10-Q 1 ftfc20150930_10q.htm FORM 10-Q ftfc20150930_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 September 30, 2015

 

[    ]

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 November 9, 2015: 7,802,593 shares

 

 
 

 

 

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Page Number

   

Item 1. Consolidated Financial Statements

 
   

Consolidated Statements of Financial Position as of September 30, 2015 (Unaudited) and December 31, 2014

3

   

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)

4

   

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)

5
   

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

6
   

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

7

   

Notes to Consolidated Financial Statements (Unaudited)

9

    

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

35

   

Item 4. Controls and Procedures

62

   

Part II. OTHER INFORMATION

 
   

Item 1. Legal Proceedings

62

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

63

   

Item 3. Defaults upon Senior Securities

63

   

Item 4. Mine Safety Disclosures

63

   

Item 5. Other Information

63

   

Item 6. Exhibits

63

   

Signatures

64

 

Exhibit No. 31.1                                                       

Exhibit No. 31.2          

Exhibit No. 32.1          

Exhibit No. 32.2

Exhibit No. 101.INS

Exhibit No. 101.SCH

Exhibit No. 101.CAL

Exhibit No. 101.DEF

Exhibit No. 101.LAB

Exhibit No. 101.PRE

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

September 30, 2015

   

December 31, 2014

 

 

 

(Unaudited)

         
Assets              

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $129,264,756 and $107,412,322 as of September 30, 2015 and December 31, 2014, respectively)

  $ 129,158,760     $ 110,651,429  

Available-for-sale equity securities at fair value (cost: $534,912 and $519,595 as of September 30, 2015 and December 31, 2014, respectively)

    614,289       671,357  

Mortgage loans on real estate

    55,084,951       38,649,733  

Investment real estate

    2,362,929       9,165,090  

Policy loans

    1,474,528       1,520,620  

Short-term investments

    599,544       1,141,199  

Other long-term investments

    31,794,676       21,781,925  

Total investments

    221,089,677       183,581,353  

Cash and cash equivalents

    11,978,769       10,158,386  

Accrued investment income

    2,081,804       1,682,906  

Recoverable from reinsurers

    1,197,636       1,222,245  

Agents' balances and due premiums

    1,090,615       562,146  

Deferred policy acquisition costs

    11,856,105       9,287,851  

Value of insurance business acquired

    6,382,496       6,674,414  

Property and equipment, net

    45,656       84,001  

Other assets

    6,826,345       5,747,866  

Total assets

  $ 262,549,103     $ 219,001,168  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 185,748,171     $ 140,554,973  

Future policy benefits

    38,631,023       35,913,730  

Policy claims

    655,416       602,269  

Other policy liabilities

    74,152       87,148  

Total policy liabilities

    225,108,762       177,158,120  

Notes payable

    -       4,076,473  

Deferred federal income taxes

    1,364,642       2,198,753  

Other liabilities

    4,228,905       2,357,484  

Total liabilities

    230,702,309       185,790,830  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 and 8,050,193 issued as of September 30, 2015 and December 31, 2014, respectively and 7,802,593 and 7,812,038 outstanding as of September 30, 2015 and December 31, 2014, respectively)

    80,502       80,502  

Additional paid-in capital

    28,684,598       28,684,748  

Treasury stock, at cost (247,580 and 238,155 shares as of September 30, 2015 and December 31, 2014, respectively)

    (893,947 )     (855,304 )

Accumulated other comprehensive income (loss)

    (22,711 )     2,683,543  

Accumulated earnings

    3,998,352       2,616,849  

Total shareholders' equity

    31,846,794       33,210,338  

Total liabilities and shareholders' equity

  $ 262,549,103     $ 219,001,168  

 

See notes to consolidated financial statements (unaudited).

