10-Q 1 ftfc20140331_10q.htm FORM 10-Q ftfc20140331_10q.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[ X ]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934

   
 

For the quarterly period ended March 31, 2014

 

[   ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

   
  For the transition period From                                    to                                    

 

Commission file number: 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Oklahoma

 

34-1991436

(State or other jurisdiction of incorporation or organization)     

 

(I.R.S. Employer Identification Number)

 

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma 74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑       No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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 ☑ No ☐

 

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

 

Large accelerated filer:   ☐ 

Accelerated filer:   ☐

Non-accelerated filer:   ☐

Smaller reporting company:   

       

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes ☐       No ☑

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of May 12, 2014: 7,831,934 shares

 

 
 

 

 

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2014

 

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION  

Page Number

       

Item 1.

 

 Consolidated Financial Statements

 

       

Consolidated Statements of Financial Position as of March 31, 2014 (Unaudited) and December 31, 2013  

3

   
Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited) 4
   
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 (Unaudited) 5
   

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

6
   
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited) 7
   
Notes to Consolidated Financial Statements (Unaudited) 8
   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations  28
       
Item 4.         Controls and Procedures            44
       

Part II.  OTHER INFORMATION

 
   
Item 1.      Legal Proceedings    45
       
Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds    45
       
Item 3.   Defaults upon Senior Securities     45
       
Item 4.     Mine Safety Disclosures   45
       
Item 5.    Other Information 46
       
Item 6.      Exhibits   46
       
Signatures 46
   
Exhibit No. 31.1  
Exhibit No. 31.2  
Exhibit No. 32.1  

Exhibit No. 32.2

 

Exhibit No 101.INS

 

Exhibit No. 101.SCH

 

Exhibit No. 101.CAL

 

Exhibit No. 101.DEF

 

Exhibit No. 101.LAB

 

Exhibit No. 101.PRE

 

                         

 
2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.      Consolidated Financial Statements

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

March 31, 2014

   

December 31, 2013

 
   

(Unaudited)

         
Assets                
Investments                
Available-for-sale fixed maturity securities at fair value (amortized cost: $102,933,909 as of March 31, 2014 and $98,218,823 as of December 31, 2013)   $ 106,507,799     $ 100,429,711  
Available-for-sale equity securities at fair value (cost: $569,927 as of March 31, 2014 and $567,697 as of December 31, 2013)     715,081       717,433  

Mortgage loans on real estate

    23,187,509       19,124,869  

Investment real estate

    9,259,216       6,531,971  

Policy loans

    1,515,681       1,488,646  

Other long-term investments

    23,258,295       21,763,648  
Total investments     164,443,581       150,056,278  
Cash and cash equivalents     9,802,871       10,608,438  
Accrued investment income     1,602,567       1,558,153  
Recoverable from reinsurers     1,206,416       1,200,807  
Agents' balances and due premiums     277,006       285,033  
Deferred policy acquisition costs     8,409,997       8,172,627  
Value of insurance business acquired     6,980,936       7,086,790  
Property and equipment, net     117,373       130,287  
Other assets     3,447,464       4,074,746  
Total assets   $ 196,288,211     $ 183,173,159  
Liabilities and Shareholders' Equity                
Policy liabilities                

Policyholders' account balances

  $ 120,703,388     $ 113,750,681  

Future policy benefits

    33,974,561       33,354,454  

Policy claims

    618,698       611,417  

Other policy liabilities

    86,691       89,504  
Total policy liabilities     155,383,338       147,806,056  
Notes payable     4,076,473       -  
Deferred federal income taxes     2,785,695       2,543,825  
Other liabilities     2,159,409       2,182,264  
Total liabilities     164,404,915       152,532,145  
Shareholders' equity                
Common stock, par value $.01 per share (20,000,000 shares authorized, and 8,050,193 issued as of March 31, 2014 and December 31, 2013 and 7,831,934 and 7,851,984 outstanding as of March 31, 2014 and December 31, 2013, respectively)     80,502       80,502  

Additional paid-in capital

    28,684,748       28,684,748  
Treasury stock, at cost (218,259 and 198,209 shares as of March 31, 2014 and December 31, 2013, respectively)     (773,731 )     (693,731 )

Accumulated other comprehensive income

    2,957,285       1,878,157  

Accumulated earnings

    934,492       691,338  
Total shareholders' equity     31,883,296       30,641,014  
Total liabilities and shareholders' equity   $ 196,288,211     $ 183,173,159  

 

See notes to consolidated financial statements (unaudited).

