10-Q 1 ftfc_10q-093012.htm FORM 10-Q ftfc_10q-093012.htm
United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[ X ]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934
 
For the quarterly period ended September 30, 2012


[    ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period From                    to                    .

Commission file number: 000-52613

FIRST TRINITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Oklahoma
(State or other jurisdiction of incorporation or organization)
 
34-1991436
(I.R.S. Employer Identification Number)

7633 East 63rd Place, Suite 230
Tulsa, Oklahoma 74133
(Address of principal executive offices)

(918) 249-2438
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for 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 þ       No o

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 Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,  non-accelerated filer, or a smaller reporting company.  See 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:  þ
       
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o       No þ
 
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:    Common stock .01 par value as of November 9, 2012: 7,835,785 shares
 
 
1

 
 
FIRST TRINITY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
Page Number
   
Item 1.  Consolidated Financial Statements
 
   
Consolidated Statements of Financial Position as of September 30, 2012 (Unaudited) and December 31, 2011
3
   
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)
4
   
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)
5
   
Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)
6
   
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)
7
   
Notes to Consolidated Financial Statements (Unaudited)
8
   
Item 2. Management’s Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources
23
   
Item 4.  Controls and Procedures
47
   
Part II.  OTHER INFORMATION
 
   
Item 1.  Legal Proceedings
47
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
47
   
Item 3.  Defaults upon Senior Securities
47
   
Item 4.  Mine Safety Disclosures
47
   
Item 5.  Other Information
47
   
Item 6.  Exhibits
48
   
Signatures
48
   
Exhibit No. 31.1
 
Exhibit No. 31.2
 
Exhibit No. 32.1
 
Exhibit No. 32.2
 
Exhibit No 101.INS
 
Exhibit No. 101.SCH
 
Exhibit No. 101.CAL
 
Exhibit No. 101.DEF
 
Exhibit No. 101.LAB
 
Exhibit No. 101.PRE
 

 
2

 

PART I – FINANCIAL INFORMATION

Item 1.          Consolidated Financial Statements

First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Financial Position

   
September 30, 2012
   
December 31, 2011
 
 
 
(Unaudited)
       
Assets            
Investments
           
Available-for-sale fixed maturity securities at fair value (amortized cost: $89,836,280 and $78,128,103 as of September 30, 2012 and December 31, 2011, respectively)
  $ 96,981,267     $ 81,051,207  
Available-for-sale equity securities at fair value (cost: $725,492 and $750,941 as of September 30, 2012 and December 31, 2011, respectively)
    946,562       898,893  
Mortgage loans on real estate
    8,662,046       1,985,394  
Investment real estate
    3,335,720       3,466,581  
Policy loans
    1,474,373       1,472,666  
Other long-term investments
    18,534,991       9,875,675  
Total investments
    129,934,959       98,750,416  
Cash and cash equivalents
    12,881,116       27,705,711  
Accrued investment income
    1,438,636       1,122,574  
Recoverable from reinsurers
    1,170,390       1,132,121  
Agents' balances and due premiums
    374,853       381,901  
Loans from premium financing, net
    485,620       1,022,416  
Deferred policy acquisition costs
    6,686,074       5,251,999  
Value of insurance business acquired
    7,604,592       7,912,469  
Property and equipment, net
    135,749       170,843  
Other assets
    1,724,781       1,297,205  
Total assets
  $ 162,436,770     $ 144,747,655  
Liabilities and Shareholders' Equity
               
Policy liabilities
               
Policyholders' account balances
  $ 93,544,057     $ 81,730,322  
Future policy benefits
    30,660,347       28,977,186  
Policy claims
    547,929       515,522  
Premiums paid in advance
    51,837       46,613  
Total policy liabilities
    124,804,170       111,269,643  
Deferred federal income taxes
    3,485,596       2,622,711  
Other liabilities
    688,444       2,457,188  
Total liabilities
    128,978,210       116,349,542  
Shareholders' equity
               
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 and 6,798,535 issued and 7,835,785 and 6,798,535 outstanding as of September 30, 2012 and December 31, 2011, respectively, and 36,560 and 566,404 subscribed as of September 30, 2012 and December 31, 2011, respectively
    80,109       73,649  
Additional paid-in capital
    28,668,886       24,086,146  
Treausury Stock, at cost (138,588 shares as of September 30, 2012)
    (485,058 )     -  
Accumulated other comprehensive income
    6,074,739       2,696,224  
Accumulated earnings (deficit)
    (880,116 )     1,542,094  
Total shareholders' equity
    33,458,560       28,398,113  
Total liabilities and shareholders' equity
  $ 162,436,770     $ 144,747,655  
 
See notes to consolidated financial statements (unaudited).
 
