10-Q 1 ftfc20160331_10q.htm FORM 10-Q ftfc20160331_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, 2016

 

[   ]

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 9, 2016: 7,802,593 shares

 

 
 

 

  

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2016

 

TABLE OF CONTENTS

 

 

   

PART I. FINANCIAL INFORMATION

Page Number

     

Item 1. Consolidated Financial Statements

   
     

Consolidated Statements of Financial Position as of March 31, 2016 (Unaudited) and December 31, 2015

3

 
     

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

4

 
     

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

5

 
     

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

6

 
     

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

7

 
     

Notes to Consolidated Financial Statements (Unaudited)

8

 
     

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

33

 
     

Item 4. Controls and Procedures

56

 
     

Part II. OTHER INFORMATION

   
     

Item 1. Legal Proceedings

56

 
      

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

58

 
     

Item 3. Defaults upon Senior Securities

58

 
     

Item 4. Mine Safety Disclosures

58

 
     

Item 5.Other Information

58  
     

Item 6.Exhibits

58  
     

Signatures

59

 

 

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

 

   

(Unaudited)

         
   

March 31, 2016

   

December 31, 2015

 

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $137,750,882 and $138,028,455 as of March 31, 2016 and December 31, 2015, respectively)

  $ 138,085,852     $ 134,556,027  

Available-for-sale equity securities at fair value (cost: $684,499 and $790,215 as of March 31, 2016 and December 31, 2015, respectively

    781,934       892,800  

Mortgage loans on real estate

    60,931,782       58,774,918  

Investment real estate

    2,290,186       2,326,558  

Policy loans

    1,494,578       1,486,317  

Short-term investments

    50,060       599,855  

Other long-term investments

    33,000,668       31,566,927  

Total investments

    236,635,060       230,203,402  

Cash and cash equivalents

    9,701,242       9,047,586  

Accrued investment income

    2,274,436       2,205,469  

Recoverable from reinsurers

    1,252,205       1,243,618  

Agents' balances and due premiums

    1,136,933       1,070,050  

Deferred policy acquisition costs

    13,835,212       13,015,679  

Value of insurance business acquired

    6,198,068       6,288,200  

Property and equipment, net

    791       949  

Other assets

    7,498,370       6,054,889  

Total assets

  $ 278,532,317     $ 269,129,842  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 200,756,060     $ 197,688,616  

Future policy benefits

    40,826,600       39,464,124  

Policy claims

    805,429       714,928  

Other policy liabilities

    73,582       76,554  

Total policy liabilities

    242,461,671       237,944,222  

Deferred federal income taxes

    831,228       33,210  

Other liabilities

    1,735,367       937,367  

Total liabilities

    245,028,266       238,914,799  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of March 31, 2016 and December 31, 2015 and 7,802,593 outstanding as of March 31, 2016 and December 31, 2015

    80,502       80,502  

Additional paid-in capital

    28,684,598       28,684,598  

Treasury stock, at cost (247,580 shares as of March 31, 2016 and December 31, December 31, 2015)

    (893,947 )     (893,947 )

Accumulated other comprehensive income (loss)

    337,878       (2,655,817 )

Accumulated earnings

    5,295,020       4,999,707  

Total shareholders' equity

    33,504,051       30,215,043  

Total liabilities and shareholders' equity

  $ 278,532,317     $ 269,129,842  

 

See notes to consolidated financial statements (unaudited).

 

 
3

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 

Revenues

               

Premiums

  $ 3,192,542     $ 2,320,314  

Net investment income

    3,360,203       2,407,560  

Net realized investment gains (losses)

    (19,151 )     424,002  

Other income

    7,313       4,811  

Total revenues

    6,540,907       5,156,687  

Benefits, Claims and Expenses

               

Benefits and claims

               

Increase in future policy benefits

    1,358,144       791,311  

Death benefits

    952,058       918,791  

Surrenders

    137,726       142,394  

Interest credited to policyholders

    1,653,720       1,247,890  

Dividend, endowment and supplementary life contract benefits

    66,058       53,433  

Total benefits and claims

    4,167,706       3,153,819  

Policy acquisition costs deferred

    (1,576,209 )     (971,951 )

