumptions and methodologies.

The Company's investments in fixed maturity securities available for sale, equity securities available for sale and trading securities assets and liabilities are carried at fair value.  The following are the Company's methodologies and valuation techniques for assets and liabilities measured at fair value.

Fixed maturities available for sale mainly consist of U.S. treasury securities and corporate debt securities. The Company employs a market approach to the valuation of securities where there are sufficient market transactions involving identical or comparable assets. If sufficient market data is not available for identical or comparable assets, the Company uses an income approach to valuation. The majority of the financial instruments included in fixed maturity securities available for sale are evaluated utilizing observable inputs; accordingly, they are categorized in either Level 1 or Level 2 of the fair value hierarchy. However, in instances where significant inputs utilized in valuation of the securities are unobservable, the securities are categorized in Level 3 of the fair value hierarchy.

Corporate securities primarily include fixed rate corporate bonds. Inputs utilized in connection with the Company's valuation techniques relating to this class of securities include recently executed transactions, market price quotations, benchmark yields and issuer spreads. Corporate securities are categorized in Level 2 of the fair value hierarchy.

U.S. treasury securities are based on quoted prices in active markets and are generally categorized in Level 1 of the fair value hierarchy.

Equity securities available for sale consist of common and preferred stocks mainly in private equity investments, financial institutions and insurance companies. Equity securities for which there is sufficient market data are categorized as Level 1 or 2 in the fair value hierarchy.  For the equity securities in which quoted market prices are not available, the transaction price is used as the best estimate of fair value at inception.  When evidence is believed to support a change to the carrying value from the transaction price, adjustments are made to reflect the expected exit values. The Company performs ongoing reviews of the underlying investments. The reviews consist of the evaluations of expected cash flows, material events and market data. These investments are included in Level 3 of the fair value hierarchy.

Securities designated as trading securities consist of exchange traded equities and exchange traded options.  These securities are primarily valued at quoted active market prices, and are therefore categorized as Level 1 in the fair value hierarchy.

The following table presents the Company's assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of June 30, 2017.

   
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets
                        
Fixed Maturities, available for sale
  
$
9,670,669
    
$
176,953,831
    
$
2,768,128
    
$
189,392,628
  
Equity Securities, available for sale
    
18,087,741
      
7,250,795
      
27,591,222
      
52,929,758
  
Total
  
$
27,758,410
    
$
184,204,626
    
$
30,359,350
    
$
242,322,386
  

The following table presents the Company's assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of December 31, 2016.

   
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets
                        
Fixed Maturities, available for sale
  
$
9,035,810
    
$
175,120,657
    
$
3,083,251
    
$
187,239,718
  
Equity Securities, available for sale
    
19,360,394
      
6,553,410
      
25,793,299
      
51,707,103
  
Trading Securities
    
2,500
      
-
      
-
      
2,500
  
Total
  
$
28,398,704
    
$
181,674,067
    
$
28,876,550
    
$
238,949,321
  
                                 
Liabilities
                                
Trading Securities
  
$
1,439
    
$
-
    
$
-
    
$
1,439
  

The following table provides reconciliations for Level 3 assets measured at fair value on a recurring basis. Transfers into and out of Level 3 are recognized as of the end of the quarter in which they occur.

   
Fixed Maturities,
Available for Sale
    
Equity Securities,
Available for Sale
    
Total
  
Balance at December 31, 2016
  
$
3,083,251
    
$
25,793,299
    
$
28,876,550
  
Total unrealized gains (losses):
                        
Included in realized gains (losses)
    
-
      
-
      
-
  
Included in other comprehensive income
    
702,310
      
(204,624
)
    
497,686
  
Purchases
    
-
      
2,114,307
      
2,114,307
  
Sales
  
$
(1,017,433
)
  
$
(111,760
)
  
$
(1,129,193
)
Balance at June 30, 2017
    
2,768,128
      
27,591,222
      
30,359,350
  

The Level 3 securities include collateralized debt obligations of trust preferred securities issued by banks and insurance companies and certain equity securities with unobservable inputs. The Company computed fair value of Level 3 equity investments based on a review of current financial information, earnings trends and similar companies in the same industries.

There were no transfers in or out of Level 3 as of June 30, 2017.  Transfers occur when there is a lack of observable market information.