 

 
3

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2014

   

2013

 
Revenues                
Premiums   $ 2,009,983     $ 1,927,550  
Net investment income     1,970,808       1,651,623  
Net realized investment gains     296,565       149,269  
Other income     13,312       3,019  
Total revenues     4,290,668       3,731,461  
Benefits, Claims and Expenses                
Benefits and claims                

Increase in future policy benefits

    619,972       590,691  

Death benefits

    722,449       493,866  

Surrenders

    91,446       129,036  

Interest credited to policyholders

    1,022,210       903,040  

Dividend, endowment and supplementary life contract benefits

    66,210       52,830  
Total benefits and claims     2,522,287       2,169,463  

Policy acquisition costs deferred

    (528,162 )     (641,535 )

Amortization of deferred policy acquisition costs

    281,282       257,538  

Amortization of value of insurance business acquired

    105,854       94,844  

Commissions

    510,450       518,642  

Other underwriting, insurance and acquisition expenses

    1,133,459       982,381  
Total expenses     1,502,883       1,211,870  
Total benefits, claims and expenses     4,025,170       3,381,333  
Income before total federal income tax expense (benefit)     265,498       350,128  
Current federal income tax expense     50,259       47,524  
Deferred federal income tax benefit     (27,915 )     (78,388 )
Total federal income tax expense (benefit)     22,344       (30,864 )
Net income   $ 243,154     $ 380,992  
Net income per common share basic and diluted   $ 0.03     $ 0.05  

 

See notes to consolidated financial statements (unaudited).

 

 
4

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2014

   

2013

 
Net income   $ 243,154     $ 380,992  
Other comprehensive income                
Total net unrealized gains arising during the period     1,654,985       341,411  
Less net realized investment gains     296,565       149,269  

Net unrealized gains

    1,358,420       192,142  

Less adjustment to deferred acquisition costs

    9,510       516  

Other comprehensive income before income tax expense

    1,348,910       191,626  
Income tax expense     269,782       38,325  

Total other comprehensive income

    1,079,128       153,301  

Total comprehensive income

  $ 1,322,282     $ 534,293  

 

See notes to consolidated financial statements (unaudited).

 

 
5

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 2014 and 2013

(Unaudited)

 

   

Common

Stock

$.01 Par Value

   

Additional

Paid-in

Capital

   

Treasury

Stock

   

Accumulated

Other

Comprehensive

Income

   

Accumulated

Earnings

(Deficit)

   

Total

Shareholders'

Equity

 
Balance as of January 1, 2013   $ 80,374     $ 28,707,648     $ (648,595 )   $ 5,780,670     $ (197,985 )   $ 33,722,112  

Subscriptions of common stock

    128       2,837       -       -       -       2,965  

Repurchase of common stock

    -       -       (45,137 )     -       -       (45,137 )

Comprehensive income:

                                               
Net income     -       -       -       -       380,992       380,992  
Other comprehensive income     -       -       -       153,301       -       153,301  
Balance as of March 31, 2013   $ 80,502     $ 28,710,485     $ (693,732 )   $ 5,933,971     $ 183,007     $ 34,214,233  
                                                 
Balance as of January 1, 2014   $ 80,502     $ 28,684,748     $ (693,731 )   $ 1,878,157     $ 691,338     $ 30,641,014  

Repurchase of common stock

    -       -       (80,000 )     -       -       (80,000 )

Comprehensive income:

                                               
Net income     -       -       -       -       243,154       243,154  
Other comprehensive income     -       -       -       1,079,128       -       1,079,128  
Balance as of March 31, 2014   $ 80,502     $ 28,684,748     $ (773,731 )   $ 2,957,285     $ 934,492     $ 31,883,296  

 

See notes to consolidated financial statements (unaudited).

 

 
6

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2014

   

2013

 
Operating activities                

Net income

  $ 243,154     $ 380,992  

Adjustments to reconcile net income to net cash provided by operating activities:

               
Provision for depreciation     103,524       51,974  
Accretion of discount on investments     (221,043 )     (209,431 )
Net realized investment gains     (296,565 )     (149,269 )
Amortization of policy acquisition cost     281,282       257,538  
Policy acquisition cost deferred     (528,162 )     (641,535 )
Mortgage loan origination fees deferred     (21,500 )     (48,031 )
Amortization of loan origination fees     17,923       11,438  
Amortization of value of insurance business acquired     105,854       94,844  
Provision for deferred federal income tax benefit     (27,915 )     (78,388 )
Interest credited to policyholders     1,022,210       903,040  
Change in assets and liabilities:                
Accrued investment income     (44,414 )     (34,093 )
Policy loans     (27,035 )     (10,380 )
Allowance for mortgage and premium finance loan losses     17,603       46,371  
Recoverable from reinsurers     (5,609 )     (91,458 )
Agents' balances and due premiums     8,027       (14,660 )
Other assets     627,282       (185,324 )
Future policy benefits     620,107       602,399  
Policy claims     7,281       (105,498 )
Other policy liabilities     (2,813 )     (42,858 )
Other liabilities     (22,855 )     (35,419 )
Net cash provided by operating activities     1,856,336       702,252  
                 
Investing activities                
Purchases of fixed maturity securities     (8,075,994 )     (6,649,734 )
Maturities of fixed maturity securities     1,487,000       825,000  
Sales of fixed maturity securities     1,943,330       962,518  
Purchases of equity securities     (2,230 )     (2,134 )
Purchases of mortgage loans     (4,753,722 )     (2,866,116 )
Payments on mortgage loans     709,836       689,827  
Purchases of other long-term investments     (1,837,619 )     (3,697,065 )
Payments on other long-term investments     758,383       937,922  
Loans repaid for premiums financed     -       125,429  
Purchases of real estate     (2,817,857 )     -  
Purchases of furniture and equipment     -       (40,435 )
Net cash used in investing activities     (12,588,873 )     (9,714,788 )
                 
Financing activities                
Policyholders' account deposits     8,031,177       5,573,147  
Policyholders' account withdrawals     (2,100,680 )     (1,664,367 )
Purchases of treasury stock     (80,000 )     (45,137 )
Proceeds from issuance of notes payable     4,076,473       -  
Proceeds from stock offerings     -       2,965  
Net cash provided by financing activities     9,926,970       3,866,608  
                 
Decrease in cash     (805,567 )     (5,145,928 )

Cash and cash equivalents, beginning of period

    10,608,438       10,947,474  

Cash and cash equivalents, end of period

  $ 9,802,871     $ 5,801,546  

 

See notes to consolidated financial statements (unaudited).