 
3

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
                       
Premiums
  $ 1,943,647     $ 1,525,552     $ 5,806,616     $ 4,576,930  
Income from premium financing
    20,591       54,701       97,282       127,754  
Net investment income
    1,565,135       629,440       4,303,960       1,788,875  
Net realized investment gains
    378,378       573,823       471,189       599,173  
Other income
    3,544       5,131       15,354       7,916  
Total revenues
    3,911,295       2,788,647       10,694,401       7,100,648  
Benefits, Claims and Expenses
                               
Benefits and claims
                               
Increase in future policy benefits
    472,508       462,699       1,645,523       1,408,649  
Death benefits
    606,062       258,413       1,891,630       1,134,920  
Surrenders
    156,212       95,799       430,212       247,605  
Interest credited to policyholders
    873,679       380,171       2,505,815       1,087,522  
Dividend and accumulation benefits
    93,576       -       274,674       -  
Total benefits and claims
    2,202,037       1,197,082       6,747,854       3,878,696  
Policy acquisition costs deferred
    (459,085 )     (500,681 )     (1,885,010 )     (1,575,579 )
Amortization of deferred policy acquisition costs
    52,998       18,877       437,537       206,594  
Amortization of value of insurance business acquired
    92,211       58,211       307,877       172,688  
Commissions
    545,148       538,106       1,835,323       1,547,115  
Other underwriting, insurance and acquisition expenses
    940,584       742,502       2,754,979       2,099,985  
Total expenses
    1,171,856       857,015       3,450,706       2,450,803  
Total benefits, claims and expenses
    3,373,893       2,054,097       10,198,560       6,329,499  
Income before total federal income tax expense
    537,402       734,550       495,841       771,149  
Current federal income tax expense
    53,365       29,607       120,145       33,270  
Deferred federal income tax expense (benefit)
    11,960       56,676       (44,054 )     88,342  
Total federal income tax expense
    65,325       86,283       76,091       121,612  
Net income
  $ 472,077     $ 648,267     $ 419,750     $ 649,537  
Net income per common share basic and diluted
  $ 0.06     $ 0.09     $ 0.05     $ 0.09  
 
See notes to consolidated financial statements (unaudited).
 
 
4

 

First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income
  $ 472,077     $ 648,267     $ 419,750     $ 649,537  
Other comprehensive income (loss)
                               
Total net unrealized gains (losses) arising during the period
    2,868,334       (112,202 )     4,766,190       90,883  
Less: Net realized investment gains
    378,378       573,823       471,189       599,173  
Net unrealized gains (losses)
    2,489,956       (686,025 )     4,295,001       (508,290 )
Adjustment to deferred acquisition costs
    (5,547 )     345       (13,398 )     (5,748 )
Other comprehensive income (loss) before income tax expense (benefit)
    2,484,409       (685,680 )     4,281,603       (514,038 )
Income tax expense (benefit)
    511,973       (34,562 )     903,088       39,481  
Total other comprehensive income (loss)
    1,972,436       (651,118 )     3,378,515       (553,519 )
Total comprehensive income (loss)
  $ 2,444,513     $ (2,851 )   $ 3,798,265     $ 96,018  

See notes to consolidated financial statements (unaudited).
 
5

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2012 and 2011
(Unaudited)
   
Common Stock $.01 Par Value
   
Additional Paid-in Capital
   
Treasury Stock
   
Accumulated Other Comprehensive Income
   
Accumulated Earnings (Deficit)
   
Total Shareholders' Equity
 
Balance as of January 1, 2011
  $ 62,533     $ 16,677,615     $ -     $ 3,305,370     $ (3,389,571 )   $ 16,655,947  
Stock dividend
    3,238       2,425,090       -       -       (2,428,328 )     -  
Subscriptions of common stock
    6,357       4,044,125       -       -       -       4,050,482  
Comprehensive income:
                                               
Net income
    -       -       -       -       649,537       649,537  
Other comprehensive loss
    -       -       -       (553,519 )     -       (553,519 )
Balance as of September 30, 2011
  $ 72,128     $ 23,146,830     $ -     $ 2,751,851     $ (5,168,362 )   $ 20,802,447  
                                                 
Balance as of January 1, 2012
  $ 73,649     $ 24,086,146     $ -     $ 2,696,224     $ 1,542,094     $ 28,398,113  
Stock dividend
    3,789       2,838,171       -       -       (2,841,960 )     -  
Subscriptions of common stock
    2,671       1,744,569       -       -       -       1,747,240  
Repurchase of common stock
    -       -       (485,058 )     -       -       (485,058 )
Comprehensive income:
                                               
Net income
    -       -       -       -       419,750       419,750  
Other comprehensive income
    -       -       -       3,378,515       -       3,378,515  
Balance as of September 30, 2012
  $ 80,109     $ 28,668,886     $ (485,058 )   $ 6,074,739     $ (880,116 )   $ 33,458,560  
 
See notes to consolidated financial statements (unaudited).
 
