10-K 1 ftfc_10k-123112.htm FORM 10-K ftfc_10k-123112.htm
United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K
(Mark One)
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 small business issuer as specified in its charter)
 
Oklahoma   34-1991436
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer number)
 
     
7633 East 63rd Place, Suite 230 Tulsa, Oklahoma 74133
  (Address of principal executive offices)  
 
(918) 249-2438
(Issuer's telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
None

Securities registered pursuant to section 12(g) of the Exchange Act:
Title of Each Class
Common Stock, $.01 Par Value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes  ¨    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
Yes  ¨    No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  x    No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
 
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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.
 
Large accelerated filer:  ¨   Accelerated filer:  ¨ Non accelerated filer:  ¨ Smaller reporting company:  x
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
  
Because of the absence of an established trading market for the common stock, the registrant is unable to calculate the aggregate market value of the voting stock held by non-affiliates as of the last business day of the registrant’s most recently completed fiscal quarter.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.    Common stock $.01 par value as of March 11, 2013: 7,789,060 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2013 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this report.

 
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FIRST TRINITY FINANCIAL CORPORATION

TABLE OF CONTENTS

 
Part I      
       
Item 1. Business   4
Item 2. Properties   9
Item 3. Legal Proceedings   10
Item 4. Mine Safety Disclosures   10
       
Part II      
       
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities   11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   12
Item 8. Financial Statements   33
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure   70
Item 9A. Controls and Procedures   70
Item 9B. Other Information   71
       
Part III      
       
Item 10. Directors, Executive Officers and Corporate Governance   71
Item 11. Executive Compensation   71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   71
Item 13. Certain Relationships and Related Transactions, and Director Independence   71
Item 14. Principal Accounting Fees and Services   71
Item 15. Exhibits   71
Signatures     72
Exhibit Index     73
 
 
Exhibit 21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 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

 
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PART I

Item 1. Business
 
Business Development

First Trinity Financial Corporation (the “Company” or “FTFC") is the parent holding company of Trinity Life Insurance Company, Family Benefit Life Insurance Company, First Trinity Capital Corporation and Southern Insurance Services, LLC.

First Trinity Financial Corporation 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, Missouri and South Dakota.  The private placement is for 600,000 shares of the Company’s common stock for $8.50 per share.  If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses.  As of December 31, 2012, the Company had received gross proceeds of $536,095 from the subscription of 63,070 shares of its common stock in this private placement and incurred $232,921 in offering costs. This offering was suspended on March 8, 2013 and resulted in gross proceeds of $620,245 from the subscription of 72,970 shares of its common stock and incurred $290,163 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 product is issued as either a simplified issue or as a graded benefit, determined by underwriting.  TLIC also offers various annuity and deposit-type liability products.  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.  In late 2012, Family Benefit Life was initially licensed in the states of Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.

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.
 
 
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The Company also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2009, that operated as a property and casualty insurance agency but currently has no operations.

The Company was a development stage company until commencing operations in 2007.  Net losses of $3,480,907 occurred from 2004 through 2009.  Those losses resulted primarily from costs incurred while raising capital and establishing the subsidiary companies as well as losses resulting from issuing and administering new and renewal life insurance policies.  The Company’s operations produced combined net income of $8,553,210 in 2010, 2011 and 2012.  The Company has therefore had cumulative net income since inception of $5,072,303.

The Company issued 323,777 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2011, however, that resulted in accumulated earnings (deficit) being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.  The Company also issued 378,928 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2012, that resulted in accumulated earnings being charged an additional $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.  The impact of these two stock dividend charges of $5,270,288 to accumulated earnings (deficit) decreased the balance of accumulated deficit as of December 31, 2012 to $197,985.

Acquisition of Other Companies

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation from an unaffiliated company (the “FLAC acquisition”).  The FLAC acquisition was accounted for as a purchase.  The aggregate purchase price for the FLAC acquisition was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000).  The FLAC acquisition was financed with the working capital of FTFC.  On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by the Oklahoma Insurance Department.

On December 28, 2011, TLIC acquired 100% of the outstanding common stock of Family Benefit Life from Family Benefit Life’s shareholders (the “Family Benefit Life acquisition”).  The Family Benefit Life acquisition was accounted for as a purchase.  The aggregate purchase price for the Family Benefit Life acquisition was $13,855,129.  Given that the Family Benefit Life acquisition occurred in late December 2011, the acquisition only impacted the Company’s consolidated statement of financial position as of December 31, 2011 and not the Company’s consolidated statement of operations for the year ended December 31, 2011.  Family Benefit Life’s 2012 operating results are reflected in the Company’s consolidated statement of operations for the year ended December 31, 2012.

TLIC's acquisition of 100% ownership of Family Benefit Life for $13,855,129 was paid in cash.  The fair value of the net assets acquired in this transaction was $20,770,608.  Since the fair value of the net assets acquired exceeded the purchase price for acquiring those net assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned as “Gain from acquisition of Family Benefit Life” per the requirements of Financial Accounting Standards Board Codification Topic 805 “Business Combinations.”  The reason for the gain from the acquisition of Family Benefit Life primarily related to its management not being committed to rebuild its marketing force in the 2011 economic environment.

Financial Information about Segments

Our business is comprised of three primary operating business segments: Life and Annuity Insurance Operations, Premium Finance Operations and Corporate Operations.  Results for the parent holding company, after elimination of intercompany amounts, are allocated to the corporate operations segment.  See Note 12 of the “Notes to Consolidated Financial Statements” for operating results of our segments for each of the years ended December 31, 2012 and 2011.
 
Life and Annuity Insurance Operations

Our Life and Annuity Insurance Operations consists of issuing ordinary whole life insurance, modified premium whole life with an annuity rider, term, final expense, accidental death and dismemberment and annuity products.  The policies 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.
 
 
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TLIC renewed its administrative services agreement with Investors Heritage Life Insurance Company (“IHLIC”) on August 28, 2012.  Under the terms of this agreement, IHLIC provided services include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of TLIC.  The agreement is effective for a period of five (5) years from September 1, 2012 through August 31, 2017 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.

Family Benefit Life entered into an administrative services agreement with IHLIC on November 28, 2012.  Under the terms of this agreement, IHLIC provided services include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of FBLIC.  The agreement is effective for a period of five (5) years from November 1, 2012 through October 31, 2017 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.

FTFC entered into an administrative services agreement with IHLIC on January 7, 2011.  Under the terms of this agreement, IHLIC provides services incidental to the operation of FTFC as a financial holding company.  The agreement is effective for a period of five (5) years from January 1, 2011 through December 31, 2015 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.

TLIC continues to seek to serve middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.  The majority of its inforce business resulted from the acquisition of FLAC.  TLIC markets its products through independent agents.  With the acquisition of Family Benefit Life in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico.  In late 2012, Family Benefit Life was initially licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.

 
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The following table sets forth our direct collected life insurance premiums and annuity considerations by the policyholder’s state of residence at the time of premium collection, for the most significant states in which we are licensed, for the years ended December 31, 2012 and 2011, in accordance with statutory accounting practices prescribed by the states of domicile of TLIC and Family Benefit Life.
 
   
2012
 
State
 
Life
         
Annuity
       
Illinois
  $ 759,462       10 %   $ 271,584       2 %
Kansas
    2,216,328       28 %     3,353,559       24 %
Kentucky
    157,717       2 %     -       0 %
Missouri
    672,018       8 %     686,815       5 %
Nebraska
    200,166       3 %     1,568,425       11 %
North Dakota
    139,999       2 %     1,604,688       11 %
Ohio
    802,968       10 %     142,100       1 %
Oklahoma
    1,728,591       21 %     1,479,199       11 %
Texas
    1,163,941       15 %     4,730,831       34 %
All other
    113,223       1 %     185,013       1 %
Total direct collected premium
  $ 7,954,413       100 %   $ 14,022,214       100 %
 
   
2011
 
State
 
Life
         
Annuity
       
Illinois
  $ 662,596       10 %   $ 233,200       2 %
Kansas
    2,027,065       31 %     4,416,651       29 %
Kentucky
    117,781       2 %     -       0 %
Nebraska
    127,653       2 %     768,952       5 %
North Dakota
    141,904       2 %     3,491,223       23 %
Ohio
    709,532       10 %     25,600       0 %
Oklahoma
    1,615,111       25 %     1,466,488       10 %
Texas
    1,090,481       17 %     4,769,022       31 %
All other
    98,814       1 %     65,508       0 %
Total direct collected premium
  $ 6,590,937       100 %   $ 15,236,644       100 %
 
Reinsurance

TLIC cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth and risk diversification.  TLIC reinsures all amounts of risk on any one life in excess of $55,000 for individual life insurance with Investors Heritage Life Insurance Company, Munich American Reassurance Company, Optimum Re Life Company and Wilton Reassurance Company.
 
TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re Life Company, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World.  The agreement provides for automatic retrocession of coverage in excess of Optimum Re Life Company’s retention on business ceded to Optimum Re Life Company by the other parties to the Reinsurance Pool.  TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $50,000.   As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.

Effective September 29, 2005, FLAC and Wilton Reassurance Company executed a binding letter of intent whereby both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Reassurance Company on a 50/50 quota share original term coinsurance basis.  The letter of intent was executed on a retroactive basis to cover all applicable business issued by FLAC subsequent to January 1, 2005.  Wilton Reassurance Company agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Reassurance Company as they were collected.  As of June 24, 2006, Wilton Reassurance Company terminated the reinsurance agreement for new business issued after the termination date.
 
 
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Family Benefit Life also participates in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large risk.  Family Benefit Life reinsures initial amounts of risk on any one life in excess of $50,000 for individual life insurance with Optimum Re.  Family Benefit Life also reinsures its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re.
 
Family Benefit Life participates in the Servicemen Group Life Insurance Pool, administered by Prudential Life Insurance Company, in which it assumes group life insurance on a percentage based on the total inforce amount of participating companies.  The group plan permits conversion to permanent insurance with the initial face amount reinsured with the Office of Servicemembers Group Life Insurance.

To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and Family Benefit Life remain primarily liable for the entire amount at risk.
 
Competition

The U.S. life insurance industry is a mature industry that, in recent years, has experienced little to no growth. Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation.  In addition, legislation became effective in the United States that permits commercial banks, insurance companies and investment banks to combine.  These factors have increased competitive pressures in general.

Many domestic life insurance companies have significantly greater financial, marketing and other resources, longer business histories and more diversified lines of insurance products than we do.  We also face competition from companies marketing in person as well as with direct mail and Internet sales campaigns.  Although we may be at a competitive disadvantage to these entities, we believe that our premium rates and policy features are generally competitive with those of other life insurance companies selling similar types of products.

Governmental Regulation

TLIC and Family Benefit Life, respectively, are subject to regulation and supervision by the Oklahoma Insurance Department (“OID”) and the Missouri Department of Insurance (“MDOI”).  The insurance laws of Oklahoma and Missouri give the OID and MDOI broad regulatory authority, including powers to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments.

TLIC and Family Benefit Life can be required, under the solvency or guaranty laws of most states in which it does business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of other insurance companies that become insolvent.  These assessments may be deferred or foregone under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes.

TLIC is subject to Oklahoma laws and Family Benefit Life is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance.  The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.  Cash dividends may only be paid out of surplus derived from realized net profits.  Based on these limitations, there is capacity for TLIC to pay a dividend up to $377,777 in 2013 without prior approval.  In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $887,520 in 2013 without prior approval.  Family Benefit Life paid $1,515,975 of dividends to TLIC in 2012 and received permission from the Missouri Department of Insurance to pay $581,300 of dividends in excess of the $934,675 limitation.

There are certain factors particular to the life insurance business which may have an adverse effect on the statutory operating results of TLIC and Family Benefit Life.  One such factor is that the costs associated with issuing a new policy in force is usually greater than the first year’s policy premium.  Accordingly, in the early years of a new life insurance company, these initial costs and the required provisions for reserves often have an adverse effect on statutory operating results.
 
 
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Premium Finance Operations

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 would not accept new premium financing contracts after June 30, 2012.  FTCC continues 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.

The premium finance subsidiary, FTCC, has provided premium financing to individuals and businesses.  Many casualty insurance carriers require their premiums to be paid on an annual or lump sum basis.  A premium finance company finances these casualty premiums.  A typical premium finance contract requires the insured to pay 25% of the premium up front and the balance is paid over a nine month period.  Premium financing is unique in that the unpaid balance due the company is lower than the unearned premium, which has in effect been assigned to the company in the event of non-payment, thus, the element of risk is minimized.

FTCC was capitalized with $4,000,000 from FTFC.  The Company engages in the premium finance business, independent of its life insurance business.  FTCC is licensed to conduct premium finance business in Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.  Until the May 16, 2012 announcement discussed above, FTCC had historically contracted with over 200 insurance agencies to finance their casualty insurance premiums but two years ago focused on financing with approximately 30 agencies primarily in Oklahoma.  There was no guarantee that those agencies would write premium financing contracts with FTCC.  FTCC was not dependent on a single customer or a few major customers.  During 2011, FTCC returned $1,000,000 of capital to FTFC.  During 2012, FTCC returned $650,000 of capital to FTFC.
 
Premium finance companies are regulated by the individual states with no uniformity among state regulations. Commercial insurance premium finance transactions are not regulated directly in Oklahoma.  Consumer insurance premium finance transactions are considered a consumer credit sale and are subject to the Oklahoma Uniform Consumer Credit Code.  Therefore the regulation of the transaction is by the Oklahoma Department of Consumer Credit under the consumer credit laws.  FTCC is regulated by the Department of Banking in Mississippi.

Finance companies are subject to interest rate fluctuations.  An increase in the cost of funds or a decrease in interest rates that FTCC charged could affect profitability.

The premium financing business is highly competitive in every channel in which FTCC competed.  FTCC competed with large financial institutions most of which may have greater financial, marketing and other resources than FTCC.  FTCC targeted the niche market of small businesses and individual consumers needing casualty insurance financing and faced competition with many specialty financing businesses.  Some competitors were affiliated with property and casualty writing agencies and may have advantageous marketing relationships with their affiliates.

SIS, a property and casualty insurance agency acquired in 2009, wrote commercial and personal lines of insurance, primarily in the state of Mississippi.  SIS is no longer operating as a property and casualty insurance agency and currently has no operations.

Employees

As of March 11, 2013, the Company had nine full-time employees and one part-time employee.

Item 2. Properties

The Company leases 6,769 square feet of office space pursuant to a five-year lease that began October 1, 2010 and leased 950 square feet of office space effective December 15, 2009 that terminated December 31, 2010.  On June 17, 2010, the Company agreed to lease an additional 4,252 square feet of expansion office space whereby, effective October 1, 2010, the Company would lease for five years a combined 6,769 square feet.  Under the terms of the home office lease, the monthly rent is $7,897 from October 1, 2010 through September 30, 2015.  The Company incurred rent expense of $76,136 and $72,809 for the years ended December 31, 2012 and 2011, respectively, under this lease and other minor leases.  The Company received a $120,000 leasehold improvement allowance from the lessor that is being amortized over the non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2012 and 2011.  Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for 2013 and 2014 and $71,073 in 2015.
 
 
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TLIC owns approximately six and one-half acres of land located in Topeka, Kansas.  A 20,000 square foot office building has been constructed on approximately one-half of this land.  On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years.  The monthly lease payments are as follows: $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.

TLIC has also leased 10,000 square feet in the Topeka, Kansas office building under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. This lease was renewed on July 1, 2011 to run through May 31, 2016.  Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice.  The lease agreement calls for minimum monthly base lease payments of $17,535.

Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building.  The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments decreased to $3,100 per month for the period September 1, 2010 through August 31, 2015.

The future minimum lease payments to be received under the above non cancelable lease agreements are $360,072, $360,072, $235,220 and $87,675 for the years 2013 through 2016, respectively.

Family Benefit Life owned approximately one and one-half acres of land located in Jefferson City, Missouri.  A 6,100 square foot building (serving as Family Benefit Life’s headquarters) and a 2,200 square foot building (leased to a third party) are on one acre of this land and the other half acre is held for sale.  In October 2012, both of the buildings were sold.

With respect to the 2,200 square foot building, Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011.  The lease could have been renewed annually if no termination notice was given by either party on or before May 1.  No notice was given by either party on May 1, 2011 or May 1, 2012 and therefore the lease was renewed for additional one-year periods.  The tenant paid Family Benefit Life $15,000 per year in monthly installments of $1,250.  In connection with the October 2012 sale of the two buildings, the underlying third party lease was transferred to the new owner.  The new owner also charged the Company $12,152 of rent during the last three months of 2012.

Item 3. Legal Proceedings

There are no material legal proceedings pending against the Company or its subsidiaries or of which any of their property is the subject.  There are no proceedings in which any director, officer, affiliate or shareholder of the Company, or any of their associates, is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

Item 4. Mine Safety Disclosures

None

 
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PART II

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

(a)       Market Information

Trading of the Company’s common stock is limited and an established public market does not exist.

(i)        Holders

As of March 12, 2012 there were approximately 4,000 shareholders of the Company’s outstanding common stock.