 

 
3

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues

                               

Premiums

  $ 2,496,403     $ 2,026,730     $ 7,141,841     $ 5,968,768  

Net investment income

    2,916,317       2,227,772       7,828,639       6,460,183  

Net realized investment gains

    280,763       16,528       786,852       778,244  

Loss on other-than-temporary impairment

    (1,078 )     -       (305,334 )     -  

Gain on reinsurance assumption

    38,923       -       588,923       -  

Other income

    40,492       56,277       56,656       76,352  

Total revenues

    5,771,820       4,327,307       16,097,577       13,283,547  
                                 

Benefits, Claims and Expenses

                               

Benefits and claims

                               

Increase in future policy benefits

    909,156       562,682       2,605,117       1,777,486  

Death benefits

    803,941       808,294       2,574,150       2,280,756  

Surrenders

    122,655       215,089       400,536       459,027  

Interest credited to policyholders

    1,459,480       1,141,903       4,052,780       3,243,630  

Dividend, endowment and supplementary life contract benefits

    66,689       59,569       224,793       197,169  

Total benefits and claims

    3,361,921       2,787,537       9,857,376       7,958,068  

Policy acquisition costs deferred

    (1,596,615 )     (606,042 )     (3,819,582 )     (1,692,513 )

Amortization of deferred policy acquisition costs

    428,448       347,073       1,285,997       936,627  

Amortization of value of insurance business acquired

    92,561       106,241       291,918       308,839  

Commissions

    1,430,501       591,212       3,340,116       1,631,193  

Other underwriting, insurance and acquisition expenses

    1,189,367       867,080       3,599,813       3,190,362  

Total expenses

    1,544,262       1,305,564       4,698,262       4,374,508  

Total benefits, claims and expenses

    4,906,183       4,093,101       14,555,638       12,332,576  
                                 

Income before total federal income tax expense

    865,637       234,206       1,541,939       950,971  

Current federal income tax expense (benefit)

    218,754       (146,465 )     318,132       (68,015 )

Deferred federal income tax expense (benefit)

    (834 )     182,907       (157,546 )     143,888  

Total federal income tax expense

    217,920       36,442       160,586       75,873  
                                 

Net income

  $ 647,717     $ 197,764     $ 1,381,353     $ 875,098  
                                 

Net income per common share basic and diluted

  $ 0.08     $ 0.03     $ 0.18     $ 0.11  

 

See notes to consolidated financial statements (unaudited).

 

 
4

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net income

  $ 647,717     $ 197,764     $ 1,381,353     $ 875,098  
                                 

Other comprehensive income (loss)

                               

Total net unrealized gains (losses) arising during the period

    (1,524,166 )     (1,251,770 )     (3,436,009 )     2,391,378  

Less net realized investment gains (losses)

    200,657       7,631       (18,521 )     574,062  

Net unrealized gains (losses)

    (1,724,823 )     (1,259,401 )     (3,417,488 )     1,817,316  

Less adjustment to deferred acquisition costs

    (16,661 )     7,714       (34,669 )     32,279  

Other comprehensive income (loss) before income tax expense

    (1,708,162 )     (1,267,115 )     (3,382,819 )     1,785,037  

Income tax expense (benefit)

    (341,633 )     (253,424 )     (676,565 )     357,006  
                                 

Total other comprehensive income (loss)

    (1,366,529 )     (1,013,691 )     (2,706,254 )     1,428,031  
                                 

Total comprehensive income (loss)

  $ (718,812 )   $ (815,927 )   $ (1,324,901 )   $ 2,303,129  

 

See notes to consolidated financial statements (unaudited).

 

 
5

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

                           

Accumulated

                 
   

Common

   

Additional

           

Other

           

Total

 
   

Stock

   

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Shareholders'

 
   

$.01 Par Value

   

Capital

   

Stock

   

Income (Loss)

   

Earnings

   

Equity

 

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

    -       -       -       -       875,098       875,098  

Other comprehensive income

    -       -       -       1,428,031       -       1,428,031  

Balance as of September 30, 2014

  $ 80,502     $ 28,684,748     $ (773,731 )   $ 3,306,188     $ 1,566,436     $ 32,864,143  
                                                 

Balance as of January 1, 2015

  $ 80,502     $ 28,684,748     $ (855,304 )   $ 2,683,543     $ 2,616,849     $ 33,210,338  

Repurchase of common stock

    -       -       (38,643 )     -       -       (38,643 )

Stock dividend adjustment

    -       (150 )     -       -       150       -  

Comprehensive income (loss):

                                               

Net income

    -       -       -       -       1,381,353       1,381,353  

Other comprehensive loss

    -       -       -       (2,706,254 )     -       (2,706,254 )

Balance as of September 30, 2015

  $ 80,502     $ 28,684,598     $ (893,947 )   $ (22,711 )   $ 3,998,352     $ 31,846,794  

 

See notes to consolidated financial statements (unaudited).