 
6

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Operating activities
           
Net income
  $ 419,750     $ 649,537  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for depreciation
    165,182       159,993  
Accretion of discount on investments
    (116,930 )     (643,351 )
Realized investment gains
    (471,189 )     (599,173 )
Gain on sale of fixed asset
    (2,934 )     (2,171 )
Loss on sale of invested real estate
    -       2,150  
Amortization of policy acquisition cost
    437,537       206,594  
Policy acquisition cost deferred
    (1,885,010 )     (1,575,579 )
Loan origination fees deferred
    (149,588 )     -  
Amortization of value of insurance business acquired
    307,877       172,688  
Provision for deferred federal income tax
    (44,054 )     88,342  
Interest credited on policyholder deposits
    2,505,815       1,087,522  
Change in assets and liabilities:
               
Accrued investment income
    (316,062 )     (85 )
Policy loans
    (1,707 )     (57,196 )
Allowance for loan losses
    5,997       (214,136 )
Recoverable from reinsurers
    (38,269 )     (67,856 )
Agents' balances and due premiums
    7,048       (43,066 )
Other assets
    (427,576 )     41,162  
Future policy benefits
    1,683,161       1,456,098  
Policy claims
    32,407       (24,977 )
Premiums paid in advance
    5,224       10,985  
Other liabilities
    (302,149 )     573,184  
Net cash provided by operating activities
    1,814,530       1,220,665  
                 
Investing activities
               
Purchase of fixed maturity securities
    (18,476,679 )     (2,194,847 )
Maturities of fixed maturity securities
    1,378,000       600,000  
Sales of fixed maturity securities
    4,971,785       3,422,767  
Purchase of equity securities
    (504,568 )     (1,198,706 )
Sales of equity securities
    891,480       -  
Purchase of mortgage loans
    (7,341,848 )     (412,500 )
Payments on mortgage loans
    833,373       187,944  
Purchase of invested real estate
    -       (13,550 )
Sale of invested real estate
    -       49,000  
Purchase of other long-term investments
    (9,573,807 )     (2,995,500 )
Payments on other long-term investments
    1,545,128       918,608  
Maturity of certificate of deposit
    -       102,273  
Loans made for premiums financed
    (924,868 )     (2,103,627 )
Loans repaid for premiums financed
    1,455,667       2,249,726  
Sales of furniture and equipment
    5,000       2,300  
Purchases of furniture and equipment
    (1,294 )     (121,248 )
Net cash used in investing activities
    (25,742,631 )     (1,507,360 )
                 
Financing activities
               
Policyholder account deposits
    11,386,515       8,076,604  
Policyholder account withdrawals
    (3,545,191 )     (1,493,209 )
Purchase of treasury stock
    (485,058 )     -  
Proceeds from public stock offering
    1,747,240       4,050,482  
Net cash provided by financing activities
    9,103,506       10,633,877  
                 
Increase (decrease) in cash
    (14,824,595 )     10,347,182  
Cash and cash equivalents, beginning of period
    27,705,711       12,985,278  
Cash and cash equivalents, end of period
  $ 12,881,116     $ 23,332,460  
 
See notes to consolidated financial statements (unaudited).
 
 
7

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
 
 
1.          Organization and Significant Accounting Policies

Nature of Operations

First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company, Family Benefit Life Insurance Company, First Trinity Capital Corporation and Southern Insurance Services, LLC.  The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.  The Company raised $1,450,000 from two private placement stock offerings during 2004.  On June 22, 2005, the Company’s intrastate public stock offering filed with the Oklahoma Department of Securities for $12,750,000, which included a 10% "over-sale" provision (additional sales of $1,275,000), was declared effective.  The offering was completed February 23, 2007.  The Company raised $14,025,000 from this offering.  On June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities.  The offering was completed April 30, 2012.  The Company raised $11,000,010 from this offering.