(ii)       Dividends

The Company has not paid any cash dividends since inception (April 19, 2004).  The Board of Directors of the Company has not adopted a dividend payment policy; however, dividends must necessarily depend upon the Company's earnings and financial condition, applicable legal restrictions, and other factors relevant at the time the Board of Directors considers a dividend policy.  Cash available for dividends to shareholders of the Company must initially come from income and capital gains earned on its investment portfolio and dividends paid by the Company’s subsidiaries.

Provisions of the Oklahoma Insurance Code relating to insurance holding companies subject transactions between the Company and TLIC and the Company and Family Benefit Life, including dividend payments, to certain standards generally intended to prevent such transactions from adversely affecting the adequacy of life insurance subsidiaries' capital and surplus available to support policyholder obligations.  In addition, under the Oklahoma General Corporation Act, the Company may not pay dividends if, after giving effect to a dividend, it would not be able to pay its debts as they become due in the usual course of business or if its total liabilities would exceed its total assets.

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 Company 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 earnings 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 whichshareholders received a share of common stock for each 20 shares of common stock of the Company theyhold.  The dividend was payable to the holders of shares of the Company 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 earnings being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.

(iii)      Securities Authorized for Issuance Under Equity Compensation Plans

There are no plans under which equity securities are authorized for issuance.

(b)       None
 
(c)       The Company repurchased 185,313 shares of its common stock from former members of the Board of Directors at a cost of $648,595 during 2012.
 
 
11

 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

First Trinity Financial Corporation  (“we” “us”, “our”, or the Company) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets and a premium finance company, financing casualty insurance premiums.

As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders.  Our core TLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents.  With the acquisition of Family Benefit Life in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico.  In late 2012, Family Benefit Life was initially licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.

We also realize revenues from our investment portfolio, which is a key component of our operations.  The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts.  Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies.  Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.

We provide financing for casualty insurance premiums through independent property and casualty insurance agents.  We are licensed 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 would not accept new premium financing contracts after June 30, 2012.  FTCC continues 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.

Recent Acquisitions

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business.  In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000.

In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of Family Benefit Life Insurance Company, included in the life insurance segment, for $13,855,129.  Given that the Family Benefit Life acquisition occurred in late December 2011, the acquisition only impacts the Company’s consolidated statement of financial position as of December 31, 2011 and not the Company’s consolidated statement of operations for the year ended December 31, 2011.  Family Benefit Life’s 2012 operating results are reflected in the Company’s consolidated statement of operations for the year ended December 31, 2012.

Our profitability in the life insurance segment is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired and administer life insurance company acquisitions at an expense level that validates the acquisition cost.  Profitability in the premium financing segment is dependent on the Company’s ability to compete in that sector, maintain low administrative costs and minimize losses.  However, as introduced above, the Company has discontinued its premium financing operations and will completely exit that segment of the business on approximately July 1, 2013.

 
12

 
 
Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States.  Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.  We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, loans from premium financing, allowance for loans losses from premium financing, value of insurance business acquired, policy liabilities, income taxes, regulatory requirements, contingencies and litigation.  We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.

Investments in Fixed Maturities and Equity Securities

We hold fixed maturities and equity interests in a variety of companies.  We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments.  We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature.  This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within shareholders’ equity.  If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.

For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security.  The amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security.  For equity securities, the amount of any other-than temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security.  It is not possible to accurately predict when it may be determined that a specific security will become impaired.  Future adverse changes in market conditions, poor operating results of underlying investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.  In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.

Deferred Policy Acquisition Costs

Commissions and other acquisition costs which vary with and are primarily related to the successful production of new and renewal insurance contracts are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate.  The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred.  Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs.  We consider estimated future gross profits or future premiums; expected mortality or morbidity; interest earned and credited rates; persistency and expenses in determining whether the balance is recoverable.

If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense.  The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment.  A revision to these assumptions may impact future financial results. Deferred acquisition costs related to the successful production of new and renewal insurance business for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
 
 
13

 

Deferred acquisition costs related to the successful production of new and renewal insurance and annuity products that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies.  To the extent that realized gains and losses on securities result in adjustments to deferred acquisition costs related to insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs.

Deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized.  This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income” in the shareholders’ equity section of the statement of financial position.

Loans from Premium Financing and Allowance for Loans from Premium Financing

Loans from premium financing are carried at their outstanding unpaid principal balances, net of unearned interest, charge-offs and an allowance for loan losses.  Interest on loans is earned based on the interest method for computing unearned interest.  The rule of 78s is used to calculate the amount of the interest charge to be forgiven in the event that a loan is repaid prior to the agreed upon number of monthly payments.  When serious doubt concerning collectability arises, loans are placed on a nonaccrual basis.  Generally if no payment is received after one hundred twenty days, all accrued and uncollected interest income is reversed against current period operations.  Interest income on nonaccrual loans is recognized only when the loan is paid in full.  Loan origination fees and costs are charged to expense as incurred.

The allowance for possible loan losses from financing property and casualty insurance premiums is a reserve established through a provision for possible loan losses charged to expense which represents, in management’s judgment, the known and inherent credit losses existing in the loan portfolio.  The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio and reduces the carrying value of loans from premium financing to the estimated net realizable value on the statement of financial position.

While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of the loan portfolio, the economy and changes in interest rates.  The Company’s allowance for possible loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by us in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis.

Value of Insurance Business Acquired

As a result of our purchases of FLAC and Family Benefit Life, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force.  The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under Financial Accounting Standards Board (“FASB”) guidance.  The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits.  The recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was initially recorded in the purchases of FLAC and Family Benefit Life.  Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.

 
14

 

For the amortization of the value of acquired insurance in force, the Company reviews its estimates of gross profits each reporting period.  The most significant assumptions involved in the estimation of gross profits include interest rate spreads; future financial market performance; business surrender and lapse rates; mortality and morbidity; expenses and the impact of realized investment gains and losses.  In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made.

As of December 31, 2012 and 2011 there was $1,230,982 and $827,409, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and Family Benefit Life.  The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years:  $414,820 in 2013, $421,829 in 2014, $409,016 in 2015, $395,025 in 2016 and $381,246 in 2017.

Future Policy Benefits

Our liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums.  For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation.  Interest rate assumptions are based on factors such as market conditions and expected investment returns.  Although mortality and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.

Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency; mortality rates; investment yields; discretionary benefit increases; new business pricing and operating expense levels.  We evaluate historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial judgment is required.  Actual experience may emerge differently from that originally estimated.  Any such difference would be recognized in the current year’s consolidated statement of income.

Federal Income Taxes

We use the liability method of accounting for income taxes.  Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined using tax basis.  A valuation allowance is established for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits.

We evaluate our deferred income tax assets, which partially offset our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the financial statements in the period in which such revisions are made.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In May 2011, the 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.

 
15

 
 
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.
 
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.
 
 
16

 
 
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
 
In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.
 
The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The updated guidance will not have any effect on the Company's results of operations, financial position or liquidity.

Business Segments

FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units.  The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.  Our business segments are as follows:

 
·
Life and annuity insurance operations, consisting of the operations of TLIC and Family Benefit Life;
 
·
Premium finance operations, consisting of the operations of FTCC and SIS; and
 
·
Corporate operations, which includes the results of the parent company after the elimination of intercompany amounts.

Please see Note 12 to the Consolidated Financial Statements for additional information regarding segment data.

 
17

 

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 Year Ended December 31, 2012

   
Year Ended December 31,
   
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
  $ 8,024,901     $ 6,229,383     $ 1,795,518       28.8 %   $ 1,177,106     $ 618,412  
Net investment income
    5,920,278       2,291,761       3,628,517       158.3 %     2,547,865       1,080,652  
Net realized investment gains
    746,889       604,784       142,105       23.5 %     199,216       (57,111 )
Gain from acquisition of Family Benefit Life
    -       6,915,479       (6,915,479 )     -100.0 %     -       (6,915,479 )
Other revenues
    116,452       182,852       (66,400 )     -36.3 %     140       (66,540 )
Total revenues
    14,808,520       16,224,259       (1,415,739 )     -8.7 %     3,924,327       (5,340,066 )
Benefits and claims
    9,242,052       5,308,825       3,933,227       74.1 %     2,408,286       1,524,941  
Expenses
    4,608,655       3,425,163       1,183,492       34.6 %     1,268,967       (85,475 )
Total benefits, claims and expenses
    13,850,707       8,733,988       5,116,719       58.6 %     3,677,253       1,439,466  
Income before federal income tax expense (benefit)
    957,813       7,490,271       (6,532,458 )     -87.2 %     247,074       (6,779,532 )
Federal income tax expense (benefit)
    (144,068 )     130,278       (274,346 )     -210.6 %     (119,032 )     (155,314 )
Net income
  $ 1,101,881     $ 7,359,993     $ (6,258,112 )     -85.0 %   $ 366,106     $ (6,624,218 )
Net income per common share basic and diluted
  $ 0.14     $ 1.00     $ (0.86 )                        
 