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)  

 

1.     Organization and Significant Accounting Policies

 

Nature of Operations

 

First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) , First Trinity Capital Corporation (“FTCC”) and Southern Insurance Services, LLC (“SIS”). The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.

 

The Company owns 100% of TLIC. TLIC owns 100% of FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals. TLIC’s and FBLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Arizona, Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Texas and West Virginia.

 

The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds and collections of past due accounts and accounts involved in litigation. The Company also owns 100% of SIS, a limited liability company acquired in 2009 that operated as a property and casualty insurance agency but currently has no operations.

 

Company Capitalization

 

The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from three public stock offerings from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012; and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings.

 

The Company also issued 702,705 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,288 with an offsetting credit of $5,270,288 to common stock and additional paid-in capital. The impact of these two stock dividend charges of $5,270,288 to accumulated earnings decreased the balance of accumulated earnings as of March 31, 2014 to $934,492, as shown in the accumulated earnings caption in the March 31, 2014 consolidated statement of financial position.

 

The Company has also purchased 218,259 shares of treasury stock at a cost of $773,731 from former members of the Board of Directors, a former agent and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

 

Acquisition of Other Companies 

 

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The acquisition of FLAC 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 quarterly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.

 

 
8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

1.     Organization and Significant Accounting Policies (continued)

 

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 TLIC.”

 

On December 28, 2011, TLIC acquired 100% of the outstanding common stock of FBLIC from FBLIC’s shareholders. The acquisition of FBLIC was accounted for as a purchase. The aggregate purchase price for the acquisition of FBLIC was $13,855,129. The acquisition of FBLIC was financed with the working capital of TLIC.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ended December 31, 2014 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2013.

 

Principles of Consolidation

 

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

 

Reclassifications

 

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

 

Use of Estimates

 

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

 

Common Stock

 

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

 

Subsequent Events

 

Management has evaluated all events subsequent to March 31, 2014 through the date that these financial statements have been issued.

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

1.     Organization and Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements

 

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

 

In February 2013, the Financial Accounting Standards Board (“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 operations 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 Company adopted the updated guidance effective March 31, 2013, and such adoption did not have any effect on the Company’s results of operations, financial position or liquidity.

  

Future Application of Accounting Standards

 

The Company is currently required to prepare its financial statements in accordance with U.S. GAAP, as promulgated by the FASB. During the last several years, the Securities and Exchange Commission (“SEC”) has been evaluating whether, when and how International Financial Reporting Standards (“IFRS”) should be incorporated into the U.S. financial reporting system. Before making a decision, the SEC set forth a work plan to evaluate the remaining differences between GAAP and IFRS, determine whether IFRS represent high quality standards, consider how the International Accounting Standards Board (“IASB”) is funded and its governance structure and examine the variations in the way IFRS was applied by various foreign companies that file financial statements with the SEC. In July 2012, the SEC staff issued a final report on the SEC work plan which concluded that IFRS provided high quality accounting standards, but also indicated concerns with funding, consistency of application and enforcement of IFRS globally. The report did not give a recommendation to the SEC on whether, when and how IFRS should be incorporated into the U.S. financial reporting system. In addition, the SEC has not indicated a timeline for further consideration of incorporating IFRS.

 

The FASB and the IASB have a convergence program with the intent of developing global standards for several significant areas of accounting, including the accounting for insurance contracts. In June 2012, the FASB issued a statement that indicated that based on the nature and totality of differences between the FASB's and IASB's views, it is not likely that the two boards will achieve convergence on this project. The FASB further noted that the FASB and IASB have very different perspectives on the project, given that the U.S. has existing guidance on insurance contracts whereas there is currently no comprehensive IFRS accounting standard for insurance contracts. In June 2013, each board issued for comment an exposure draft of the accounting for insurance contracts that has significant differences from the other board's draft as well as from current GAAP. Both exposure drafts propose changes that, if ultimately adopted, could significantly impact the accounting by insurers, including the Company, for premiums, policyholders’ account balances, future policy benefits, policy claims and claims adjustment expenses, reinsurance and deferred acquisition costs. The Boards are reviewing the comments received on the exposure drafts and are expected to begin re-deliberations in the first quarter of 2014. As a result of this, it is currently unclear what changes, if any, may be made to the accounting for insurance contracts under GAAP as a result of this project. In addition, any new standards issued by the Boards regarding insurance contracts may involve methodologies for valuing insurance contract liabilities that may be significantly different from the methodologies required by current GAAP. It is also possible that the Boards could issue different final standards. In February 2014, the FASB announced that it has decided to consider targeted improvements to GAAP related to insurance contracts rather than a comprehensive overhaul of GAAP related to insurance contracts.