On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas and Missouri.  The private placement is for 600,000 shares of the Company’s common stock for $8.50 per share.  If all shares are sold, the Company will receive $4,335,000 after reduction for offering expenses.  As of September 30, 2012, the Company has received gross proceeds of $310,760 from the subscription of 36,560 shares of its common stock in this private placement and incurred $46,614 in offering costs.

The Company purchased First Life America Corporation (“FLAC”) on December 23, 2008.  On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC”) and FLAC, were merged, with FLAC being the surviving company.  Immediately following the merger, FLAC changed its name to Trinity Life Insurance Company (“TLIC”).  After the merger, the Company had two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma.

TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states primarily in the Midwest.  TLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products.  The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years.  They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee.  The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting.  The products are sold through independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.

TLIC purchased Family Benefit Life Insurance Company (“Family Benefit Life”) on December 28, 2011.  Family Benefit Life is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in seven states.  Family Benefit Life’s current product portfolio consists of whole life, term, accidental death and dismemberment, annuity, endowment and group life insurance products.  The products are sold through independent agents in the states of Arizona, Colorado, Kansas, Missouri, Nebraska, New Mexico and Oklahoma.

FTCC was incorporated in 2006, and began operations in January 2007.  FTCC provides financing for casualty insurance premiums for individuals and companies and is licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.

The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts.  On May 16, 2012, the Company determined and then announced that FTCC will not accept new premium financing contracts after June 30, 2012.  FTCC will continue to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force.  The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013.  The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
 
 
8

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
 
 
1.           Organization and Significant Accounting Policies (continued)

The Company also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2010, that operated as a property and casualty insurance agency but currently has no operations.

Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.  The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ended December 31, 2012 or for any other interim period or for any other future year.  Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted.  The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2011.
 
Principles of Consolidation

The consolidated financial statements include the accounts and operations of the Company and its subsidiaries.  All intercompany accounts and transactions are eliminated in consolidation.

Reclassifications

Certain reclassifications have been made in the prior year and prior quarter financial statements to conform to current year and current quarter classifications.  These reclassifications had no effect on previously reported net income or shareholders' equity.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

Common Stock

Common stock is fully paid, non-assessable and has a par value of $.01 per share.

On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold.  The dividend was payable to the holders of shares of the Corporation as of March 10, 2011.  Fractional shares were rounded to the nearest whole number of shares.  The Company issued 323,777 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.  On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold.  The dividend was payable to the holders of shares of the Corporation as of March 10, 2012.  Fractional shares were rounded to the nearest whole number of shares.  The Company issued 378,928 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.  These stock dividends were non-cash investing and financing activities.
 
 
9

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
 
 
1.           Organization and Significant Accounting Policies (continued)

Subsequent Events

Management has evaluated all events subsequent to September 30, 2012 through the date that these financial statements have been issued.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In May 2011, the Financial Accounting Standards Board (FASB) issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.

The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.

Presentation of Comprehensive Income
 
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity.  The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
 
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
 
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
 
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts.  This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred.  If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Intangibles - Goodwill and Other
 
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied.  Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology, or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill.  If an entity determines that it is more likely than not, it must perform an impairment test.
 
 
10

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

 
1.           Organization and Significant Accounting Policies (continued)

The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill.  If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any.  In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill.  If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Testing Indefinite-Lived Intangible Assets for Impairment
 
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill.  Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value.  If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed.  The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset.  If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
 
The updated guidance is effective for the quarter ending March 31, 2013.  Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
 
 
11

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

2.           Investments

Fixed Maturity and Equity Securities Available-For-Sale

Investments in fixed maturity and equity securities available-for-sale as of September 30, 2012 and December 31, 2011 are summarized as follows:

September 30, 2012
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Fixed maturity securities
                       
U.S. government
  $ 2,568,969     $ 275,199     $ -     $ 2,844,168  
Residential mortgage-backed securities
    114,048       75,233       -       189,281  
Corporate bonds
    85,602,523       6,835,482       183,607       92,254,398  
Foreign bonds
    1,550,740       194,371       51,691       1,693,420  
Total fixed maturity securities
  $ 89,836,280     $ 7,380,285     $ 235,298     $ 96,981,267  
 
   
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Equity securities                                
Mutual funds
  $ 160,366     $ 45,601     $ -     $ 205,967  
Corporate preferred stock
    247,960       22,375       -       270,335  
Corporate common stock
    317,166       153,094       -       470,260  
Total equity securities
    725,492       221,070       -       946,562  
Total fixed maturity and equity securities
  $ 90,561,772     $ 7,601,355     $ 235,298     $ 97,927,829  
 