 

 
6

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2015

   

2014

 

Operating activities

               

Net income

  $ 1,381,353     $ 875,098  

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

               

Provision for depreciation

    147,462       151,013  

Accretion of discount on investments

    (758,333 )     (667,036 )

Net realized investment gains

    (786,852 )     (778,244 )

Loss on other-than-temporary impairment

    305,334       -  

Gain on reinsurance assumption

    (588,923 )     -  

Amortization of policy acquisition cost

    1,285,997       936,627  

Policy acquisition cost deferred

    (3,819,582 )     (1,692,513 )

Mortgage loan origination fees deferred

    (74,000 )     (73,500 )

Amortization of loan origination fees

    51,362       58,477  

Amortization of value of insurance business acquired

    291,918       308,839  

Provision for deferred federal income tax benefit

    (157,546 )     143,888  

Interest credited to policyholders

    4,052,780       3,243,630  

Change in assets and liabilities:

               

Accrued investment income

    (361,106 )     (163,477 )

Policy loans

    51,961       (8,668 )

Short-term investments

    541,655       (1,391,445 )

Allowance for mortgage and premium finance loan losses

    48,585       59,793  

Recoverable from reinsurers

    24,609       25,794  

Agents' balances and due premiums

    (526,319 )     (212,376 )

Other assets (excludes $61 and $9,500 of premium finance loans for 2015 and 2014, respectively)

    (1,078,539 )     (801,606 )

Future policy benefits

    2,628,204       1,799,893  

Policy claims

    53,147       (77,687 )

Other policy liabilities

    (12,996 )     10,072  

Other liabilities

    1,871,421       (776,409 )

Net cash provided by operating activities

    4,571,592       970,163  
                 

Investing activities

               

Purchases of fixed maturity securities

    (26,575,622 )     (19,781,456 )

Maturities of fixed maturity securities

    1,634,000       4,209,000  

Sales of fixed maturity securities

    5,937,843       6,349,530  

Purchases of equity securities

    (551,229 )     (131,717 )

Sales of equity securities

    533,813       105,080  

Reinsurance assumption

    64,935       -  

Purchases of mortgage loans

    (23,665,861 )     (20,972,323 )

Payments on mortgage loans

    7,452,257       5,284,042  

Purchases of other long-term investments

    (11,968,198 )     (1,975,228 )

Payments on other long-term investments

    3,245,071       2,759,728  

Loans repaid for premiums financed

    61       19,000  

Purchases of real estate

    -       (2,817,857 )

Sale of real estate

    7,083,246       36,000  

Net cash used in investing activities

    (36,809,684 )     (26,916,201 )
                 

Financing activities

               

Policyholders' account deposits

    45,590,381       24,011,810  

Policyholders' account withdrawals

    (7,416,790 )     (5,067,516 )

Purchases of treasury stock

    (38,643 )     (80,000 )

Proceeds from issuance of notes payable

    -       4,076,473  

Repayment of notes payable

    (4,076,473 )     -  

Net cash provided by financing activities

    34,058,475       22,940,767  
                 

Increase (decrease) in cash

    1,820,383       (3,005,271 )

Cash and cash equivalents, beginning of period

    10,158,386       10,608,438  

Cash and cash equivalents, end of period

  $ 11,978,769     $ 7,603,167  

 

See notes to consolidated financial statements (unaudited).

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Supplemental Disclosure – Cash and Non-Cash Impact on Operating, Investing and Financing Activities

(Unaudited)

 

 

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923. During third quarter 2015, the Company completed its evaluation of assets, liabilities and gain associated with the reinsurance assumption and adjusted the assets, liabilities and gain on reinsurance assumption initially estimated and recorded in second quarter 2015.