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

 (Unaudited)

 

1.     Organization and Significant Accounting Policies (continued)

 

The FASB and the IASB also continue to deliberate the three remaining projects intended to bring convergence between GAAP and IFRS for revenue recognition, accounting for financial instruments and leasing. The revenue recognition project is largely converged and the Boards are expected to issue final guidance in the first half of 2014. The Boards currently have different positions on certain key aspects of the financial instrument project (the classification and measurement and impairment) but both Boards intend to complete their financial instrument project during the first half of 2014. The timing of the leasing project is not known at this time.

 

The Company is not able to predict whether it will be required to adopt IFRS or how the adoption of IFRS (or the potential convergence of GAAP and IFRS, including the joint project for valuing insurance contract liabilities) may impact the Company's financial statements in the future.

 

 
11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

2.     Investments

 

Fixed Maturity and Equity Securities Available-For-Sale

 

Investments in fixed maturity and equity securities available-for-sale as of March 31, 2014 and December 31, 2013 are summarized as follows:

 

March 31, 2014 (Unaudited)  

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
Fixed maturity securities                                

U.S. government and U.S. government agencies

  $ 3,172,218     $ 170,315     $ 209,679     $ 3,132,854  

States and political subdivisions

    208,514       563       9,407       199,670  

Residential mortgage-backed securities

    80,477       60,767       -       141,244  

Corporate bonds

    89,108,143       3,436,978       539,786       92,005,335  

Foreign bonds

    10,364,557       682,672       18,533       11,028,696  
Total fixed maturity securities     102,933,909       4,351,295       777,405       106,507,799  

 

Equity securities  

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

Mutual funds

    71,038       15,159       -       86,197  

Corporate preferred stock

    347,905       23,540       23,775       347,670  

Corporate common stock

    150,984       130,230       -       281,214  
Total equity securities     569,927       168,929       23,775       715,081  
Total fixed maturity and equity securities   $ 103,503,836     $ 4,520,224     $ 801,180     $ 107,222,880  

 

December 31, 2013  

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
Fixed maturity securities                                

U.S. government and U.S. government agencies

  $ 3,163,203     $ 177,700     $ 285,282     $ 3,055,621  

States and political subdivisions

    209,495       601       9,698       200,398  

Residential mortgage-backed securities

    86,022       62,588       -       148,610  

Corporate bonds

    89,683,844       3,332,305       1,262,513       91,753,636  

Foreign bonds

    5,076,259       234,153       38,966       5,271,446  
Total fixed maturity securities     98,218,823       3,807,347       1,596,459       100,429,711  

 

Equity securities  

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

Mutual funds

    68,808       15,759       -       84,567  

Corporate preferred stock

    347,905       21,752       32,605       337,052  

Corporate common stock

    150,984       144,830       -       295,814  
Total equity securities     567,697       182,341       32,605       717,433  
Total fixed maturity and equity securities   $ 98,786,520     $ 3,989,688     $ 1,629,064     $ 101,147,144  

 

 
12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

2.     Investments (continued)

 

All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of March 31, 2014 and December 31, 2013 are summarized as follows:

 

March 31, 2014 (Unaudited)  

Fair Value

   

Unrealized

Loss

   

Number of

Securities

 
Fixed maturity securities                        

Less than 12 months

                       
U.S. government and U.S. government agencies   $ 781,946     $ 118,054       2  
Corporate bonds     17,903,337       492,672       72  
Foreign bonds     2,120,370       18,533       8  

Total less than 12 months

    20,805,653       629,259       82  

More than 12 months

                       
U.S. government and U.S. government agencies     438,375       91,625       1  
States and political subdivisions     97,934       9,407       1  
Corporate bonds     952,033       47,114       7  

Total more than 12 months

    1,488,342       148,146       9  
Total fixed maturity securities     22,293,995       777,405       91  
Equity securities                        

Less than 12 months

                       
Corporate preferred stock     194,670       23,775       3  
Total equity securities     194,670       23,775       3  
Total fixed maturity and equity securities   $ 22,488,665     $ 801,180       94  

 

December 31, 2013  

Fair Value

   

Unrealized

Loss

   

Number of

Securities

 
Fixed maturity securities                        

Less than 12 months

                       
U.S. government and U.S. government agencies   $ 1,144,718     $ 285,282       3  
States and political subdivisions     97,934       9,698       1  
Corporate bonds     31,495,624       1,225,816       141  
Foreign bonds     1,364,449       38,966       5  

Total less than 12 months

    34,102,725       1,559,762       150  

More than 12 months

                       
Corporate bonds     531,683       36,697       4  

Total more than 12 months

    531,683       36,697       4  
Total fixed maturity securities     34,634,408       1,596,459       154  
Equity securities                        

Less than 12 months

                       
Corporate preferred stock     185,840       32,605       3  
Total equity securities     185,840       32,605       3  
Total fixed maturity and equity securities   $ 34,820,248     $ 1,629,064       157  

 

 
13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

2.     Investments (continued)

 

As of March 31, 2014, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 82%. As of December 31, 2013, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 77%. Fixed maturity securities were 97% and 96% investment grade as rated by Standard & Poor’s as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014, all of the above equity securities had a fair value to cost ratio equal to or greater than 85%. As of December 31, 2013, all of the above equity securities had a fair value to cost ratio equal to or greater than 78%.