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the Consolidated Financial Statements.

The carrying values and estimated fair values of certain of the Company's financial instruments not recorded at fair value in the Consolidated Balance Sheets are shown below. Because the fair value for all Consolidated Balance Sheet items are not required to be disclosed, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.

   
June 30, 2017
    
December 31, 2016
  
Assets
  
Carrying Amount
    
Estimated Fair Value
    
Carrying Amount
    
Estimated Fair Value
  
Mortgage loans on real estate
  
$
18,378,499
    
$
18,378,499
    
$
18,577,372
    
$
18,577,372
  
Investment real estate
    
53,077,397
      
53,077,397
      
57,138,980
      
57,138,980
  
Notes receivable
    
18,618,464
      
18,618,464
      
16,876,485
      
16,876,485
  
Policy loans
    
9,764,728
      
9,764,728
      
10,070,134
      
10,070,134
  
Cash and cash equivalents
    
12,506,426
      
12,506,426
      
15,156,548
      
15,156,548
  

The above estimated fair value amounts have been determined based upon the following valuation methodologies. Considerable judgment was required to interpret market data in order to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange.  The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

The fair values of mortgage loans on real estate are estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings.  The inputs used to measure the fair value of our mortgage loans on real estate are classified as Level 3 within the fair value hierarchy.

A portion of the mortgage loans balance consists of discounted mortgage loans. The Company has been purchasing non-performing discounted mortgage loans at a deep discount through an auction process led by the Federal Government.  In general, the discounted loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company.  Accordingly, the Company records its investment in the discounted loans at its original purchase price, which Management believes approximates fair value.  The inputs used to measure the fair value of our discounted mortgage loans are classified as Level 3 within the fair value hierarchy.

Investment real estate is recorded at the lower of the net investment in the real estate or the fair value of the real estate less costs to sell.  The determination of fair value assessments are performed on a periodic, non-recurring basis by external appraisal and assessment of property values by Management.  The inputs used to measure the fair value of our investment real estate are classified as Level 3 within the fair value hierarchy.

Notes receivable are carried at their unpaid principal balances, which approximates fair value. The inputs used to measure the fair value of the loans are classified as Level 3 within the fair value hierarchy.

Policy loans are carried at the aggregate unpaid principal balances in the Condensed Consolidated Balance Sheets which approximate fair value, and earn interest at rates ranging from  4% to 8%. Individual policy liabilities in all cases equal or exceed outstanding policy loan balances.  The inputs used to measure the fair value of our policy loans are classified as Level 3 within the fair value hierarchy.

The carrying amount of cash and cash equivalents in the Consolidated Balance Sheets approximates fair value given the highly liquid nature of the instruments.  The inputs used to measure the fair value of our cash and cash equivalents are classified as Level 1 within the fair value hierarchy.

The carrying amount of short term investments in the Consolidated Balance Sheets approximates fair value.  The inputs used to measure the fair value of our short term investments are classified as Level 3 within the fair value hierarchy.

The carrying value is a reasonable estimate of fair value for notes payable subject to floating rates of interest.  The fair value of notes payable with fixed rate borrowings is determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities.  The inputs used to measure the fair value of our notes payable are classified as Level 2 within the fair value hierarchy.

Note 5 – Credit Arrangements

At June 30, 2017 and December 31, 2016, the Company had the following outstanding debt:

       
Outstanding Principal Balance
  
Instrument
Issue Date
Maturity Date
  
June 30, 2017
    
December 31, 2016
  
Promissory Note:
                
SoftVest, LP
7/22/2016
7/22/2018
  
$
725,000
    
$
1,450,000
  
SoftSearch Investment, L.P.
7/22/2016
7/22/2018
    
725,000
      
1,450,000
  

Instrument
Issue Date
Maturity Date
  
Revolving Credit Limit
    
December 31, 2016
    
Borrowings
    
Repayments
    
June 30, 2017
  
Lines of Credit:
                                  
UTG
11/20/2013
11/20/2017
  
$
8,000,000
    
$
-
      
-
      
-
    
$
-
  
UG
6/2/2015
5/10/2018
    
10,000,000
      
-
      
-
      
-
      
-
  

The UTG line of credit carries interest at a fixed rate of  3.75% and is payable monthly. As collateral, UTG has pledged 100% of the common voting stock of its wholly owned subsidiary, Universal Guaranty Life Insurance Company ("UG").  The Company is currently in the process of renewing this line of credit.