December 31, 2011
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Fixed maturity securities
                               
U.S. government
  $ 2,762,683     $ 46,489     $ -     $ 2,809,172  
Residential mortgage-backed securities
    135,538       67,443       -       202,981  
Corporate bonds
    73,083,134       2,708,377       39,646       75,751,865  
Foreign bonds
    2,146,748       185,566       45,125       2,287,189  
Total fixed maturity securities
  $ 78,128,103     $ 3,007,875     $ 84,771     $ 81,051,207  
 
   
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Equity securities                                
Mutual funds
  $ 150,815     $ 32,707     $ -     $ 183,522  
Corporate preferred stock
    247,960       -       -       247,960  
Corporate common stock
    352,166       115,245       -       467,411  
Total equity securities
    750,941       147,952       -       898,893  
Total fixed maturity and equity securities
  $ 78,879,044     $ 3,155,827     $ 84,771     $ 81,950,100  

 
12

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
 
 
2.           Investments (continued)

All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of September 30, 2012 and December 31, 2011 are summarized as follows:


September 30, 2012
 
Fair Value
   
Unrealized Loss
   
Number of Securities
 
Fixed maturity securities
                 
Less than 12 months
                 
Corporate bonds
  $ 3,753,299     $ 183,607       24  
Foreign bonds
    551,439       51,691       2  
Total fixed maturity securities
  $ 4,304,738     $ 235,298       26  
 
December 31, 2011
 
Fair Value
   
Unrealized Loss
   
Number of Securities
 
Fixed maturity securities
                 
Less than 12 months
                 
Corporate bonds
  $ 922,288     $ 39,646       5  
Foreign bonds
    965,011       45,125       4  
Total fixed maturity securities
  $ 1,887,299     $ 84,771       9  

As of September 30, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 83%.  As of December 31, 2011, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 90%.  Fixed maturity securities were 96% and 88% investment grade as rated by Standard & Poor’s as of September 30, 2012 and December 31, 2011, respectively.  There were no equity securities in an unrealized loss position as of September 30, 2012 and December 31, 2011.

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value based on all of the factors considered.  Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer.  The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.

For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors.  The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings.  The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss).

Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of operations.  Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of operations in the periods incurred as the difference between fair value and cost.

Based on our review, the Company experienced no other-than-temporary impairments during the nine months ended September 30, 2012 and the year ended December 31, 2011.
 
 
13

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
 
 
2.           Investments (continued)

Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 2012, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.

Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized, as of September 30, 2012 and December 31, 2011 are summarized as follows:
 
   
September 30, 2012
   
December 31, 2011
 
             
Unrealized appreciation on available-for-sale securities
  $ 7,366,057     $ 3,071,056  
Adjustment to deferred acquisition costs
    (38,994 )     (25,596 )
Deferred income taxes
    (1,252,324 )     (349,236 )
Net unrealized appreciation on available-for-sale securities
  $ 6,074,739     $ 2,696,224  

The amortized cost and fair value of fixed maturity available-for-sale securities as of September 30, 2012, by contractual maturity, are summarized as follows:

   
Available-for-Sale
 
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 3,010,797     $ 3,106,105  
Due in one year through five years
    27,281,689       29,275,696  
Due after five years through ten years
    48,466,701       52,526,457  
Due after ten years
    10,963,045       11,883,728  
Due at multiple maturity dates
    114,048       189,281  
    $ 89,836,280     $ 96,981,267  

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.

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended Sepember 30,
 
   
2012
   
2011
   
2012
   
2011
 
Proceeds
  $ 3,205,210     $ 3,166,481     $ 7,241,265     $ 4,022,767  
Gross realized gains
    380,992       573,823       476,614       599,579  
Gross realized losses
    (2,614 )     -       (5,425 )     (406 )
 
 
14

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
 
 
2.           Investments (continued)

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2012 and 2011 and the amount of realized investment gains on fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Change in unrealized investment gains:
                       
Available-for-sale securities:
                       
Fixed maturity securities
  $ 2,465,576     $ (612,053 )   $ 4,221,883     $ (433,431 )
Equity securities
    24,380       (73,972 )     73,118       (74,859 )
Other realized investment gains:
                               
Available-for-sale securities:
                               
Fixed maturity securities
    20,230       573,823       109,725       599,173  
Equity securities
    358,148       -       361,464       -  