Amortization of deferred policy acquisition costs

    696,546       394,460  

Amortization of value of insurance business acquired

    90,132       99,958  

Commissions

    1,280,086       870,146  

Other underwriting, insurance and acquisition expenses

    1,534,440       1,230,916  

Total expenses

    2,024,995       1,623,529  

Total benefits, claims and expenses

    6,192,701       4,777,348  

Income before total federal income tax expense

    348,206       379,339  

Current federal income tax expense

    3,298       74,965  

Deferred federal income tax expense (benefit)

    49,595       (58,656 )

Total federal income tax expense

    52,893       16,309  

Net income

  $ 295,313     $ 363,030  

Net income per common share basic and diluted

  $ 0.04     $ 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,

 
   

2016

   

2015

 

Net income

  $ 295,313     $ 363,030  

Other comprehensive income

               

Total net unrealized gains arising during the period

    3,779,522       1,085,720  

Less net realized investment gains (losses)

    (22,726 )     22,749  

Net unrealized gains

    3,802,248       1,062,971  

Less adjustment to deferred acquisition costs

    60,130       17,489  

Other comprehensive income before income tax expense

    3,742,118       1,045,482  

Income tax expense

    748,423       209,095  

Total other comprehensive income

    2,993,695       836,387  

Total comprehensive income

  $ 3,289,008     $ 1,199,417  

 

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, 2016 and 2015

(Unaudited)

 

   

Common

Stock

$.01 Par Value

   

Additional

Paid-in

Capital

   

Treasury

Stock

   

Accumulated

Other

Comprehensive

Income (loss)

   

Accumulated

Earnings

   

Total

Shareholders'

Equity

 

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 )

Comprehensive income:

                                               

Net income

    -       -       -       -       363,030       363,030  

Other comprehensive income

    -       -       -       836,387       -       836,387  

Balance as of March 31, 2015

  $ 80,502     $ 28,684,748     $ (893,947 )   $ 3,519,930     $ 2,979,879     $ 34,371,112  
                                                 

Balance as of January 1, 2016

  $ 80,502     $ 28,684,598     $ (893,947 )   $ (2,655,817 )   $ 4,999,707     $ 30,215,043  

Comprehensive income:

                                               

Net income

    -       -       -       -       295,313       295,313  

Other comprehensive income

    -       -       -       2,993,695       -       2,993,695  

Balance as of March 31, 2016

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 337,878     $ 5,295,020     $ 33,504,051  

 

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,

 
   

2016

   

2015

 

Operating activities

               

Net income

  $ 295,313     $ 363,030  

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

               

Provision for depreciation

    36,530       49,304  

Accretion of discount on investments

    (375,081 )     (229,755 )

Net realized investment losses (gains)

    19,151       (424,002 )

Amortization of policy acquisition cost

    696,546       394,460  

Policy acquisition cost deferred

    (1,576,209 )     (971,951 )

Mortgage loan origination fees deferred

    -       (26,000 )

Amortization of loan origination fees

    7,251       9,320  

Amortization of value of insurance business acquired

    90,132       99,958  

Provision for deferred federal income tax benefit (expense)

    49,595       (58,656 )

Interest credited to policyholders

    1,653,720       1,247,890  

Change in assets and liabilities:

               

Accrued investment income

    (68,967 )     (73,833 )

Policy loans

    (8,261 )     59,044  

Short-term investments

    549,795       (638 )

Allowance for mortgage loan losses

    6,369       24,603  

Recoverable from reinsurers

    (8,587 )     8,011  

Agents' balances and due premiums

    (66,883 )     (143,165 )

Other assets

    (1,443,481 )     571,783  

Future policy benefits

    1,362,476       794,590  

Policy claims

    90,501       69,138  

Other policy liabilities

    (2,972 )     (20,166 )

Other liabilities

    798,000       1,806,321  

Net cash provided by operating activities

    2,104,938       3,549,286  
                 

Investing activities

               