 

In conjunction with this 2015 reinsurance assumption transaction, the cash and non-cash impact on operating, investing and financing activities is summarized as follows:

 

   

Nine Months Ended

 
   

September 30, 2015

 

Cash used in reinsurance assumption

  $ -  

Cash provided in reinsurance assumption

    64,935  

Increase in cash from reinsurance assumption

    64,935  

Fair value of assets acquired in reinsurance assumption (excluding cash)

       

Available-for-sale fixed maturity securities

    3,534,093  

Policy loans

    5,869  

Accrued investment income

    37,792  

Due premiums

    2,150  

Total fair value of assets acquired (excluding cash)

    3,579,904  

Fair value of liabilities assumed in reinsurance assumption

       

Policyholders' account balances

    2,966,827  

Future policy benefits

    89,089  

Total fair value of liabilities assumed

    3,055,916  

Fair value of net assets acquired in reinsurance assumption (excluding cash)

    523,988  

Fair value of net assets acquired in reinsurance assumption (including cash)

  $ 588,923  

 

See notes to consolidated financial statements (unaudited).

 

 
8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

First Trinity Financial Corporation (the “Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) and First Trinity Capital Corporation (“FTCC”). 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 insurance and annuity 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 Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia 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, collections of past due accounts and accounts involved in litigation.

 

Company Capitalization

 

The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering 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 702,685 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 $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital. As a result, the Company’s accumulated earnings as of September 30, 2015, as shown in the consolidated statement of financial position was negatively impacted in 2011 ($2,428,328) and 2012 ($2,841,810) and all periods thereafter by the $5,270,138 charge from the two stock dividends.

 

The Company has also purchased 247,580 shares of treasury stock at a cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

 

Acquisitions

 

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 monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(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.

 

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923. During third quarter 2015, the Company completed its evaluation of assets, liabilities and gain associated with the reinsurance assumption and adjusted the assets, liabilities and gain on reinsurance assumption initially estimated and recorded in second quarter 2015.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ended December 31, 2015 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, 2014.

 

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.

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Treasury Stock

 

Treasury stock, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.

 

Subsequent Events

 

Management has evaluated all events subsequent to September 30, 2015 through the date that these financial statements have been issued.

 

Recent Accounting Pronouncements

 

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

        

In April 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group was eligible for discontinued operations presentation.

 

The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation.

 

The updated guidance was effective for the quarter ending March 31, 2015. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.

 

The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

 

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.

 

 
11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

 

In June 2014, the FASB issued updated guidance to resolve diversity in practice concerning employee share-based payments that contain performance targets that could be achieved after the requisite service period. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance targets in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award.

 

The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption 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.

 

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

 

In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.

 

If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions.

 

The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter.

 

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

        

In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract.

 

 
12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.

 

The updated guidance is effective for reporting periods beginning after December 15, 2015. 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.

 

Receivables – Troubled Debt Restructurings by Creditors

 

In January 2015, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. This guidance can be elected for prospective adoption or by using a retrospective transition method. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Amendments to the Consolidation Analysis

 

In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Simplifying the Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued updated guidance to clarify the required presentation of debt issuance costs.  The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts.  Amortization of debt issuance costs is to be reported as interest expense.  The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance.  The updated guidance is effective for reporting periods beginning after December 15, 2015.  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.

 

Simplifying the Accounting for Measurement-Period Adjustments

 

In September 2015, the FASB issued updated guidance regarding business combinations that requires an acquirer to recognize post-close measurement adjustments for provisional amounts in the period the adjustment amounts are determined rather than retrospectively.  The acquirer is also required to recognize, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the provisional amount, calculated as if the accounting had been completed at the acquisition date.  The updated guidance is to be applied prospectively effective for annual and interim periods beginning after December 15, 2015.  In connection with business combinations which have already been completed, the adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

 
13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

2. Investments

 

Fixed Maturity and Equity Securities Available-For-Sale

 

Investments in fixed maturity and equity securities available-for-sale as of September 30, 2015 and December 31, 2014 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

September 30, 2015 (Unaudited)

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

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

  $ 2,934,923     $ 150,306     $ 65,796     $ 3,019,433  

States and political subdivisions

    8,309,947       78,676       62,130       8,326,493  

Residential mortgage-backed securities

    60,967       39,480       -       100,447  

Corporate bonds

    102,360,369       2,640,590       2,324,260       102,676,699  

Foreign bonds

    15,598,550       258,667       821,529       15,035,688  

Total fixed maturity securities

    129,264,756       3,167,719       3,273,715       129,158,760  

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 

 