Major categories of net investment income for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Fixed maturity securities
  $ 1,341,056     $ 586,003     $ 3,900,111     $ 1,735,605  
Equity securities
    11,077       42,686       39,243       50,892  
Mortgage loans
    213,949       25,841       365,975       83,516  
Real estate
    93,684       89,600       280,635       267,407  
Policy loans
    27,785       8,365       76,615       26,744  
Short-term and other investments
    2,843       584       17,471       8,681  
Gross investment income
    1,690,394       753,079       4,680,050       2,172,845  
Investment expenses
    (125,259 )     (123,639 )     (376,090 )     (383,970 )
Net investment income
  $ 1,565,135     $ 629,440     $ 4,303,960     $ 1,788,875  

Included in invested assets are securities and other assets having amortized cost values of $3,228,517 and $2,671,077 and fair values of $3,478,020 and $2,713,063 as of September 30, 2012 and December 31, 2011, respectively, which have been placed on deposit with various state insurance departments.


3.           Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) on the measurement date.  The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.

The Company holds fixed maturity and equity securities that are measured and reported at fair market value on the statement of financial position.  The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value, as follows:
 
 
15

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

 
3.           Fair Value Measurements (continued)

Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities include fixed maturity and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  The Company’s Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  This category generally includes certain private equity investments and asset-backed securities where independent pricing information was not able to be obtained for a significant portion of the underlying assets.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy.  If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.  A review of fair value hierarchy classifications is conducted on a quarterly basis.  Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
 
 
16

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

 
3.           Fair Value Measurements (continued)

The Company’s fair value hierarchy for those financial instruments measured and carried at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 is summarized as follows:
 
September 30, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                       
U.S. government
  $ -     $ 2,844,168     $ -     $ 2,844,168  
Residential mortgage-backed securities
    -       189,281       -       189,281  
Corporate bonds
    -       92,254,398       -       92,254,398  
Foreign bonds
    -       1,693,420       -       1,693,420  
Total fixed maturity securities
  $ -     $ 96,981,267     $ -     $ 96,981,267  
Equity securities, available-for-sale
                               
Mutual funds
  $ 106,427     $ 99,540     $ -     $ 205,967  
Corporate preferred stock
    -       270,335       -       270,335  
Corporate common stock
    427,760       -       42,500       470,260  
Total equity securities
  $ 534,187     $ 369,875     $ 42,500     $ 946,562  
 
December 31, 2011
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                               
U.S. government
  $ -     $ 2,809,172     $ -     $ 2,809,172  
Residential mortgage-backed securities
    -       202,981       -       202,981  
Corporate bonds
    -       75,751,865       -       75,751,865  
Foreign bonds
    -       2,287,189       -       2,287,189  
Total fixed maturity securities
  $ -     $ 81,051,207     $ -     $ 81,051,207  
Equity securities, available-for-sale
                               
Mutual funds
  $ -     $ 183,522     $ -     $ 183,522  
Corporate preferred stock
    -       247,960       -       247,960  
Corporate common stock
    389,911       -       77,500       467,411  
Total equity securities
  $ 389,911     $ 431,482     $ 77,500     $ 898,893  

As of September 30, 2012, Level 3 financial instruments consisted of one private placement common stock that has no active trading.  As of December 31, 2011, Level 3 financial instruments consisted of two private placement common stocks that have no active trading.  These stocks represent investments in small development stage insurance holding companies.  The fair value for these securities was determined through the use of unobservable assumptions about market participants.  The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.

Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and equity securities available-for-sale are primarily based on prices supplied by its third party investment service.  The third party investment service provides quoted prices in the market which use observable inputs in developing such rates.
 
 
17

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

 
3.           Fair Value Measurements (continued)

The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources.  Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing.  As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy.  The Company’s Level 2 investments include obligations of U.S. government agencies, mortgage-backed securities, corporate bonds and foreign bonds.

The Company’s equity securities are included in Level 1 except for mutual funds and the preferred stock included in Level 2 and the private placement common stocks included in Level 3.  Level 1 for these equity securities is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and based upon unadjusted prices.  Level 2 for the mutual funds and preferred stock is appropriate since they are not actively traded as of September 30, 2012.  The Company’s fixed maturity and equity securities portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.

The change in the fair value of the Company’s Level 3 equity securities, available-for-sale for the three and nine months ended September 30, 2012 and 2011 is summarized as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Beginning balance
  $ 77,500     $ 77,500     $ 77,500     $ 77,500  
                                 
Sales
    (35,000 )     -       (35,000 )     -  
                                 
Ending balance
  $ 42,500     $ 77,500     $ 42,500     $ 77,500  
 
The Company uses various financial instruments in the normal course of its business.  The Company’s insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below.
 