 

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

 

For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of operations. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of operations in the periods incurred as the difference between fair value and cost.

 

Based on management’s review, the Company experienced no other-than-temporary impairments during the three months ended March 31, 2014 and the year ended December 31, 2013. Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2014, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.  The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment. 

 

Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of March 31, 2014 and December 31, 2013, are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2014

   

December 31, 2013

 
Unrealized appreciation on available-for-sale securities   $ 3,719,044     $ 2,360,624  
Adjustment to deferred acquisition costs     (22,437 )     (12,927 )
Deferred income taxes     (739,322 )     (469,540 )
Net unrealized appreciation on available-for-sale securities   $ 2,957,285     $ 1,878,157  

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

 

 

2.     Investments (continued)

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of March 31, 2014, by contractual maturity, are summarized as follows:

 

   

March 31, 2014 (Unaudited)

 
   

Fixed Maturity Available-For-Sale Securities

   

Other Long-Term Investments

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 
                                 

Due in one year or less

  $ 6,119,494     $ 6,240,813     $ 4,058,504     $ 4,142,545  

Due in one year through five years

    35,950,898       38,106,833       9,986,012       10,803,464  

Due after five years through ten years

    50,549,233       51,831,520       6,156,279       7,588,500  

Due after ten years

    10,233,807       10,187,390       3,057,500       4,373,133  

Due at multiple maturity dates

    80,477       141,243       -       -  
    $ 102,933,909     $ 106,507,799     $ 23,258,295     $ 26,907,642  

 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale and mortgage loans on real estate for the three months ended March 31, 2014 and 2013 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

Fixed Maturity Securities

   

Mortgage Loans on Real Estate

 
   

2014

   

2013

   

2014

   

2013

 

Proceeds

  $ 3,430,330     $ 1,787,518     $ 709,836     $ 689,827  

Gross realized gains

    279,570       51,013       17,961       102,515  

Gross realized losses

    (966 )     (4,259 )     -       -  

 

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2014 and 2013 and the amount of realized investment gains on fixed maturity securities available-for-sale and mortgage loans on real estate for the three months ended March 31, 2014 and 2013 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2014

   

2013

 
Change in unrealized investment gains:                

Available-for-sale securities:

               
Fixed maturity securities   $ 1,363,002     $ 179,844  
Equity securities     (4,582 )     12,298  
                 
Net realized investment gains (losses):                

Available-for-sale securities:

               
Fixed maturity securities     278,604       46,754  
Mortgage loans on real estate     17,961       102,515  

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

2.     Investments (continued)

 

Major categories of net investment income for the three months ended March 31, 2014 and 2013 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2014

   

2013

 

Fixed maturity securities

  $ 1,119,896     $ 1,098,833  

Equity securities

    10,657       7,315  

Other long-term investments

    415,411       395,635  

Mortgage loans

    453,972       210,022  

Policy loans

    24,943       24,104  

Real estate

    173,195       90,710  

Short-term and other investments

    36,297       10,428  
Gross investment income     2,234,371       1,837,047  

Investment expenses

    (263,563 )     (185,424 )
Net investment income   $ 1,970,808     $ 1,651,623  

 

TLIC and FBLIC are required to hold assets on deposit with various state insurance departments for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of March 31, 2014 and December 31, 2013, these required deposits, included in investment assets, had amortized costs that totaled $3,229,689 and $3,220,853, respectively. As of March 31, 2014 and December 31, 2013, these required deposits had fair values that totaled $3,173,283 and $3,097,372, respectively.

 

The Company’s mortgage loans by property type as of March 31, 2014 and December 31, 2013 are summarized as follows:

 

   

March 31, 2014

   

December 31, 2013

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Commercial mortgage loans

                               
Retail stores   $ 1,739,415       7.50 %   $ 1,801,443       9.42 %
Office buildings     340,153       1.47 %     349,508       1.83 %

Total commercial mortgage loans

    2,079,568       8.97 %     2,150,951       11.25 %

Residential mortgage loans

    21,107,941       91.03 %     16,973,918       88.75 %

Total mortgage loans

  $ 23,187,509       100.00 %   $ 19,124,869       100.00 %

 

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-half of this land. The Company also owns one acre of land in Greensburg, Indiana that includes a 3,975 square foot retail building on approximately 8% of this land and another acre of land in Norman, Oklahoma that includes a 9,100 square foot retail building on approximately 18% of this land.

 

In February 2014, the Company purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land and three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land.