Purchases of fixed maturity securities available-for-sale

    (2,222,996 )     (2,170,526 )

Maturities of fixed maturity securities available-for-sale

    1,138,000       567,000  

Sales of fixed maturity securities available-for-sale

    1,136,413       621,229  

Purchases of equity securities available-for-sale

    (4,552 )     (534,687 )

Sales of equity securities available-for-sale

    108,800       526,284  

Purchases of mortgage loans

    (3,710,052 )     (8,455,196 )

Payments on mortgage loans

    1,572,244       1,550,599  

Purchases of other long-term investments

    (2,024,317 )     (2,022,600 )

Payments on other long-term investments

    1,141,454       1,170,576  

Sale of real estate

    -       7,083,246  

Net cash used in investing activities

    (2,865,006 )     (1,664,075 )
                 

Financing activities

               

Policyholders' account deposits

    5,326,249       12,577,187  

Policyholders' account withdrawals

    (3,912,525 )     (2,883,871 )

Purchases of treasury stock

    -       (38,643 )

Repayment of notes payable

    -       (4,076,473 )

Net cash provided by financing activities

    1,413,724       5,578,200  
                 

Increase in cash

    653,656       7,463,411  

Cash and cash equivalents, beginning of period

    9,047,586       10,158,386  

Cash and cash equivalents, end of period

  $ 9,701,242     $ 17,621,797  

 

See notes to consolidated financial statements (unaudited).

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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.

 

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.

 

 
8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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.

 

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, 2016 are not necessarily indicative of the results to be expected for the year ended December 31, 2016 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, 2015.

 

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.

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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 March 31, 2016 through the date that these financial statements have been issued.

 

Recent Accounting Pronouncements

 

Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (“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.

 

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.

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance did not 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.

 

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 did not 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 did not have a material effect on the Company's results of operations, financial position or liquidity.

 

 
11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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 did not 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 did not 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 did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments.

 

This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss).

 

 
12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods and the existence of a deferred tax asset related to available-for-sale securities in future periods that have not yet been fully assessed.

 

Leases

 

In February 2016, the FASB issued updated guidance to require lessees to recognize a right-to-use asset and a lease liability for leases with terms of more than 12 months.  The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease).  Both lease classifications require the lessee to record the right-to-use asset and the lease liability based upon the present value of cash flows.  Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-to-use asset.  Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease.   The accounting by lessors is not significantly changed by the updated guidance.  The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the financial statements.

 

The updated guidance is effective for reporting periods beginning after December 15, 2018, and will require that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied.  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.

 

Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting

 

In March 2016, the FASB issued updated guidance to simplify several aspects of accounting for share-based payment transactions as follows:

 

Accounting for Income Taxes

 

Under current accounting guidance, if the deduction for a share-based payment award for tax purposes exceeds, or is less than, the compensation cost recognized for financial reporting purposes, the resulting excess tax benefit, or tax deficiency, is reported as part of additional paid-in capital.  Under the updated guidance, these excess tax benefits, or tax deficiencies, are reported as part of income tax expense or benefit in the income statement.  The updated guidance also removes the requirement to delay recognition of any excess tax benefit when there are no current taxes payable to which the benefit would be applied.  The tax-related cash flows resulting from share-based payments are to be included with other income tax cash flows as an operating activity rather than being reported separately as a financing activity.

 

Forfeitures

 

The updated guidance permits an entity to make an accounting policy election to either account for forfeitures when they occur or continue to apply the current method of accruing the compensation cost based on the number of awards that are expected to vest. 

 

Minimum Statutory Tax Withholding Requirements

 

The updated guidance changes the threshold amount an entity can withhold for taxes when settling an equity award and still qualify for equity classification. A company can withhold up to the maximum statutory tax rates in the employees’ applicable jurisdiction rather than withholding up to the employers’ minimum statutory withholding requirement. The update also clarifies that all cash payments made to taxing authorities on behalf of employees for withheld shares are to be presented in financing activities on the statement of cash flows.