 
18

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

 
3.           Fair Value Measurements (continued)

The carrying value and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of September 30, 2012 and December 31, 2011, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

Financial Instruments Disclosed, But Not Carried, at Fair Value:
 
   
September 30, 2012
 
   
Carrying Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                             
Mortgage loans on real estate
                             
Commercial
  $ 2,293,766     $ 2,360,760     $ -     $ -     $ 2,360,760  
Residential
    6,368,280       6,368,280       -       -       6,368,280  
Policy loans
    1,474,373       1,474,373       -       -       1,474,373  
Other long-term investments
    18,534,991       20,752,300       -       -       20,752,300  
Cash and cash equivalents
    12,881,116       12,881,116       12,881,116       -       -  
Accrued investment income
    1,438,636       1,438,636       -       -       1,438,636  
Loans from premium financing
    485,620       485,620       -       -       485,620  
Total financial assets
  $ 43,476,782     $ 45,761,085     $ 12,881,116     $ -     $ 32,879,969  
Financial liabilities
                                       
Policyholders' account balances
  $ 93,544,057     $ 92,952,819     $ -     $ -     $ 92,952,819  
Policy claims
    547,929       547,929       -       -       547,929  
Total financial liabilities
  $ 94,091,986     $ 93,500,748     $ -     $ -     $ 93,500,748  
 
   
December 31, 2011
 
   
Carrying Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                                       
Mortgage loans on real estate
                                       
Commercial
  $ 1,856,160     $ 1,934,303     $ -     $ -     $ 1,934,303  
Residential
    129,234       131,319       -       -       131,319  
Policy loans
    1,472,666       1,472,666       -       -       1,472,666  
Other long-term investments
    9,875,675       11,610,716       -       -       11,610,716  
Cash and cash equivalents
    27,705,711       27,705,711       27,705,711       -       -  
Accrued investment income
    1,122,574       1,122,574       -       -       1,122,574  
Loans from premium financing
    1,022,416       1,022,416       -       -       1,022,416  
Total financial assets
  $ 43,184,436     $ 44,999,705     $ 27,705,711     $ -     $ 17,293,994  
Financial liabilities
                                       
Policyholders' account balances
  $ 81,730,322     $ 80,609,804     $ -     $ -     $ 80,609,804  
Policy claims
    515,522       515,522       -       -       515,522  
Total financial liabilities
  $ 82,245,844     $ 81,125,326     $ -     $ -     $ 81,125,326  
 
 
19

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

3.           Fair Value Measurements (continued)

The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies.  However, considerable judgment was required to interpret market data 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 following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:

Mortgage Loans on Real Estate

The fair values for commercial and residential mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period.  The residential mortgages have been recently purchased and therefore the spot rate yield curve equaled the purchase price.

Other Long-Term Investments

Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach.  Projected cash flows are discounted using applicable rates.

Cash and Cash Equivalents, Policy Loans and Accrued Investment Income
 
The carrying value of these financial instruments approximates their fair values.

Loans from Premium Financing

The carrying value of loans from premium financing is net of unearned interest and any estimated loan losses and approximates fair value.  Estimated loan losses were $235,001 and $229,004 as of September 30, 2012 and December 31, 2011, respectively.

Investment Contracts – Policyholders’ Account Balances

The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach.  Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.

Policy Claims

The carrying amounts reported for these liabilities approximate their fair value.
 
 
20

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

4.           Segment Data

The Company has a life insurance segment, consisting of the operations of TLIC and Family Benefit Life, and a premium financing segment, consisting of the operations of FTCC and SIS.  Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment.  These segments for the three and nine months ended September 30, 2012 and 2011 and assets as of September 30, 2012 and December 31, 2011 are summarized as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
Life and annuity insurance operations
  $ 3,521,425     $ 2,713,398     $ 10,189,056     $ 6,951,075  
Premium finance operations
    20,717       55,014       97,525       126,201  
Corporate operations
    369,153       20,235       407,820       23,372  
Total
  $ 3,911,295     $ 2,788,647     $ 10,694,401     $ 7,100,648  
Income (loss) before income taxes:
                               
Life and annuity insurance operations
  $ 398,533     $ 877,183     $ 734,680     $ 1,200,390  
Premium finance operations
    (78,135 )     (54,840 )     (182,290 )     (129,682 )
Corporate operations
    217,004       (87,793 )     (56,549 )     (299,559 )
Total
  $ 537,402     $ 734,550     $ 495,841     $ 771,149  
Depreciation and amortization expense:
                               