 

Cost

   

Gains

   

Losses

   

Value

 
Equity securities                                

Mutual funds

    83,215       -       13,848       69,367  

Corporate preferred stock

    259,992       3,702       1,040       262,654  

Corporate common stock

    191,705       95,943       5,380       282,268  

Total equity securities

    534,912       99,645       20,268       614,289  

Total fixed maturity and equity securities

  $ 129,799,668     $ 3,267,364     $ 3,293,983     $ 129,773,049  

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2014

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

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

  $ 2,650,994     $ 168,071     $ 69,052     $ 2,750,013  

States and political subdivisions

    1,184,034       20,982       863       1,204,153  

Residential mortgage-backed securities

    68,242       62,193       -       130,435  

Corporate bonds

    92,367,191       3,711,276       885,169       95,193,298  

Foreign bonds

    11,141,861       426,197       194,528       11,373,530  

Total fixed maturity securities

    107,412,322       4,388,719       1,149,612       110,651,429  

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 

 

 

Cost

   

Gains

   

Losses

   

Value

 
Equity securities                                

Mutual funds

    80,879       2,586       -       83,465  

Corporate preferred stock

    254,502       3,273       1,700       256,075  

Corporate common stock

    184,214       147,603       -       331,817  

Total equity securities

    519,595       153,462       1,700       671,357  

Total fixed maturity and equity securities

  $ 107,931,917     $ 4,542,181     $ 1,151,312     $ 111,322,786  

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

2. Investments (continued)

 

All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of September 30, 2015 and December 31, 2014 are summarized as follows:

 

           

Unrealized

   

Number of

 

September 30, 2015 (Unaudited)

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

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

  $ 298,777     $ 1,223       1  

States and political subdivisions

    2,858,266       62,130       14  

Corporate bonds

    32,164,337       1,734,929       129  

Foreign bonds

    6,174,712       576,466       29  

Total less than 12 months

    41,496,092       2,374,748       173  

More than 12 months

                       

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

    1,065,427       64,573       2  

Corporate bonds

    2,919,944       589,331       15  

Foreign bonds

    431,616       245,063       2  

Total more than 12 months

    4,416,987       898,967       19  

Total fixed maturity securities

    45,913,079       3,273,715       192  

Equity securities

                       

Less than 12 months

                       

Mutual funds

    69,367       13,848       1  

Corporate preferred stock

    48,960       1,040       1  

Corporate common stock

    44,404       5,380       1  

Total equity securities

    162,731       20,268       3  

Total fixed maturity and equity securities

  $ 46,075,810     $ 3,293,983       195  

 

           

Unrealized

   

Number of

 

December 31, 2014

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

Corporate bonds

  $ 12,258,681     $ 477,590       47  

Foreign bonds

    3,446,676       194,528       16  

Total less than 12 months

    15,705,357       672,118       63  

More than 12 months

                       

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

    1,360,948       69,052       3  

States and political subdivisions

    105,569       863       1  

Corporate bonds

    2,761,555       407,579       14  

Total more than 12 months

    4,228,072       477,494       18  

Total fixed maturity securities

    19,933,429       1,149,612       81  

Equity securities

                       

Greater than 12 months

                       

Corporate preferred stock

    48,300       1,700       1  

Total equity securities

    48,300       1,700       1  

Total fixed maturity and equity securities

  $ 19,981,729     $ 1,151,312       82  

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

2. Investments (continued)

 

As of September 30, 2015, the Company held 192 available-for-sale fixed maturity securities with an unrealized loss of $3,273,715, fair value of $45,913,079 and amortized cost of $49,186,794. These unrealized losses were primarily due to market interest rate movements in the bond market as of September 30, 2015. The ratio of the fair value to the amortized cost of these 192 securities is 93%.

 

The Company has recorded an other-than-temporary impairment during 2015.  During the second quarter of 2015, the Company impaired its bonds in a mining corporation with a total par value of $600,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $305,334 for the nine months ended September 30, 2015. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. The Company has experienced no additional other-than-temporary impairments during 2015.