Consolidated Condensed Financial Position as of December 31, 2012

   
December 31, 2012
   
December 31, 2011
   
Increase (Decrease)
2012 to 2011
   
Percentage Change
2012 to 2011
                         
                         
Investment assets
  $ 133,846,664     $ 98,750,416     $ 35,096,248       35.5 %
Other assets
    31,603,653       45,997,239       (14,393,586 )     -31.3 %
Total assets
  $ 165,450,317     $ 144,747,655     $ 20,702,662       14.3 %
                                 
Policy liabilities
  $ 126,966,173     $ 111,269,643     $ 15,696,530       14.1 %
Deferred federal income taxes
    3,301,524       2,622,711       678,813       25.9 %
Other liabilities
    1,460,508       2,457,188       (996,680 )     -40.6 %
Total liabilities
    131,728,205       116,349,542       15,378,663       13.2 %
Shareholders' equity
    33,722,112       28,398,113       5,323,999       18.7 %
Total liabilities and shareholders' equity
  $ 165,450,317     $ 144,747,655     $ 20,702,662       14.3 %
                                 
Shareholders' equity per common share
  $ 4.29     $ 3.67     $ 0.62       17.0 %
 
 
18

 

Results of Operations – Years Ended December 31, 2012 and 2011

Revenues

Our primary sources of revenue are life insurance premium income and investment income.  Premium payments are classified as first-year, renewal and single.  In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period.  The impact on total revenues of Family Benefit Life total revenues, acquired on December 28, 2011, for the year ended December 31, 2012 is summarized in the tables below.

Our revenues for the years ended December 31, 2012 and 2011 are summarized as follows:

   
Years Ended December 31,
   
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
  $ 8,024,901     $ 6,229,383     $ 1,795,518       28.8 %   $ 1,177,106     $ 618,412  
Income from premium financing
    102,491       168,124       (65,633 )     -39.0 %     -       (65,633 )
Net investment income
    5,920,278       2,291,761       3,628,517       158.3 %     2,547,865       1,080,652  
Net realized investment gains
    746,889       604,784       142,105       23.5 %     199,216       (57,111 )
Gain from acquisition of Family benefit Life
    -       6,915,479       (6,915,479 )     -100.0 %     -       (6,915,479 )
Other income
    13,961       14,728       (767 )     -5.2 %     140       (907 )
Total revenues
  $ 14,808,520     $ 16,224,259     $ (1,415,739 )     -8.7 %   $ 3,924,327     $ (5,340,066 )
 
The decrease of $5,340,066 in total revenues for the year ended December 31, 2012, excluding Family Benefit Life revenues, is discussed below.

Premiums

Our premiums for the years ended December 31, 2012 and 2011 are summarized as follows:

   
Years Ended December 31,
   
Increase (Decrease)
   
Percentage Change
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
Family Benefit Life
  $ 1,177,106     $ -     $ 1,177,106       -  
Whole life and term first year
    226,835       62,722       164,113       261.7 %
Whole life and term renewal
    2,214,485       2,356,464       (141,979 )     -6.0 %
Final expense first year
    1,058,505       1,105,504       (46,999 )     -4.3 %
Final expense renewal
    3,347,970       2,704,693       643,277       23.8 %
Total premiums
  $ 8,024,901     $ 6,229,383     $ 1,795,518       28.8 %
 
The $618,412 increase in premiums for the year ended December 31, 2012, excluding Family Benefit Life premiums, is primarily due to a $643,277 increase in final expense renewal premiums.

Income from Premium Financing

The income from premium financing has steadily decreased during the past two years.  There was a decrease of $65,633 for the year ended December 31, 2012.

As introduced above, 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 would not accept new premium financing contracts after June 30, 2012.  FTCC continues 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.
 
 
19

 

Net Investment Income

The major components of our net investment income for the years ended December 31, 2012 and 2011 are summarized as follows:
 
   
Years Ended December 31,
   
Total
Increase (Decrease)
   
Percentage Change
 
Family Benefit Life
   
Increase
Net
(Decrease)
 
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
 
2012 Results
   
2012 less 2011
 
Fixed maturity securities
  $ 4,194,409     $ 1,718,804     $ 2,475,605       144.0 %   $ 2,218,935     $ 256,670  
Equity securities
    49,235       55,725       (6,490 )     -11.6 %     18,369       (24,859 )
Other long-term investments
    1,188,323       599,468       588,855       98.2 %     333,739       255,116  
Mortgage loans
    544,567       116,219       428,348       368.6 %     6,057       422,291  
Real estate
    370,620       348,002       22,618       6.5 %     11,250       11,368  
Policy loans
    100,120       32,233       67,887       210.6 %     62,458       5,429  
Short-term and other investments
    21,939       22,763       (824 )     -3.6 %     5,650       (6,474 )
Gross investment income
    6,469,213       2,893,214       3,575,999       123.6 %     2,656,458       919,541  
Investment expenses
    (548,935 )     (601,453 )     (52,518 )     8.7 %     (108,593 )     (161,111 )
Net investment income
  $ 5,920,278     $ 2,291,761     $ 3,628,517       158.3 %   $ 2,547,865     $ 1,080,652  
 
The $919,541 increase in gross investment income for the year ended December 31, 2012, excluding Family Benefit Life gross investment income, is due to the 2012 investment of excess cash primarily in fixed maturity securities, other long-term investments (lottery receivables) and mortgage loans.

The $161,111 decrease in investment expenses for the year ended December 31, 2012, excluding Family Benefit Life investment expenses, is due to $117,000 of decreased investment advisory management service fees and $72,000 of decreased investment real estate expenses that more than offset $28,000 of increased loan origination fees.
 
Net Realized Investment Gains

There was a $142,105 increase in net realized investment gains for the year ended December 31, 2012.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $228,320 for the year ended December 31, 2012 resulted from proceeds of $9,511,967 for these securities that had carrying values of $9,283,647 at the 2012 disposal dates.

The net realized investment gains from the sales of equity securities available-for-sale of $442,737 for the year ended December 31, 2012 resulted from proceeds of $1,114,426 for these securities that had carrying values of $671,689 at the 2012 disposal dates.

The net realized investment gains from the sale of investment real estate of $75,832 for the year ended December 31, 2012 resulted from proceeds of $512,500 for two buildings that had a carrying value of $436,668 at the 2012 disposal date.
 
 
20

 

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $606,935 for the year ended December 31, 2011 resulted from proceeds of $4,671,870 for these securities that had carrying values of $4,064,935 at the 2011 disposal dates.

There were no sales of equity securities available-for-sale for the year ended December 31, 2011.

The net realized investment losses from the sale of investment real estate of $2,151 for the year ended December 31, 2011 resulted from proceeds of $49,000 for the sale of land that had a carrying value of $51,151 at the 2011 disposal date.

We have recorded no other-than-temporary impairments in 2012 and 2011.

Gain from Acquisition of Family Benefit Life

In late December 2011, we acquired 100% ownership of Family Benefit Life from its shareholders for $13,855,129 paid in cash.  The fair value of the net assets acquired in this transaction was $20,770,608.  Since the fair value of the net assets acquired exceeded the cost paid for those assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned “Gain from acquisition of Family Benefit Life” per the requirements of FASB Codification Topic 805 “Business Combinations.”  The reason for the gain from the acquisition of Family Benefit Life related primarily to that company’s management not being committed to rebuild the marketing force of that company in the current economic environment.

The total acquisition date fair value of the net assets acquired from Family Benefit Life in late December 2011 is as follows:
 
Category of Net Asset Acquired
 
Fair Value
 
Available-for-sale fixed maturity securities
  $ 56,252,307  
Available-for-sale equity securities
    304,773  
Mortgage loans on real estate
    79,710  
Investment real estate
    582,560  
Policy loans
    1,047,378  
Other invested assets
    110  
Cash and cash equivalents
    9,103,505  
Accrued investment income
    775,438  
Recoverable from reinsurers
    120,068  
Agents' balances and due premiums
    16,476  
Value of insurance business acquired
    5,627,662  
Other assets
    10,336  
Policyholders' account balances
    (36,746,133 )
Future policy benefits
    (13,502,833 )
Policy claims
    (166,593 )
Premiums paid in advance
    (12,214 )
Deferred federal income taxes
    (2,188,650 )
Current federal taxes payable
    (36,720 )
Other liabilities
    (496,572 )
Fair value of net assets acquired
  $ 20,770,608  
Cash paid as purchase consideration
  $ (13,855,129 )
Gain from acquisition of Family Benefit Life
  $ 6,915,479  
 
 
21

 
 
Other Income

The $907 decrease in other income for the year ended December 31, 2012, excluding Family Benefit Life other income, is primarily due to decrease service fees.