During May of 2017, the Federal Home Loan Bank approved UG's Cash Management Advance Application ("CMA"). The CMA gives the Company the option of selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. The variable rate CMA is prepayable at any time without a fee, while the fixed CMA is not prepayable prior to maturity. The Company is currently in the process of renewing the CMA.

On July 22, 2016, the Company entered in to an agreement to acquire 300,000 shares of its outstanding common stock from a shareholder that owned approximately 8% of the Company's outstanding common stock.  The acquisition was made under the Company's stock buy-back program. As part of this transaction, two promissory notes totaling $2.9 million were issued. The notes require principal payments of one half of the note value to be paid one year from the date of purchase and the other one half to be paid two years from the date of purchase. The notes bear interest at 0%.  During April of 2017, the Company paid $725,000 on the outstanding principal balance of each promissory note.

Note 6 – Shareholders' Equity

Stock Repurchase Program – The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG's common stock. At a meeting of the Board of Directors on June 15, 2016, the Board of Directors of UTG authorized the repurchase of up to an additional $2 million of UTG's common stock and on July 14, 2016, the Board of Directors again increased the amount available by an additional $4.5 million, for a total repurchase of $14.5 million. Repurchased shares are available for future issuance for general corporate purposes. Company Management has broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. Open market purchases are made based on the last available market price but may be limited.  During the six month period ended June 30, 2017, the Company repurchased approximately 11,500 shares through the stock repurchase program for approximately $206,000. Through June 30, 2017, UTG has spent approximately $12.1 million in the acquisition of approximately 1,070,000 shares under this program.

During 2017, the Company issued approximately 11,000 shares of stock to management as compensation. These awards are determined at the discretion of the Board of Directors

Earnings Per Share Calculations

Earnings per share are based on the weighted average number of common shares outstanding during each period.  For the three and six months ended June 30, 2017 and 2016, diluted earnings per share were the same as basic earnings per share since the Company had no dilutive instruments outstanding.

Note 7 – 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.  In the normal course of business, the Company is involved from time to time in various legal actions and other state and federal proceedings.  Management is of the opinion that the ultimate disposition of the matters will not have a materially adverse effect on the Company's results of operations or financial position.

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 condensed consolidated financial statements, though the Company has no control over such assessments.

Within the Company's trading accounts, certain trading securities carried as liabilities represent securities sold short.  A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale. All trading securities were settled during the first quarter of 2017.

The following table represents the total funding commitments and the unfunded commitment as of June 30, 2017 related to certain investments:

   
Total Funding
Commitment
    
Unfunded
Commitment
  
RLF III, LLC
  
$
4,000,000
    
$
398,120
  
Sovereign's Capital, LP Fund I
    
500,000
      
33,642
  
UGLIC, LLC
    
1,600,000
      
120,000
  
Sovereign's Capital, LP Fund II
    
1,000,000
      
456,064
  
Barton Springs Music, LLC
    
2,500,000
      
1,339,063
  
Master Mineral Holdings II, LP
    
4,122,167
      
556,286
  

During 2006, the Company committed to invest in RLF III, LLC ("RLF"), which makes land-based investments in undervalued assets. RLF makes capital calls as funds are needed for continued land purchases.

During 2012, the Company committed to invest in Sovereign's Capital, LP Fund I ("Sovereign's"), which invests in companies in emerging markets. Sovereign's makes capital calls to investors as funds are needed.

During 2014, the Company committed to invest in UGLIC, LLC, which purchases real estate tax receivables.  UGLIC, LLC makes capital calls as funds are needed for additional purchases.

During 2015, the Company committed to invest in Sovereign's Capital, LP Fund II ("Sovereign's II"), which invests in companies in emerging markets. Sovereign's II makes capital calls to investors as funds are needed.

During 2016, the Company made a commitment to invest in Barton Springs Music, LLC ("Barton"), which invests in music royalties.  Barton makes capital calls to its investors as funds are needed to acquire the royalty rights.