 

 
16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

 

2.     Investments (continued)

 

The Company’s investment real estate as of March 31, 2014 and December 31, 2013 is summarized as follows:

 

 

   

March 31, 2014

   

December 31, 2013

 

Land

  $ 2,283,638     $ 1,453,135  

Buildings

    7,676,169       5,688,816  

Less - accumulated depreciation

    (700,591 )     (609,980 )
Buildings net of accumulated depreciation     6,975,578       5,078,836  

Investment real estate, net of accumulated depreciation

  $ 9,259,216     $ 6,531,971  

 

 

3.     Fair Value Measurements

 

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

 

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

 

Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include equity securities that are traded in an active exchange market.

 

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

 

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

 

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

 

 
17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

3.     Fair Value Measurements (continued)

 

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 is summarized as follows:

 

March 31, 2014 (Unaudited)  

Level 1

   

Level 2

   

Level 3

   

Total

 
Fixed maturity securities, available-for-sale                                

U.S. government and U.S. government agencies

  $ -     $ 3,132,854     $ -     $ 3,132,854  

States and political subdivisions

    -       199,670       -       199,670  

Residential mortgage-backed securities

    -       141,244       -       141,244  

Corporate bonds

    -       92,005,335       -       92,005,335  

Foreign bonds

    -       11,028,696       -       11,028,696  
Total fixed maturity securities   $ -     $ 106,507,799     $ -     $ 106,507,799  
                                 
Equity securities, available-for-sale                                

Mutual funds

  $ -     $ 86,197     $ -     $ 86,197  

Corporate preferred stock

    90,020       257,650       -       347,670  

Corporate common stock

    263,214       -       18,000       281,214  
Total equity securities   $ 353,234     $ 343,847     $ 18,000     $ 715,081  

 

December 31, 2013  

Level 1

   

Level 2

   

Level 3

   

Total

 
Fixed maturity securities, available-for-sale                                

U.S. government and U.S. government agencies

  $ -     $ 3,055,621     $ -     $ 3,055,621  

States and political subdivisions

    -       200,398       -       200,398  

Residential mortgage-backed securities

    -       148,610       -       148,610  

Corporate bonds

    -       91,753,636       -       91,753,636  

Foreign bonds

    -       5,271,446       -       5,271,446  
Total fixed maturity securities   $ -     $ 100,429,711     $ -     $ 100,429,711  
                                 
Equity securities, available-for-sale                                

Mutual funds

  $ -     $ 84,567     $ -     $ 84,567  

Corporate preferred stock

    81,540       255,512       -       337,052  

Corporate common stock

    277,814       -       18,000       295,814  
Total equity securities   $ 359,354     $ 340,079     $ 18,000     $ 717,433  

 

As of both March 31, 2014 and December 31, 2013, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. These private placement stocks represent investments in small development stage insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.

 

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

 

 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

 (Unaudited)

 

3.     Fair Value Measurements (continued)

 

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

 

The Company’s equity securities are included in Level 1 and Level 2 and the private placement common stocks included in Level 3. Level 1 for those equity securities classified as such is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and are based upon unadjusted prices. Level 2 for those equity securities classified as such is appropriate since they are not actively traded as of March 31, 2014.

 

The Company’s fixed maturity and equity securities available-for-sale portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.

 

 
19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

3.     Fair Value Measurements (continued)

 

Fair Value of Financial Instruments

 

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of March 31, 2014 and December 31, 2013, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

 

Financial Instruments Disclosed, But Not Carried, at Fair Value:

 

   

March 31, 2014 (Unaudited)

 
   

Carrying

Amount

   

Fair

Value

   

Level 1

   

Level 2

   

Level 3

 
Financial assets                                        

Mortgage loans on real estate

                                       
Commercial   $ 2,079,568     $ 2,130,232     $ -     $ -     $ 2,130,232  
Residential     21,107,941       21,822,974       -       -       21,822,974  

Policy loans

    1,515,681       1,515,681       -       -       1,515,681  

Other long-term investments

    23,258,295       26,907,642       -       -       26,907,642  

Cash and cash equivalents

    9,802,871       9,802,871       9,802,871       -       -  

Accrued investment income

    1,602,567       1,602,567       -       -       1,602,567  
Total financial assets   $ 59,366,923     $ 63,781,967     $ 9,802,871     $ -     $ 53,979,096  
Financial liabilities                                        

Policyholders' account balances

  $ 120,703,388     $ 106,091,744     $ -     $ -     $ 106,091,744  

Notes payable

    4,076,473       4,076,473       -       -       4,076,473  

Policy claims

    618,698       618,698       -       -       618,698  
Total financial liabilities   $ 125,398,559     $ 110,786,915     $ -     $ -     $ 110,786,915  

 

   

December 31, 2013

 
   

Carrying

Amount

   

Fair

Value

   

Level 1

   

Level 2

   

Level 3

 
Financial assets                                        

Mortgage loans on real estate

                                       
Commercial   $ 2,150,951     $ 2,169,618     $ -     $ -     $ 2,169,618  
Residential     16,973,918       17,758,414       -       -       17,758,414  

Policy loans

    1,488,646       1,488,646       -       -       1,488,646  

Other long-term investments

    21,763,648       24,728,710       -       -       24,728,710  

Cash and cash equivalents

    10,608,438       10,608,438       10,608,438       -       -  

Accrued investment income

    1,558,153       1,558,153       -       -       1,558,153  
Total financial assets   $ 54,543,754     $ 58,311,979     $ 10,608,438     $ -     $ 47,703,541  
Financial liabilities                                        

Policyholders' account balances

  $ 113,750,681     $ 96,709,910     $ -     $ -     $ 96,709,910  

Policy claims

    611,417       611,417       -       -       611,417  
Total financial liabilities   $ 114,362,098     $ 97,321,327     $ -     $ -     $ 97,321,327  

 

 
20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

 

3.     Fair Value Measurements (continued)

 

The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

 

The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:

 

Fixed Maturity and Equity Securities                                        

 

The fair value of fixed maturity and equity securities are based on the principles previously discussed as Level 1, Level 2 and Level 3.