Total Benefits, Claims and Expenses

Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses.  Benefit payments can significantly impact expenses from period to period.

The impact on total benefits, claims and expenses of Family Benefit Life total benefits, claims and expenses, acquired on December 28, 2011, for the year ended December 31, 2012 is summarized in the tables below.

Our benefits, claims and expenses for the years ended December 31, 2012 and 2011 are summarized as follows:

   
Years Ended December 31,
   
Total
Increase (Decrease)
   
Percentage Change
 
Family Benefit Life
   
Net
Increase (Decrease)
 
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
 
2012 Results
   
2012 less 2011
 
Benefits and claims
                                   
Increase (decrease) in future policy benefits
  $ 2,054,925     $ 1,982,865     $ 72,060       3.6 %   $ (407,069 )   $ 479,129  
Death benefits
    2,863,555       1,479,188       1,384,367       93.6 %     852,322       532,045  
Surrenders
    583,498       336,062       247,436       73.6 %     310,827       (63,391 )
Interest credited to policyholders
    3,330,592       1,510,710       1,819,882       120.5 %     1,242,724       577,158  
Dividend and supplementary life contract benefits
    409,482       -       409,482       -       409,482       -  
Total benefits and claims
    9,242,052       5,308,825       3,933,227       74.1 %     2,408,286       1,524,941  
Expenses                                                
Policy acquisition costs deferred
    (2,302,070 )     (2,262,751 )     (39,319 )     1.7 %     -       (39,319 )
Amortization of deferred policy acquisition costs
    512,546       230,284       282,262       122.6 %     -       282,262  
Amortization of value of insurance business acquired
    403,573       222,451       181,122       81.4 %     225,106       (43,984 )
Commissions
    2,324,073       2,281,934       42,139       1.8 %     32,053       10,086  
Other underwriting, insurance and acquisition expenses
    3,670,533       2,953,245       717,288       24.3 %     1,011,808       (294,520 )
Total expenses
    4,608,655       3,425,163       1,183,492       34.6 %     1,268,967       (85,475 )
Total benefits, claims and expenses
  $ 13,850,707     $ 8,733,988     $ 5,116,719       58.6 %   $ 3,677,253     $ 1,439,466  
 
The increase of $1,439,466 in total benefits, claims and expenses for the year ended December 31, 2012, excluding Family Benefit Life benefits, claims and expenses, is discussed below.

Benefits and Claims

The $1,524,941 increase in benefits and claims for the year ended December 31, 2012, excluding Family Benefit Life benefits and claims, is primarily due to the following:

 
·
$577,158 increase in interest credited to policyholders primarily due to an increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits in excess of withdrawals).

 
22

 
 
 
·
$532,045 increase in death benefits is primarily due to an increase in the number of final expense claims incurred.  There was a 1,010 increase in the number of final expense policies in force from 8,063 policies as of December 31, 2011 to 9,073 policies as of December 31, 2012.  Correspondingly, there was a $9,305,891 increase in the amount of final expense insurance in force from $67,693,765 as of December 31, 2011 to $76,999,656 as of December 31, 2012.  This final expense policy expansion has increased our mortality exposure.

 
·
$479,129 increase in the change in future policy benefits primarily relates to an increase in the number of final expense and ordinary policies in force.

 
·
$63,391 decrease in surrenders reflects an improvement in persistency.

Deferral and Amortization of Deferred Acquisition Costs

Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies.  Certain costs related to the successful acquisition of insurance and annuity policies that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies.  These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring life insurance, which vary with, and are primarily related to, the production of new and renewal insurance and annuity contracts.

For the year ended December 31, 2012 and 2011, capitalized costs were $2,302,070 and $2,262,751, respectively.  Amortization of deferred policy acquisition costs for the year ended December 31, 2012 and 2011 were $512,546 and $230,284, respectively.

Family Benefit Life had little impact on the deferral or amortization of deferred acquisition costs since its 2012 production of new life and annuity policies was minimal.  The Company’s management is focused on reinvigorating the Family Benefit Life new business production and has filed new products for state approval that should begin being marketed in April 2013.

The $39,319 increase in the acquisition costs deferred primarily relates to increased production of ordinary policies in 2012.  The $282,262 increase in the 2012 amortization of deferred acquisition costs primarily reflects the increase in final expense claims incurred and the increased annuity lapses after the surrender charge period.

Amortization of Value of Insurance Business Acquired

The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits.   Amortization of the value of insurance business acquired was $403,573 and $222,451 for the years ended December 31, 2012 and 2011, respectively.  The $181,122 increase in the 2012 amortization of value of insurance business acquired primarily relates to the $225,106 amortization of value of insurance business acquired related to the acquisition of Family Benefit Life on December 28, 2011.

 
23

 

Commissions

Our commissions for the year ended December 31, 2012 and 2011 are summarized as follows:

   
Year Ended December 31,
   
Increase (Decrease)
   
Percentage Change
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
Family Benefit Life
  $ 32,053     $ -     $ 32,053       -  
Annuity
    451,595       542,928       (91,333 )     -16.8 %
Whole life and term first year
    159,398       78,784       80,614       102.3 %
Whole life and term renewal
    94,283       95,732       (1,449 )     -1.5 %
Final expense first year
    1,273,515       1,323,291       (49,776 )     -3.8 %
Final expense renewal
    313,229       241,199       72,030       29.9 %
Total commissions
  $ 2,324,073     $ 2,281,934     $ 42,139       1.8 %
 
The $10,086 increase in commissions for the year ended December 31, 2012, excluding Family Benefit Life commissions, is primarily due to:

 
·
$80,614 increase in first year whole life and term commissions that corresponds to $164,113 of increased first year whole life and term premiums.

 
·
$72,030 increase in final expense renewal commissions that corresponds to $643,277 of increased final expense renewal premiums.

 
·
$1,449 decrease in renewal whole life and term commissions that corresponds to a $141,979 decrease in renewal whole life and term premiums.

 
·
$49,776 decrease in final expense first year commissions that correspond to the $46,999 decrease in final expense first year premiums.

 
·
$91,333 decrease in annuity first year, single and renewal commissions that corresponds to $507,750 of decreased annuity considerations deposited.

Other Underwriting, Insurance and Acquisition Expenses

The $294,520 decrease in other underwriting, insurance and acquisition expenses for the year ended December 31, 2012, excluding Family Benefit Life expenses, is primarily attributed to third party legal, accounting, actuarial and other costs incurred in 2011 associated with the acquisition of Family Benefit Life.  The 2012 costs paid to third parties related to the synergy and conversion of Family Benefit Life into our operations were accumulated in Family Benefit Life and for the year ended December 31, 2012 totaled approximately $200,000.

Federal Income Taxes

FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or Family Benefit Life.  TLIC and Family Benefit Life are taxed as life insurance companies under the provisions of the Internal Revenue Code.  Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years.  However, for 2012, we intend to file a combined life insurance company federal tax return for TLIC and Family Benefit Life.  Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.

For the years ended December 31, 2012 and 2011, deferred income tax expense (benefit) was ($417,122) and $96,183, respectively.  Current income tax expense was $273,054 and $34,095 for the years ended December 31, 2012 and 2011, respectively.
 
 
24

 

Net Income Per Common Share Basic and Diluted

Net income was $1,101,881 ($0.14 per common share basic and diluted) and $7,359,993 ($1.00 per common share basic and diluted) for the years ended December 31, 2012 and 2011, respectively.

Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year.  The weighted average outstanding and subscribed common shares basic and diluted for the year ended December 31, 2012 and 2011 were 7,883,901 and 7,349,296, respectively.  These weighted average shares reflect the retrospective adjustment for the impacts of the 5% stock dividend declared by the Company on January 11, 2012 and issued to holders of shares of the Company as of March 10, 2012.