During 2016, the Company made a commitment to invest in Master Mineral Holdings II, LP ("MMH"), which purchases land for leasing opportunities to those looking to harvest natural resources.  MMH makes capital calls to its investors as funds are needed for continued land purchases.

Note 8 – Other Cash Flow Disclosures

On a cash basis, the Company paid the following expenses:

   
Three Months Ended
  
   
June 30,
  
   
2017
    
2016
  
Interest
  
$
-
    
$
-
  
Federal income tax
    
115,000
      
735,000
  

   
Six Months Ended
  
   
June 30,
  
   
2017
    
2016
  
Interest
  
$
-
    
$
-
  
Federal income tax
    
115,000
      
735,000
  

Note 9 – Concentrations of Credit Risk

The Company maintains cash balances in financial institutions that at times may exceed federally insured limits.  The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse Correll, the Company's CEO and Chairman.  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.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is Management's discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively with the Parent, the "Company").  The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in the Company's annual report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Cautionary Statement Regarding Forward-Looking Statements

This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably," or similar expressions, we are making forward-looking statements.

Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.  Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.

Overview

UTG, Inc., a Delaware corporation, is a life insurance holding company.  The Company's dominant business is individual life insurance, which includes the servicing of existing insurance policies in force, the acquisition of other companies in the life insurance business and the administration and processing of life insurance business for other entities.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability.  The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.  Management has identified the accounting policies related to 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 as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's Discussion and Analysis.

During the six months ended June 30, 2017, there were no additions to or changes in the critical accounting policies disclosed in the 2016 Form 10-K, as discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements.


Results of Operations

On a consolidated basis, the Company reported a net loss attributable to common shareholders' of approximately $(2.5) million for the six-month period ended June 30, 2017 and a net loss attributable to common shareholders' of approximately $(555,000) for the three-month period ended June 30, 2017.  For the six-month period ended June 30, 2016, the Company reported net income attributable to common shareholders' of approximately $569,000 and a net loss attributable to common shareholders' of approximately $(713,000) for the three-month period ended June 30, 2016.

Revenues

The Company's total revenues decreased approximately 35% when comparing the six month periods ended June 30, 2017 and 2016. The Company's revenues decreased by approximately 8% when comparing the three month periods ended June 30, 2017 and 2016. The variance in total revenues reported, year to date and for the quarter, is mainly attributable to fluctuations in net investment income and net realized investment gains reported by the Company during 2017 and 2016. Further analysis of the fluctuations in net investment income and net realized investment gains is provided below.

Premium and policy fee revenues, net of reinsurance, decreased approximately 12% when comparing the first six months of 2017 compared to the same period in 2016.  Premium and policy fee revenues, net of reinsurance, decreased by approximately 21% when comparing the second quarter of 2017 to the same quarter in 2016.  The Company writes minimal new business.  Premium and policy fee revenues, net of reinsurance, represented 37% and 28% of the Company's revenues as of June 30, 2017 and 2016, respectively.

The following table reflects net investment income of the Company for the three and six month periods ended June 30:

   
Three Months Ended
  
Six Months Ended
   
June 30,
  
June 30,
   
2017
  
2016
  
2017
  
2016
                 
Fixed maturities available for sale
$
2,096,562
$
2,354,484
$
4,218,439
$
4,637,567
Equity securities
  
213,780
  
484,906
  
595,643
  
700,862
Trading securities
  
0
  
24,938
  
(1,061)
  
39,477
Mortgage loans
  
369,624
  
151,941
  
597,684
  
1,252,774
Real estate
  
542,190
  
562,633
  
1,011,448
  
1,126,929
Notes receivable
  
48,805
  
232,394
  
369,516
  
941,581
Policy loans
  
193,406
  
219,655
  
348,759
  
265,118
Cash and cash equivalents
  
1,386
  
5,996
  
3,966
  
9,560
Total consolidated investment income
  
3,465,753
  
4,036,947
  
7,144,394
  
8,973,868
Investment expenses
  
(649,336)
  
(826,466)
  
(1,291,493)
  
(1,744,896)
Consolidated net investment income
$
2,816,417
$
3,210,481
$
5,852,901
$
7,228,972

Net investment income represented 56% and 45% of the Company's total revenues as of June 30, 2017 and 2016, respectively.  The Company reported net investment income of approximately $5.9 million for the six-month period ended June 30, 2016, a decrease of approximately 19% compared to the same period in 2016.  For the three-month period ended June 30, 2017, net investment income decreased approximately 12%, compared to the same quarter in 2016.  Investment income was comparable for the quarter, and year to date, for all major investment categories, except mortgage loans and notes receivable.