 

As of December 31, 2014, the Company held 81 available-for-sale fixed maturity securities with an unrealized loss of $1,149,612, fair value of $19,933,429 and amortized cost of $21,083,041. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2014. The ratio of the fair value to the amortized cost of these 81 securities is 95%.

 

As of September 30, 2015, the Company has three available-for-sale equity securities with an unrealized loss of $20,268, fair value of $162,731 and cost of $182,999. The ratio of fair value to cost of these securities is 89%.

 

As of December 31, 2014, the Company held one available-for-sale equity security with an unrealized loss of $1,700, fair value of $48,300 and cost of $50,000. The ratio of fair value to cost of this security is 97%.

 

Fixed maturity securities were 94% and 95% investment grade as rated by Standard & Poor’s as of September 30, 2015 and December 31, 2014, respectively.

 

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 one other-than-temporary impairment during the nine months ended September 30, 2015. There were no impairments during the nine months ended September 30, 2014 or during the year ended December 31, 2014. Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 2015, 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. 

 

 
16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

2. Investments (continued)

 

Net unrealized gains (losses) included in other comprehensive income (loss) for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation (depreciation) had been realized as of September 30, 2015 and December 31, 2014, are summarized as follows:

 

   

(Unaudited)

         
   

September 30, 2015

   

December 31, 2014

 

Unrealized appreciation (depreciation) on available-for-sale securities

  $ (26,619 )   $ 3,390,869  

Adjustment to deferred acquisition costs

    (1,771 )     (36,440 )

Deferred income taxes

    5,679       (670,886 )

Net unrealized appreciation (depreciation) on available-for-sale securities

  $ (22,711 )   $ 2,683,543  

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $31,794,676 and $21,781,925 as of September 30, 2015 and December 31, 2014, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of September 30, 2015, by contractual maturity, are summarized as follows:

 

   

September 30, 2015 (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

  $ 5,834,282     $ 5,907,253     $ 3,916,275     $ 3,963,069  

Due after one year through five years

    33,349,555       34,646,738       11,698,420       12,608,769  

Due after five years through ten years

    51,570,973       50,673,120       8,694,860       10,383,676  

Due after ten years

    38,448,979       37,831,202       7,485,121       11,165,525  

Due at multiple maturity dates

    60,967       100,447       -       -  
    $ 129,264,756     $ 129,158,760     $ 31,794,676     $ 38,121,039  

 

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.

 

 
17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

2. Investments (continued)

 

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate and investment real estate for the three and nine months ended September 30, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 

Proceeds

  $ 4,983,682     $ 1,982,472     $ -     $ -     $ 3,328,222     $ 2,273,252     $ -     $ -  

Gross realized gains

    225,058       8,755       -       -       79,028       8,897       -       -  

Gross realized losses

    (23,323 )     (1,124 )     -       -       -       -       -       -  

Loss on other-than- Other-than-temporary impairment

    (1,078 )     -       -       -       -       -       -       -  

 

 

   

Nine Months Ended September 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 

Proceeds

  $ 7,571,843     $ 10,558,530     $ 533,813     $ 105,080     $ 7,452,257     $ 5,284,042     $ 7,083,246     $ -  

Gross realized gains

    313,690       554,818       996       21,400       109,837       204,182       390,202       -  

Gross realized losses

    (24,977 )     (2,156 )     (2,896 )     -       -       -       -       -  

Loss on other-than- Other-than-temporary impairment

    (305,334 )     -       -       -       -       -       -       -  

 

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2015 and 2014 and the amount of realized investment gains on fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate and investment real estate for the three and nine months ended September 30, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

   

Nine Months Ended September 30, (Unaudited)

 
   

2015

   

2014

   

2015

   

2014

 

Change in unrealized investment gains:

                               

Available-for-sale securities:

                               

Fixed maturity securities

  $ (1,689,567 )   $ (1,230,128 )   $ (3,345,103 )   $ 1,843,802  

Equity securities

    (35,256 )     (29,273 )     (72,385 )     (26,486 )

Net realized investment gains (losses):

                               

Available-for-sale securities:

                               