Business Segments

The revenues and income (loss) before federal income taxes from our business segments for the years ended December 31, 2012 and 2011 are summarized as follows:

   
Year Ended December 31,
   
Increase (Decrease)
   
Percentage Change
   
2012
   
2011
   
2012 to 2011
   
2012 to 2011
Revenues:
                       
Life and annuity insurance operations
  $ 14,275,397     $ 16,011,386     $ (1,735,989 )     -10.8 %
Premium finance operations
    102,734       166,919       (64,185 )     -38.5 %
Corporate operations
    430,389       45,954       384,435       836.6 %
Total
  $ 14,808,520     $ 16,224,259     $ (1,415,739 )     -8.7 %
Income (loss) before income taxes:
                               
Life and annuity insurance operations
  $ 1,332,546     $ 8,238,255     $ (6,905,709 )     -83.8 %
Premium finance operations
    (224,951 )     (212,706 )     (12,245 )     5.8 %
Corporate operations
    (149,782 )     (535,278 )     385,496       -72.0 %
Total
  $ 957,813     $ 7,490,271     $ (6,532,458 )     -87.2 %
 
Life and Annuity Insurance Operations

The $1,735,989 decrease in revenues from Life and Annuity Insurance Operations for the year ended December 31, 2012 is primarily due to the following:

 
·
$6,915,479 gain from the acquisition of Family benefit Life recognized in 2011

 
·
$412,627 decrease in net realized investment gains

 
·
$618,412 increase in premiums

 
·
$1,048,257 increase in net investment income

 
·
$3,924,327 of revenues due to the acquisition of Family Benefit Life on December 28, 2011

The $6,905,709 decreased profitability from Life and Annuity Insurance Operations for the year ended December 31, 2012 is primarily due to the following:

 
·
$6,915,479 gain from the acquisition of Family benefit Life recognized in 2011

 
·
$1,524,941 increase in benefits and claims

 
·
$412,627 decrease in net realized investment gains
 
 
25

 
 
 
·
$242,943 decrease in policy acquisition costs deferred net of amortization

 
·
$10,086 increase in commissions

 
·
$43,984 decrease in amortization of value of insurance business acquired

 
·
$242,953 decrease in other underwriting, insurance and acquisition expenses

 
·
$247,074 of Family Benefit Life income before income taxes
 
 
·
$618,412 increase in premiums

 
·
$1,048,257 increase in net investment income

Premium Finance Operations

The $64,185 decrease in revenues from Premium Finance Operations for the year ended December 31, 2012 is due to decreased fee income as we discontinued offering premium finance contracts on July 1, 2012.

The $12,245 decreased profitability from Premium Finance Operations for the year ended December 31, 2012 is primarily due to $64,185 of decreased fee income and $52,000 of decreased operating expenses.

Corporate Operations

The $384,435 increase in revenues from Corporate Operations for the year ended December 31, 2012 is primarily due to a $350,000 realized investment gain from the sale of equity securities available-for-sale and $33,000 of increased net investment income.

The $385,496 increased Corporate Operations profitability for the year ended December 31, 2012 is primarily due to the $384,435 increase in revenues discussed above.

Consolidated Financial Condition

Our invested assets as of December 31, 2012 and 2011 are summarized as follows:
 
               
Increase (Decrease)
   
Percentage Change
   
December 31, 2012
   
December 31, 2011
   
2012 to 2011
   
2012 to 2011
Assets                        
Investments
                       
Available-for-sale fixed maturity securities at fair value (amortized cost: $91,543,308 and $78,128,103 as of December 31, 2012 and December 31, 2012 and 2011, respectively)
  $ 98,659,797     $ 81,051,207     $ 17,608,590       21.7 %
Available-for-sale equity securities at fair value (cost: $695,846 and $750,941 as of December 31, 2012 and 2011, respectively)
    843,497       898,893       (55,396 )     -6.2 %
Mortgage loans on real estate
    10,435,776       1,985,394       8,450,382       425.6 %
Investment real estate
    2,858,765       3,466,581       (607,816 )     -17.5 %
Policy loans
    1,488,035       1,472,666       15,369       1.0 %
Other long-term investments
    19,560,794       9,875,675       9,685,119       98.1 %
Total investments
  $ 133,846,664     $ 98,750,416     $ 35,096,248       35.5 %
 
The $17,608,590 increase in available for sale fixed maturity securities for the year ended December 31, 2012 is primarily due to purchases of $23,432,839 in excess of sales and maturities of $9,511,967, net realized investment gains of $228,320, $4,193,385 increase in unrealized appreciation and premium amortization of $733,987.  This portfolio is reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.”  The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies and U. S. government and foreign securities.
 
 
26

 

As of December 31, 2012, we held 35 available-for-sale fixed maturity securities with an unrealized loss of $133,611, fair value of $7,386,902 and amortized cost of $7,520,513.

As of December 31, 2011, we held nine fixed maturity securities available-for-sale with an unrealized loss of $84,771, fair value of $1,887,299 and amortized cost of $1,972,070.  Since the Family Benefit Life available-for-sale fixed maturity securities were acquired on December 28, 2011, the amortized cost equaled the fair value as of December 31, 2011.

The $55,396 decrease in available-for-sale equity securities for the year ended December 31, 2012 is primarily due to sales of $1,114,426, purchases of $616,594, net realized investment gains of $442,737 and a $301 decrease in unrealized appreciation of available-for-sale equity securities.  This portfolio is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.”  The available-for-sale equity securities portfolio is invested in a variety of companies.

As of both December 31, 2012 and December 31, 2011 there were no available-for-sale equity securities in an unrealized loss position.

The $8,450,382 increase in mortgage loans for the year ended December 31, 2012 is primarily due to the origination of $9,143,326 of mortgage loans, $168,641 capitalization of loan origination fees less principal payments of $899,180 and discount accretion of $37,595. There was one loan more than 90 days past due as of December 31, 2012 with a remaining principal balance of $141,150. We have had discussions with the borrower and anticipate this loan being current in April 2013.

The $9,685,119 increase in other long-term investments (comprised of lottery receivables) for the year ended December 31, 2012 is primarily due to the purchases of $11,188,607, $1,188,321 of accretion of discount less principal payments of $2,691,809.

Our assets other than invested assets as of December 31, 2012 and December 31, 2011 are summarized as follows:

   
December 31, 2012
   
December 31, 2011
   
Increase (Decrease)
2012 to 2011
   
Percentage Change
2012 to 2011
                         
Cash and cash equivalents
  $ 10,947,474     $ 27,705,711     $ (16,758,237 )     -60.5 %
Accrued investment income
    1,417,218       1,122,574       294,644       26.2 %
Recoverable from reinsurers
    1,188,371       1,132,121       56,250       5.0 %
Agents' balances and due premiums
    358,729       381,901       (23,172 )     -6.1 %
Loans from premium financing, net
    261,072       1,022,416       (761,344 )     -74.5 %
Deferred policy acquisition costs
    7,028,820       5,251,999       1,776,821       33.8 %
Value of insurance business acquired
    7,508,895       7,912,469       (403,574 )     -5.1 %
Property and equipment, net
    124,558       170,843       (46,285 )     -27.1 %
Other assets
    2,768,516       1,297,205       1,471,311       113.4 %
Assets other than investment assets
  $ 31,603,653     $ 45,997,239     $ (14,393,586 )     -31.3 %
 
The $16,758,237 decrease in cash is primarily due to the company investing these funds in fixed maturity securities, mortgage loans and other long-term investments (i.e., lottery receivables).

The $761,344 decrease in loans from premium financing is related to normal loan collections and our May 16, 2012 decision to discontinue offering premium finance contracts effective July 1, 2012.

Other assets consist primarily of prepaid expenses, recoverable federal and state income taxes, guaranty funds, notes receivable, customer account balances receivable and receivables for securities sold with trade dates in 2012 and settlement dates in 2013.  The $1,471,311 increase in other assets is primarily due to $601,530 of receivables for securities sold with trade dates in 2012 and settlement dates in 2013, $489,098 of increased recoverable federal and state income taxes, increased receivables of $143,408 and a $96,373 increase in guaranty funds.

 
27

 

The progression of the Company’s loans from premium financing for the years ended December 31, 2012 and 2011 is summarized as follows:
 
   
Years Ended December 31,
 
   
2012
   
2011
 
Balance, beginning of year
  $ 1,274,707     $ 1,622,567  
Loans financed
    847,845       2,341,126  
Unearned interest
    51,525       136,189  
Capitalized fees and interest
    12,827       52,155  
Payment of loans and unearned interest
    (1,695,444 )     (2,877,330 )
Ending loan balance including unearned interest
    491,460       1,274,707  
Unearned interest included in ending loan balances
    (1,389 )     (23,287 )
Loan balance net of unearned interest
    490,071       1,251,420  
Less allowance for loan loss
    (228,999 )     (229,004 )
Loan balance net of unearned interest and allowance for loan losses
  $ 261,072     $ 1,022,416  
 
Our liabilities as of December 31, 2012 and 2011 are summarized as follows:
 
   
December 31, 2012
   
December 31, 2011
   
Increase (Decrease)
2012 to 2011
   
Percentage Change
2012 to 2011
                         
Policy liabilities
                       
Policyholders' account balances
  $ 95,043,370     $ 81,730,322     $ 13,313,048       16.3 %
Future policy benefits
    31,065,560       28,977,186       2,088,374       7.2 %
Policy claims
    717,521       515,522       201,999       39.2 %
Other policy liabilities
    139,722       46,613       93,109       199.7 %
Total policy liabilities
    126,966,173       111,269,643       15,696,530       14.1 %
Deferred federal income taxes
    3,301,524       2,622,711       678,813       25.9 %
Other liabilities
    1,460,508       2,457,188       (996,680 )     -40.6 %
Total liabilities
  $ 131,728,205     $ 116,349,542     $ 15,378,663       13.2 %
 
Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, unearned investment income and payable for securities purchased with trade dates in 2012 and settlement dates in 2013.