 

Mortgage Loans on Real Estate

 

The fair values for mortgage loans are estimated using discounted cash flow analyses. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread. For commercial mortgage loans, the discount rate used was assumed to be the interest rate on the last commercial mortgage acquired by the Company.

 

Cash and Cash Equivalents, Accrued Investment Income and Policy Loans

 

The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents are included in Level 1 of the fair value hierarchy due to their highly liquid nature.

 

Other Long-Term Investments

 

Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach. Projected cash flows are discounted using the average Citigroup Pension Liability Index in effect at the end of each period.

 

Investment Contracts – Policyholders’ Account Balances

 

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

 

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

 

Policy Claims

 

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

 

Notes Payable

 

The carrying amounts reported for these liabilities approximate their fair value given that the notes payable were issued on March 26, 2014.

 

 
21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

4.     Segment Data

 

The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC and SIS, after elimination of intercompany amounts, are allocated to the corporate segment. Prior to January 1, 2014, the Company’s quarterly and annual segment data was reported based upon a life insurance segment, consisting of the operations of TLIC and FBLIC, a premium financing segment, consisting of the operations of FTCC and SIS and a corporate segment. Prior to January 1, 2014, the results for the parent company, after elimination of intercompany amounts, were allocated to the corporate segment.

 

The segment data as of December 31, 2013 and for the three months ended March 31, 2013 have been restated from what was previously reported and now follows the new segmentation methodology established on January 1, 2014.

 

These segments as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2014

   

2013

 
Revenues:                

Life insurance operations

  $ 2,513,377     $ 2,365,151  

Annuity operations

    1,661,238       1,321,123  

Corporate operations

    116,053       45,187  
Total   $ 4,290,668     $ 3,731,461  
Income (loss) before income taxes:                

Life insurance operations

  $ (10,567 )   $ 326,715  

Annuity operations

    224,041       239,888  

Corporate operations

    52,024       (216,475 )
Total   $ 265,498     $ 350,128  
Depreciation and amortization expense:                

Life insurance operations

  $ 355,287     $ 360,188  

Annuity operations

    149,953       49,958  

Corporate operations

    3,343       5,648  
Total   $ 508,583     $ 415,794  

 

   

(Unaudited)

         
   

March 31, 2014

   

December 31, 2013

 
Assets:                

Life insurance operations

  $ 43,495,467     $ 41,720,508  

Annuity operations

    146,450,303       134,934,891  

Corporate operations

    6,342,441       6,517,760  
Total   $ 196,288,211     $ 183,173,159  

 

 
22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

5.     Notes Payable

 

Notes payable as of March 31, 2014 are summarized as follows:

 

   

(Unauited)

March 31, 2014

 
         

Promissory note payable to Grand Bank, secured by real estate and tenant leases located in Indiana, Oklahoma and Texas,35 monthly payments of interest at 4.50% with a final payment in the 36th month of $3,009,265 of principal plus unpaid accrued interest at 4.50%, maturity date is March 26, 2017

  $ 3,009,265  
Promissory note payable to Grand Bank, secured by real estateand tenant leases located in Missouri, 35 monthly payments of interest at 4.50% with a final payment in the 36th month of $1,067,208 of principal plus unpaid accrued interest at 4.50%, maturity date is March 26, 2017     1,067,208  
Total promissory notes payable   $ 4,076,473  

 

The $3,009,265 promissory note is collateralized by three properties, located in Indiana, Oklahoma and Texas, purchased for $4,940,647 in December 2013 and February 2014 including assignment of the tenant leases.

 

In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot building constructed on approximately 8% of this land at a cost of $2,444,203 (including closing costs of $50,516). The building is leased through October 31, 2027 plus four future extensions effective on November 1, 2027, November 1, 2032, November 1, 2037 and November 1, 2042 through October 31, 2032, October 31, 2037, October 31, 2042 and October 31, 2047, respectively. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are as follows: $14,661 in 2014; $14,881 in 2015; $15,104 in 2016; $15,331 in 2017, $15,561 in 2018, and $15,794 in 2019.

 

In December 2013, TLIC also purchased one acre of land in Norman, Oklahoma that included a 9,100 square foot building constructed on approximately 18% of this land at a cost of $1,519,431 (including closing costs of $37,931). The building is leased through August 31, 2028 plus three future extensions on September 1, 2028, September 1, 2033 and September 1, 2038 through August 31, 2033, August 31, 2038 and August 31, 2043, respectively. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $8,004 through August 31, 2028.