Life and annuity insurance operations
  $ 195,896     $ 120,851     $ 877,170     $ 504,356  
Premium finance operations
    911       927       2,765       2,781  
Corporate operations
    9,864       8,899       30,661       32,138  
Total
  $ 206,671     $ 130,677     $ 910,596     $ 539,275  
 
   
September 30, 2012
   
December 31, 2011
 
Assets:
               
Life and annuity insurance operations
  $ 154,913,578     $ 137,931,960  
Premium finance operations
    1,425,179       1,864,370  
Corporate operations
    6,098,013       4,951,325  
Total
  $ 162,436,770     $ 144,747,655  

 
21

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

5.           Allowance for Loss on Premium Finance Contracts

The progression of the Company’s allowance for loss related to loans from premium financing for the three and nine months ended September 30, 2012 and 2011 is summarized as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Allowance at beginning of period
  $ 223,135     $ 235,619     $ 229,004     $ 443,071  
Entries to statement of financial position
    11,866       -       5,997       (191,991 )
Entries to statement of operations
    -       (6,684 )     -       (22,145 )
Allowance at end of period
  $ 235,001     $ 228,935     $ 235,001     $ 228,935  
 
 
6.           Federal Income Taxes

The provision for federal income taxes is based on the liability method of accounting for income taxes.  Deferred income taxes are provided for the cumulative temporary differences between balances of assets and liabilities determined under GAAP and the balances using tax bases.  A valuation allowance has been established due to the uncertainty of certain loss carryforwards.

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2009 through 2011 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.


7.           Contingent Liabilities

In most states, guaranty fund assessments may be taken as a credit against premium taxes over a five-year period.  These assessments, brought about by the insolvency of life and health insurers, are levied at the discretion of the various state guaranty fund associations to cover association obligations.
 
 
22

 
 
Item 2.  Management's Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.

FINANCIAL HIGHLIGHTS

Consolidated Condensed Results of Operations for the Three Months Ended September 30, 2012
 
   
Three Months Ended September 30,
    Total Increase (Decrease)       Percentage Change      Family Benefit Life      Net Increase (Decrease)    
   
2012
   
2011
   
2012 less 2011
   
 2012 to 2011
   
 2012 Results
   
2012 less 2011
 
Premiums
  $ 1,943,647     $ 1,525,552     $ 418,095       27.4 %     $ 183,569     $ 234,526  
Net investment income
    1,565,135       629,440       935,695       148.7 %       610,531       325,164  
Net realized investment gains
    378,378       573,823       (195,445 )     -34.1 %       -       (195,445 )
Other revenues
    24,135       59,832       (35,697 )     -59.7 %       1,162       (36,859 )
Total revenues
    3,911,295       2,788,647       1,122,648       40.3 %       795,262       327,386  
Benefits and claims
    2,202,037       1,197,082       1,004,955       84.0 %       578,460       426,495  
Expenses
    1,171,856       857,015       314,841       36.7 %       306,435       8,406  
Total benefits, claims and expenses
    3,373,893       2,054,097       1,319,796       64.3 %       884,895       434,901  
Income (loss) before federal income tax expense (benefit)
    537,402       734,550       (197,148 )     -26.8 %       (89,633 )     (107,515 )
Federal income tax expense (benefit)
    65,325       86,283       (20,958 )     -24.3 %       (6,634 )     (14,324 )
Net income (loss)
  $ 472,077     $ 648,267     $ (176,190 )     -27.2 %     $ (82,999 )   $ (93,191 )
Net income per common share basic and diluted
  $ 0.06     $ 0.09     $ (0.03 )                          
 
Consolidated Condensed Results of Operations for the Nine Months Ended September 30, 2012
   
Nine Months Ended September 30,
     Total Increase (Decrease)      Percentage Change      Family Benefit Life      Net Increase (Decrease)  
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
   
 2012 Results
   
2012 less 2011
 
Premiums
  $ 5,806,616     $ 4,576,930     $ 1,229,686       26.9 %     $ 704,339     $ 525,347  
Net investment income
    4,303,960       1,788,875       2,515,085       140.6 %       1,817,680       697,405  
Net realized investment gains
    471,189       599,173       (127,984 )     -21.4 %       -       (127,984 )
Other revenues
    112,636       135,670       (23,034 )     -17.0 %       4,702       (27,736 )
Total revenues
    10,694,401       7,100,648       3,593,753       50.6 %       2,526,721       1,067,032  
Benefits and claims
    6,747,854       3,878,696       2,869,158       74.0 %       1,705,813