The $15,696,530 increase in policy liabilities is primarily due to deposits on annuity and deposit-type contracts exceeding withdrawals by $9,982,456, $3,330,592 of interest credited to policyholder account deposits, $2,088,374 of increased future policy benefit reserves, $201,999 of increased liabilities for policy claims and $93,109 of increased other policy liabilities.

The $678,813 increase in deferred federal income taxes during the year ended December 31, 2012 was due to $1,095,935 of increased deferred federal income taxes on the unrealized appreciation of available-for-sale fixed maturity and equity securities.  This increase was partially offset by $417,122 of operating deferred tax benefits.
 
The $996,680 decrease in other liabilities is due to a $1,226,000 decrease in deposits on pending applications and a $400,000 reduction in accrued liabilities due to payment of and reduction in bonuses accrued as of December 31, 2011.  This decrease is partially offset by a $600,000 payable for securities purchased with trade dates in 2012 and settlement dates in 2013 and a $29,000 increase in accrued expenses.

 
28

 
 
Liquidity and Capital Resources

Our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through December 31, 2012, we have received $27,011,105 from the sale of our shares. Our operations have been profitable and have generated $5,072,303 of net income from operations since we were incorporated in 2004 as shown in the accumulated earnings (deficit) balance in the December 31, 2012 consolidated statement of financial position.  The Company issued 323,777 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2011, however, that resulted in accumulated earnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.  The Company also issued 378,928 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2012, that resulted in accumulated earnings being charged an additional $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.  The impact of these two stock dividend charges of $5,270,288 to accumulated earnings (deficit) decreased the balance of accumulated deficit as of December 31, 2012 to $197,985.

As of December 31, 2012, we had cash and cash equivalents totaling $10,947,474.  As of December 31, 2012, cash and cash equivalents of $3,124,376 and $2,752,713, respectively, of the total $10,947,474 were held by TLIC and Family Benefit Life and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC.  The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.  Cash dividends may only be paid out of surplus derived from realized net profits.  Based on these limitations, there is capacity for TLIC to pay a dividend up to $377,777 in 2013 without prior approval.  In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $887,520 in 2013 without prior approval.  Family Benefit Life paid $1,515,975 of dividends to TLIC in 2012 and received permission from the Missouri Department of Insurance to pay $581,300 of dividends in excess of the $934,675 limitation.

The Company maintains cash and cash equivalents at multiple institutions.  The Federal Deposit Insurance Corporation insures non-interest bearing accounts up to $250,000.  Uninsured balances aggregate $2,514,836 as of December 31, 2012. Other funds are invested in mutual funds that invest in U.S. government securities.  We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss.  The Company has not experienced any losses in such accounts.

Our cash flows for the years ended December 31, 2012 and 2011 are summarized as follows:
 
   
Years Ended December 31,
   
Increase (Decrease)
   
Percentage Change
   
2012
   
2011
   
2012 to 2011
   
2012 to 2011
Net cash provided by operating activities
  $ 1,006,770     $ 1,945,347     $ (938,577 )     -48.2 %
Net cash used in investing activities
    (28,885,135 )     (5,428,643 )     (23,456,492 )     432.1 %
Net cash provided by financing activities
    11,120,128       18,203,729       (7,083,601 )     -38.9 %
Increase (decrease) in cash
    (16,758,237 )     14,720,433       (31,478,670 )     -213.8 %
Cash and cash equivalents, beginning of period
    27,705,711       12,985,278       14,720,433       113.4 %
Cash and cash equivalents, end of period
  $ 10,947,474     $ 27,705,711     $ (16,758,237 )     -60.5 %
 
The $938,577 decrease in cash provided by operating activities during the year ended December 31, 2012 is primarily due to increased benefits and claims and decreases in premiums that exceeded increases in net investment income and decreases in other underwriting, insurance and acquisition expenses.

The $23,456,492 of increased cash used for investing activities during the year ended December 31, 2012 was primarily related to the purchase of investments in fixed maturity securities, equity securities, mortgage loans and other long-term investments ( lottery receivables) in excess of maturities, sales and repayments of those investment types.

The $7,083,601 decrease in cash provided by financing activities for the year ended December 31, 2012 resulted from $3,229,954 of decreased policyholder account deposits in excess of withdrawals; $3,205,052 of decreased net proceeds from the public and private placement stock offerings and $648,595 for purchasing treasury shares.
 
 
29

 

Our shareholders’ equity as of December 31, 2012 and 2011 is summarized as follows:

               
Increase (Decrease)
   
Percentage Change
   
December 31, 2012
   
December 31, 2011
   
2012 to 2011
   
2012 to 2011
 
                       
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 and 6,798,535 issued and 7,789,060 and 6,798,535 outstanding as of December 31, 2012 and 2011, respectively, and 63,070 and 566,404 subscribed as of December 31, 2012 and 2011, respectively
  $ 80,374     $ 73,649     $ 6,725       9.1 %
Additional paid-in capital
    28,707,648       24,086,146       4,621,502       19.2 %
Treasury stock, at cost (185,313 shares as of December 31, 2012)
    (648,595 )     -       (648,595 )     -  
Accumulated other comprehensive income
    5,780,670       2,696,224       3,084,446       114.4 %
Accumulated earnings (deficit)
    (197,985 )     1,542,094       (1,740,079 )     -112.8 %
Total shareholders' equity
  $ 33,722,112     $ 28,398,113     $ 5,323,999       18.7 %
 
The increase in shareholders’ equity of $5,323,999 for the year ended December 31, 2012 is due to $1,786,267 of proceeds generated from the public stock offering (gross proceeds of $2,264,890 and offering expenses of $478,623), $3,084,446 of other comprehensive income, $1,101,881 of net income less $648,595 for purchases of 185,313 shares of treasury stock from former members of the Board of Directors.

Equity per common share outstanding increased 16.9% to $4.29 as of December 31, 2012 compared to $3.67 per share as of December 31, 2011, based upon 7,852,130 common shares outstanding and subscribed as of December 30, 2012 and 7,743,867 outstanding common shares as of December 31, 2011.  The common shares outstanding and subscribed as of December 31, 2011 reflect the retrospective adjustment for the impact of the 2012 5% stock dividends declared by the Company on January 11, 2012 and issued to holders of shares of the Company as of March 10, 2012.

The Company issued 323,777 shares in connection with the 2011 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.  The Company issued 378,928 shares in connection with the 2012 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.  The issuance of these stock dividends were non-cash investing and financing activities.

The liquidity requirements of our life insurance company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds.  There were no liquidity issues in 2012 or 2011.  Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.

We are subject to various market risks.  The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products.  Our investment portfolio recovered from the disruptions in the capital markets and had unrealized appreciation on available-for-sale securities of $7,264,140 and $3,071,056 as of December 31, 2012 and 2011, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments.  This $4,939,973 increase in unrealized gain arising for the year ended December 31, 2012 has been offset by the net realized investment gain of $746,889 due to the sale and call activity for available-for-sale fixed maturity securities, sale of available-for-sale equity securities and sale of investment real estate during 2012.

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals.  We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.  Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy.  Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy.  We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.
 
 
30

 

One of our significant risks relates to the fluctuations in interest rates.  Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes.  From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and Family Benefit Life’s annuity business is subject to variable interest rates.  Life insurance company policy liabilities bear fixed rates.  From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations.

We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies.  We maintain conservative durations in our fixed maturity portfolio.  As of December 31, 2012, cash and the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 13.9% of total policy liabilities.  If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.

In addition to the measures described above, TLIC and Family Benefit Life must comply with the NAIC promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency.  Upon meeting certain tests, which TLIC and Family Benefit Life met during 2012 and 2011, the SVL also requires the Company to perform annual cash flow testing for TLIC and Family Benefit Life.  This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios.  The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.

Our marketing plan could be modified to emphasize certain product types and reduce others.  New business levels could be varied in order to find the optimum level.  We believe that our current liquidity, current bond portfolio maturity distribution and cash position give us substantial resources to administer our existing business and fund growth generated by direct sales.