 

In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land at a cost of $977,013 (including closing costs of $31,063). The building is leased through December 31, 2023 plus four future extension on January 1, 2024, January 1, 2029, January 1, 2034 and January 1, 2039 through December 31, 2028, December 31, 2033, December 31, 2038 and December 31, 2043, respectively. The terms of the lease have the lessee responsible for paying real estate taxes and building insurance. TLIC is responsible for building and ground maintenance. The monthly lease payments are $5,833 through December 31, 2018 and $6,417 in 2019.

 

The $1,067,208 promissory note is collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864). The building is leased through October 31, 2028 plus three future extensions on November 1, 2028, November 1, 2033 and November 1, 2038 through October 31, 2033, October 31, 2038 and October 31, 2043, respectively. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $9,463 through October 31, 2028.

 

 
23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

6.     Federal Income Taxes

 

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

 

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2010 through 2013 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.

 

 

7.     Legal Matters and Contingent Liabilities

 

The Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, filed an action in the District Court of Tulsa County, Oklahoma in 2013, Case No. CJ-2013-03385, against former Company Board of Directors member, Wayne Pettigrew and Mr. Pettigrew’s company, Group & Pension Planners, Inc. (the “Defendants”).  The petition filed in the case alleges that Mr. Pettigrew, during and after the time he was a member of the Company’s Board of Directors, made defamatory statements regarding the Company and Mr. Zahn.  The defendants are alleged to have made defamatory statements to certain shareholders of the Company, to the press and to the OID and the Oklahoma Department of Securities.  Mr. Pettigrew has denied the allegations.

 

The Board of Directors, represented by independent counsel, concluded that there was no action to be taken against Mr. Zahn and that the allegations by Mr. Pettigrew were without substance.  The Company has been informed by the OID that it would take no action and was also informed that the Oklahoma Department of Securities, after its investigation of the allegations, concluded that no proceedings were needed with respect to the alleged matters. It is the Company’s intention to vigorously prosecute this action against the Defendants for damages and for the correction of the defamatory statements.  In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.

 

Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for the Decreasing Term to 95 policies. On November 22, 2013, three individuals who owned Decreasing Term to 95 policies filed a Petition in the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to FBLIC’s decision to not provide a dividend under the Decreasing Term to 95 policies.

 

The Petition asserts claims for breach of contract and anticipatory breach of contract and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. In addition to these claims, the Petition asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act. It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.

 

The Petition also seeks to certify a class of individuals with similar claims but no class has been certified by the Court. FBLIC denies the allegations in the Petition and will continue to defend against them. It is the Company’s intention to vigorously defend the request for class certification, as well as to defend vigorously against the individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on the substantive action.

 

 
24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2014 

(Unaudited)

 

8.     Other Comprehensive Income and Accumulated Other Comprehensive Income

 

The changes in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2014 and 2013 are summarized as follows:

 

   

Three Months Ended March 31, 2014 and 2013 (Unaudited)

 
   

Unrealized

Appreciation on

Available-For-Sale

Securities

   

Adjustment to

Deferred Acquisition

Costs

   

Accumulated

Other

Comprehensive

Income

 
Balance as of January 1, 2014   $ 1,888,498     $ (10,341 )   $ 1,878,157  

Other comprehensive income before reclassifications, net of tax

    1,323,988       (7,608 )     1,316,380  

Less amounts reclassified from accumulated other comprehensive income, net of tax

    237,252       -       237,252  
Other comprehensive income     1,086,736       (7,608 )     1,079,128  
Balance as of March 31, 2014   $ 2,975,234     $ (17,949 )   $ 2,957,285  
                         
Balance as of January 1, 2013   $ 5,811,309     $ (30,639 )   $ 5,780,670  

Other comprehensive income before reclassifications, net of tax

    273,129       (413 )     272,716  

Less amounts reclassified from accumulated other comprehensive income, net of tax

    119,415       -       119,415  
Other comprehensive income     153,714       (413 )     153,301  
Balance as of March 31, 2013   $ 5,965,023     $ (31,052 )   $ 5,933,971  

 

The pretax components of the Company’s other comprehensive income and the related income tax expense for each component for the three months ended March 31, 2014 and 2013 are summarized as follows:

 

   

Three Months Ended March 31, 2014 (Unaudited)

 
   

Pretax

   

Income Tax

Expense

(Benefit)

   

Net of Tax

 
Other comprehensive income:                        
Change in net unrealized gains on available-for-sale securities:                        
Unrealized holding gains arising during the period   $ 1,654,985     $ 330,997     $ 1,323,988  
Reclassification adjustment for gains included in income     (296,565 )     (59,313 )     (237,252 )
Net unrealized gains on investments     1,358,420       271,684       1,086,736  
Adjustment to deferred acquisition costs     (9,510 )     (1,902 )     (7,608 )
Total other comprehensive income   $ 1,348,910     $ 269,782     $ 1,079,128  

 

   

Three Months Ended March 31, 2013 (Unaudited)

 
   

Pretax

   

Income Tax

Expense

(Benefit)

   

Net of Tax

 
Other comprehensive income:                        
Change in net unrealized gains on available-for-sale securities:                        
Unrealized holding gains arising during the period   $ 341,411     $ 68,282