Fixed maturity securities

    200,657       7,631       (16,621 )     552,662  

Equity securities

    -       -       (1,900 )     21,400  

Mortgage loans on real estate

    79,028       8,897       109,837       204,182  

Investment real estate

    -       -       390,202       -  

 

 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

2. Investments (continued)

 

Major categories of net investment income for the three and nine months ended September 30, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

   

Nine Months Ended September 30, (Unaudited)

 
   

2015

   

2014

   

2015

   

2014

 

Fixed maturity securities

  $ 1,400,291     $ 1,160,725     $ 3,819,806     $ 3,408,788  

Equity securities

    8,797       10,917       29,051       32,321  

Other long-term investments

    501,221       400,985       1,340,050       1,234,775  

Mortgage loans

    1,172,040       681,204       3,108,912       1,716,909  

Policy loans

    25,248       25,902       75,554       76,280  

Real estate

    97,657       204,984       357,067       582,978  

Short-term and other investments

    46,018       40,839       159,644       112,917  

Gross investment income

    3,251,272       2,525,556       8,890,084       7,164,968  

Investment expenses

    (334,955 )     (297,784 )     (1,061,445 )     (704,785 )

Net investment income

  $ 2,916,317     $ 2,227,772     $ 7,828,639     $ 6,460,183  

 

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 September 30, 2015 and December 31, 2014, these required deposits, included in investment assets, had amortized costs that totaled $3,980,317 and $3,954,696, respectively. As of September 30, 2015 and December 31, 2014, these required deposits had fair values that totaled $4,070,232 and $4,057,740, respectively.

 

The Company’s mortgage loans by property type as of September 30, 2015 and December 31, 2014 are summarized as follows:

 

   

(Unaudited)

                 
   

September 30, 2015

   

December 31, 2014

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Commercial mortgage loans

                               

Retail stores

  $ 1,293,112       2.35 %   $ 1,635,412       4.23 %

Office buildings

    315,002       0.57 %     327,181       0.85 %

Total commercial mortgage loans

    1,608,114       2.92 %     1,962,593       5.08 %

Residential mortgage loans

    53,476,837       97.08 %     36,687,140       94.92 %

Total mortgage loans

  $ 55,084,951       100.00 %   $ 38,649,733       100.00 %

 

 
19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

2. Investments (continued)

 

The Company’s investment real estate as of September 30, 2015 and December 31, 2014 is summarized as follows:

 

   

(Unaudited)

         
   

September 30, 2015

   

December 31, 2014

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for sale

    750,047       2,034,478  

Total land

    963,207       2,247,638  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (867,835 )     (758,718 )

Buildings net of accumulated depreciation

    1,399,722       1,508,839  

Building - held for sale

    -       5,408,613  

Total buildings

    1,399,722       6,917,452  

Investment real estate, net of accumulated depreciation

  $ 2,362,929     $ 9,165,090  

 

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-fourth of this land. This building and one and one-half acres of land is held for the production of income. The remaining five acres of land are held for sale. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. This land is held for sale. FTCC also owned a small, undeveloped land parcel in Carthage, Mississippi that was sold during 2014.

 

In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot retail building on approximately 8% of this land. Also in December 2013, TLIC purchased another acre of land in Norman, Oklahoma that included a 9,100 square foot retail building on approximately 18% of this land. These buildings and land were held for sale and, as discussed below, were sold on March 11, 2015.

 

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. Also in February 2014, TLIC purchased 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. This building and land were also held for sale and, as discussed below, were sold on March 11, 2015.

 

On March 11, 2015, the Company sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. The Company recorded a gross profit on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119.

 

In addition, simultaneously with these sales, the Company settled its two notes payable, collateralized by the held for sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473. In connection with the repayments of the two notes payable, the Company expensed the loan origination fees remaining as of March 11, 2015 of $72,744. During the period from January 1, 2015 to March 11, 2015, the Company incurred interest expense of $35,181 on the two notes payable and amortized $7,423 of loan origination fees.

 

 

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.

 

 
20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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, state and political subdivision 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.

 

 
21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(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 September 30, 2015 and December 31, 2014 is summarized as follows:

 

September 30, 2015 (Unaudited)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 3,019,433     $ -     $ 3,019,433  

States and political subdivisions

    -       8,326,493       -