We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and Family Benefit Life that are limited by law to the lesser of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) return of invested capital from FTCC as those operations are discontinued, (4) public and private offerings of our common stock and (5) corporate borrowings, if necessary.

We will use the majority of our capital provided from the public stock offerings to expand life insurance operations and acquire life insurance companies.  The operations of TLIC and Family Benefit Life may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments.  Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows.

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 and incurred $1,650,001 in offering costs resulting in $9,350,009 in net proceeds.

On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota.  The private placement is for 600,000 shares of the Company’s common stock for $8.50 per share.  If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses.  As of December 31, 2012, the Company had received gross proceeds of $536,095 from the subscription of 63,070 shares of its common stock in this private placement and incurred $232,921 in offering costs. This offerring was suspended on March 8, 2013 and resulted in gross proceeds of $620,245 from the subscription of 72,970 shares of its common stock and incurred $290,163 in offering costs.

We are not aware of any commitments or unusual events that could materially affect our capital resources.  We are not aware of any current recommendations by any regulatory authority which, if implemented, would have a material adverse effect on our liquidity, capital resources or operations.

We believe that our existing cash and cash equivalents as of December 31, 2012 will be sufficient to fund our anticipated operating expenses.

 
31

 
 
Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
 
Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:
 
 
general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets;
 
differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes;
 
the effect of increased claims activity from natural or man-made catastrophes, pandemic disease, or other events resulting in catastrophic loss of life;
 
adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses such as FTCC;
 
inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset;
 
investment losses and defaults;
 
competition in our product lines;
 
attraction and retention of qualified employees and agents;
 
ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks;
 
the availability, affordability and adequacy of reinsurance protection;
 
the effects of emerging claim and coverage issues;
 
the cyclical nature of the insurance business;
 
interest rate fluctuations;
 
changes in our experiences related to deferred policy acquisition costs;
 
the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us;
 
rating agencies’ actions;
 
domestic or international military actions;
 
the effects of extensive government regulation of the insurance industry;
 
changes in tax and securities law;
 
changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;
 
regulatory or legislative changes or developments;
 
the effects of unanticipated events on our disaster recovery and business continuity planning;
 
failures or limitations of our computer, data security and administration systems;
 
risks of employee error or misconduct;
 
the introduction of alternative healthcare solutions; 
 
the assimilation of life insurance businesses we acquire and the sound management of these businesses; and
 
the availability of capital to expand our business.
 
It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others.  In addition, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable developments.

 
32

 
 
FIRST TRINITY FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
 
Consolidated Financial Statements  
Page
Numbers
     
     
Report of Independent Registered Public Accounting Firm   34
     
Consolidated Statements of Financial Position   35
     
Consolidated Statements of Operations   36
     
Consolidated Statements of Comprehensive Income   37
     
Consolidated Statements of Changes in Shareholders’ Equity   38
     
Consolidated Statements of Cash Flows   39
     
Notes to Consolidated Financial Statements   41
 
 
33

 

Report of Independent Registered Public Accounting Firm


To the Board of Directors and
Shareholders of First Trinity Financial Corporation


We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended.  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Trinity Financial Corporation and Subsidiaries as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


 
    /s/ Kerber, Eck & Braeckel LLP  
 

Springfield, Illinois
March 13, 2013

 
34

 

First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Financial Position

   
December 31, 2012
   
December 31, 2011
 
Assets
           
Investments
           
Available-for-sale fixed maturity securities at fair value (amortized cost: $91,543,308 and $78,128,103 as of December 31, 2012 and 2011, respectively)
  $ 98,659,797     $ 81,051,207  
Available-for-sale equity securities at fair value (cost: $695,846 and $750,941 as of December 31, 2012 and 2011, respectively)
    843,497       898,893  
Mortgage loans on real estate
    10,435,776       1,985,394  
Investment real estate
    2,858,765       3,466,581  
Policy loans
    1,488,035       1,472,666  
Other long-term investments
    19,560,794       9,875,675  
Total investments
    133,846,664       98,750,416  
Cash and cash equivalents
    10,947,474       27,705,711  
Accrued investment income
    1,417,218       1,122,574  
Recoverable from reinsurers
    1,188,371       1,132,121  
Agents' balances and due premiums
    358,729       381,901  
Loans from premium financing, net
    261,072       1,022,416  
Deferred policy acquisition costs
    7,028,820       5,251,999  
Value of insurance business acquired
    7,508,895       7,912,469  
Property and equipment, net
    124,558       170,843  
Other assets
    2,768,516       1,297,205  
Total assets
  $ 165,450,317     $ 144,747,655  
Liabilities and Shareholders' Equity
               
Policy liabilities
               
Policyholders' account balances
  $ 95,043,370     $ 81,730,322  
Future policy benefits
    31,065,560       28,977,186  
Policy claims
    717,521       515,522  
Other policy liabilities
    139,722       46,613  
Total policy liabilities
    126,966,173       111,269,643  
Deferred federal income taxes
    3,301,524       2,622,711  
Other liabilities
    1,460,508       2,457,188  
Total liabilities
    131,728,205       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 7,789,060 and 6,798,535 outstanding as of December 31, 2012 and 2011, respectively, and 63,070 and 566,404 subscribed as of December 31, 2012 and 2011, respectively
    80,374       73,649  
Additional paid-in capital
    28,707,648       24,086,146  
Treasury stock, at cost (185,313 shares as of December 31, 2012)
    (648,595 )     -  
Accumulated other comprehensive income
    5,780,670       2,696,224  
Accumulated earnings (deficit)
    (197,985 )     1,542,094  
Total shareholders' equity
    33,722,112       28,398,113  
Total liabilities and shareholders' equity
  $ 165,450,317     $ 144,747,655  

See notes to consolidated financial statements.
 
 
35

 

First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
 
   
Years Ended December 31,
 
   
2012
   
2011
 
Revenues
           
Premiums
  $ 8,024,901     $ 6,229,383  
Income from premium financing
    102,491       168,124  
Net investment income
    5,920,278       2,291,761  
Net realized investment gains
    746,889       604,784  
Gain from acquisition of Family Benefit Life
    -       6,915,479  
Other income
    13,961       14,728  
Total revenues
    14,808,520       16,224,259  
Benefits, Claims and Expenses
               
Benefits and claims
               
Increase in future policy benefits
    2,054,925       1,982,865  
Death benefits
    2,863,555       1,479,188  
Surrenders
    583,498       336,062  
Interest credited to policyholders
    3,330,592       1,510,710  
Dividend and supplementary life contract benefits
    409,482       -  
Total benefits and claims
    9,242,052       5,308,825  
Policy acquisition costs deferred
    (2,302,070 )     (2,262,751 )
Amortization of deferred policy acquisition costs
    512,546       230,284  
Amortization of value of insurance business acquired
    403,573       222,451  
Commissions
    2,324,073       2,281,934  
Other underwriting, insurance and acquisition expenses
    3,670,533       2,953,245  
Total expenses
    4,608,655       3,425,163  
Total benefits, claims and expenses
    13,850,707       8,733,988  
Income before total federal income tax expense (benefit)
    957,813       7,490,271  
Current federal income tax expense
    273,054       34,095  
Deferred federal income tax expense (benefit)
    (417,122 )     96,183  
Total federal income tax expense (benefit)
    (144,068 )     130,278  
Net income
  $ 1,101,881     $ 7,359,993  
Net income per common share basic and diluted
  $ 0.14     $ 1.00  
 
See notes to consolidated financial statements.
 
 
36

 

First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
 
   
Years Ended December 31,
 
   
2012
   
2011
 
Net income
  $ 1,101,881     $ 7,359,993  
Other comprehensive income (loss)
               
Total net unrealized gains arising during the period
    4,939,973       54,194  
Less: Net realized investment gains
    746,889       604,784  
Net unrealized gains (losses)
    4,193,084       (550,590 )
Adjustment to deferred acquisition costs
    (12,703 )     (14,753 )
Other comprehensive income (loss) before income tax expense
    4,180,381       (565,343 )
Income tax expense
    1,095,935       43,803  
Total other comprehensive income (loss)
    3,084,446       (609,146 )
Total comprehensive income
  $ 4,186,327     $ 6,750,847  
 
See notes to consolidated financial statements.
 
 
37

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 30, 2012 and 2011
 
   
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
    7,878       4,983,441       -       -       -       4,991,319  
Comprehensive income:
                                               
Net income
    -       -       -       -       7,359,993       7,359,993  
Other comprehensive loss
    -       -       -       (609,146 )     -       (609,146 )
Balance as of December 31, 2011
  $ 73,649     $ 24,086,146     $ -     $ 2,696,224     $ 1,542,094     $ 28,398,113