Income from the mortgage loan investment portfolio is down in the current year, when comparing the three and six month periods ended June 30, 2017 to the same periods in 2016.  This is the result of the continued pay off of loans within the portfolio, particularly the discounted mortgage loans, which have, in recent periods, provided significant earnings.  During the first quarter of 2016, two of the discounted mortgage loans paid off, which produced income of approximately $842,000.

Income from the notes receivable investment portfolio is down in the current year, when comparing the three and six month periods ended June 30, 2017 to the same periods in 2016.  During the frist quarter of 2016, one of the notes receivable was fully repaid and produced income fo approximately $500,000.



The Company reported net realized investment gains of approximately $540,000 and $4.1 million for the six month periods ended June 30, 2017 and 2016, respectively.  During the second quarter of 2017 and 2016, the Company reported net realized investment gains of approximately $1 million and $3.4 million, respectively. During the second quarter of 2016, the Company sold a parcel of real estate, which produced a gain of approximately $3.2 million.

The 2017 net realized investment gains are the result of the sale of certain equity securities, which produced gains of approximately $850,000. The gains from the equity securities sold were offset by a loss of approxiamtely $520,000 from the sale of real estate. Realized investment gains are the result of one-time events and are expected to vary from quarter to quarter.

In summary, the Company's basis for future revenue growth is expected to come from the following primary sources: conservation of business currently in-force, the maximization of investment earnings and the acquisition of other companies or policy blocks in the life insurance business.  Management has placed a significant emphasis on the development of these revenue sources to enhance these opportunities.

Expenses

The Company reported total benefits and other expenses of approximately $13.7 million for the six-month period ended June 30, 2017, a decrase of approximately 7% from the same period in 2016.  For the three-month period ended June 30, 2017, total benefits and other expenses decreased approximately 9%, compared to the same quarter in 2016.  Benefits, claims and settlement expenses represented approximately 71% of the Company's total expenses for the three and six-month periods ended June 30, 2017.  The other major expense category of the Company is operating expenses, which represented approximately 28% and 27% of the Company's total expenses for the three and six month periods ended June 30, 2017, respectively.

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims, decreased approximately 11% in the six-month period ended June 30, 2017, compared to the same period in 2016.  For the three-month period ended June 30, 2017, life benefits, claims and settlement expenses, net of reinsurance benefits and claims, decreased approximately 10%, compared to the same quarter in 2016.  Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

Net amortization of cost of insurance acquired decreased 4% during the six-month and three-month periods ended June 30, 2017 compared to the same period in 2016.  Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business.  The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition.  Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business.  The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.  Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force.  This expense is expected to decrease, unless the Company acquires a new block of business.

Operating expenses increased approximately 3% in the six-month period ended June 30, 2017 in comparison to the same period in 2016.  Second quarter 2017 operating expenses were down approximately 8% compared to operating expenses reported in the second quarter of 2016. In comparison to the prior year, operating expenses were comparable in all of the major expense categories.

UTG has a strong philanthropic program. The Company generally allocates a portion of its taxable income to be used for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that help the weak or poor. Charitable contributions made by the Company are expected to vary from year to year depending on the earnings of the Company.

Effective January 1, 2017, the Company and FSNB began sharing certain services. The shared services focuses on departments commonly utilized by both organizations such as Financial Accounting, Human Resources and Information Technology.

Management continues to place significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income.

Financial Condition

Investment Information

Investments represent approximately 86% and 85% of total assets at June 30, 2017 and December 31, 2016, respectively.  Accordingly, investments are the largest asset group of the Company.  The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments that it is 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 a diverse set of securities.

As of June 30, 2017, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets, shareholders' equity or results from operations.  To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as "investments available for sale".  Investments available for sale are carried at market, with changes in market value charged directly to shareholders' equity.  Changes in the market value of available for sale securities resulted in net unrealized gains of approximately $3.2 million for the six-month period ended June 30, 2017 and $250,000 for the second quarter of 2017.  Changes in the market value of available for sale securities resulted in net unrealized gains of approximately $20 million for the six-month period ended June 30, 2016 and $12.4 million for the second quarter of 2016. The variance in the net unrealized gains and losses is the result of normal market fluctuations and chnages in interest rates.

Capital Resources

Total shareholders' equity decreased by less than 1% as of June 30, 2017 compared to December 31, 2016. The decrease in total shareholders' equity was the result of a decrease in retained earnings, which is attributable to the current year net loss reported by the Company.

The Company's investments are predominately in fixed maturity investments such as bonds, which provide sufficient return to cover future obligations.  The Company carries all of its fixed maturity holdings as available for sale, which are reported in the Condensed Consolidated Financial Statements at their market value.

Liquidity

The Company has three principal needs for cash - the insurance company's contractual obligations to policyholders, the payment of operating expenses and debt service.  Cash and cash equivalents represented 3% and 4% of total assets as of June 30, 2017 and December 31, 2016, respectively.  Fixed maturities as a percentage of total assets were approximately 47% as of June 30, 2017 and December 31, 2016, respectively.

The Company currently has access to funds for operating liquidity.  UTG has an $8,000,000 revolving credit note with Illinois National Bank.  At June 30, 2017, the Company had no outstanding borrowings against the UTG line of credit.

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. Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds.

Net cash used in operating activities was approximately $4.4 million and $7.1 million for the six-month periods ended June 30, 2017 and 2016, respectively.  Sources of operating cash flows of the Company, as with most insurance entities, is comprised primarily of premiums received on life insurance products and income earned on investments.  Uses of operating cash flows consist primarily of payments of benefits to policyholders and beneficiaries and operating expenses.  The Company has not marketed any significant new products for several years.  As such, premium revenues continue to decline.  Management anticipates future cash flows from operations to remain similar to historic trends.

Net cash provided by investing activities was approximately $4.3 million and $9.6 million for the six-month period ended June 30, 2017 and 2016, respectively. The net cash provided by investing activities is expected to vary from quarter to quarter depending on market conditions and management's ability to find and negotiate favorable investment contracts.




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 and the servicing of its debt, are primarily provided by its subsidiaries.  On a parent only basis, UTG's cash flow is dependent on Management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances.  At June 30, 2017, substantially all of the consolidated shareholders' equity represented net assets of its subsidiary.  The Company's insurance subsidiary has maintained adequate statutory capital and surplus.  The payment of cash dividends to shareholders by UTG is not legally restricted.  However, the state insurance department regulates insurance Company dividend payments where the Company is domiciled.  No dividends were paid to shareholders in 2016 or the six-month period ended June 30, 2017.

UG is an Ohio domiciled insurance company, which requires notification within five business days to the insurance commissioner following the declaration of any ordinary dividend and at least ten calendar days prior to payment of such dividend.  Ordinary dividends are defined as the greater of:  a) prior year statutory net income or b) 10% of statutory capital and surplus.  For the year ended December 31, 2016, UG had statutory net income of approximately $4.6 million.  At December 31, 2016 UG's statutory capital and surplus amounted to approximately $45.2 million.  Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.  During 2016, UG paid UTG ordinary dividends of $1 million.  During the second quarter of 2017, UG paid UTG an ordinary dividend of $2 million. UTG used the dividends received during 2016 and 2017 for general operations of the Company.

ITEM 4.  CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to Management, including the principal executive officer and principal financial officer, allowing timely decisions regarding required disclosure. Under the supervision and with the participation of our Management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

NONE

ITEM 1A.  RISK FACTORS

NONE

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 4.  MINE SAFETY DISCLOSURES

NONE

ITEM 5.  OTHER INFORMATION

NONE

ITEM 6.  EXHIBITS

*31.1
Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2
Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1
Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**101
Interactive Data File

*Filed herewith



 
 
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.


UTG, INC.
(Registrant)

Date:
August 10, 2017
 
By
/s/ James P. Rousey
 
 
 
 
James P. Rousey
 
 
 
 
President and Director

Date:
August 10, 2017
 
By
/s/ Theodore C. Miller
 
 
 
 
Theodore C. Miller
 
 
 
 
Senior Vice President and Chief Financial Officer