 

 
13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Transition

 

The updated guidance is effective for reporting periods beginning after December 15, 2016.  Early adoption is permitted in any interim period; if early adoption is elected, the entity must adopt all of the amendments in the same reporting period and reflect any adjustments as of the beginning of the fiscal year. The Company has not elected early adoption. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Investments — Equity Method and Joint Ventures:  Simplifying the Transition to the Equity Method of Accounting

 

In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence.  If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings.  The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. 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.

 

Derivatives and Hedging:  Contingent Put and Call Options in Debt Instruments

 

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument can accelerate the repayment of principal on the debt instrument, a reporting entity does not need to assess whether the contingent event that triggers the ability to exercise the call (put) option is related to interest rates or credit risk in determining whether the option should be accounted for separately.  The updated guidance is effective for reporting periods beginning after December 15, 2016.  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.

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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, 2016 and December 31, 2015 are summarized as follows:

 

   

Amortized Cost

or Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
   

March 31, 2016 (Unaudited)

 

Fixed maturity securities

                               

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

  $ 3,351,557     $ 144,304     $ 14,870     $ 3,480,991  

States and political subdivisions

    8,976,366       286,000       6,566       9,255,800  

Residential mortgage-backed securities

    42,835       52,056       -       94,891  

Corporate bonds

    108,249,799       3,211,609       2,756,727       108,704,681  

Foreign bonds

    17,130,325       345,710       926,546       16,549,489  

Total fixed maturity securities

    137,750,882       4,039,679       3,704,709       138,085,852  

Equity securities

                               

Mutual funds

    337,627       -       4,353       333,274  

Corporate preferred stock

    149,725       6,547       -       156,272  

Corporate common stock

    197,147       95,459       218       292,388  

Total equity securities

    684,499       102,006       4,571       781,934  

Total fixed maturity and equity securities

  $ 138,435,381     $ 4,141,685     $ 3,709,280     $ 138,867,786  

 

   

December 31, 2015

 

Fixed maturity securities

                               

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

  $ 2,793,161     $ 136,190     $ 108,597     $ 2,820,754  

States and political subdivisions

    8,993,848       61,592       102,835       8,952,605  

Residential mortgage-backed securities

    49,980       43,846       -       93,826  

Corporate bonds

    109,164,942       1,820,894       4,234,897       106,750,939  

Foreign bonds

    17,026,524       185,225       1,273,846       15,937,903  

Total fixed maturity securities

    138,028,455       2,247,747       5,720,175       134,556,027  

Equity securities

                               

Mutual funds

    335,554       -       10,613       324,941  

Corporate preferred stock

    259,993       6,035       990       265,038  

Corporate common stock

    194,668       117,196       9,043       302,821  

Total equity securities

    790,215       123,231       20,646       892,800  

Total fixed maturity and equity securities

  $ 138,818,670     $ 2,370,978     $ 5,740,821     $ 135,448,827  

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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, 2016 and December 31, 2015 are summarized as follows:

 

   

Fair Value

   

Unrealized

Loss

   

Number of

Securities

 
   

March 31, 2016 (Unaudited)

 

Fixed maturity securities

                       

Less than 12 months

                       

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

  $ 297,129     $ 2,871       1  

States and political subdivisions

    889,414       4,910       4  

Corporate bonds

    25,942,240       1,065,260       101  

Foreign bonds

    4,795,868       656,355       24  

Total less than 12 months

    31,924,651       1,729,396       130  

More than 12 months

                       

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

    1,118,001       11,999       2  

States and political subdivisions

    105,458       1,656       1  

Corporate bonds

    7,609,154       1,691,467       37  

Foreign bonds

    717,844       270,191       5  

Total more than 12 months

    9,550,457       1,975,313       45  

Total fixed maturity securities

    41,475,108       3,704,709       175  

Equity securities

                       

Less than 12 months

                       

Mutual funds

    82,463       4,353       1  

Corporate common stock

    51,720       218       1  

Total equity securities

    134,183       4,571       2  

Total fixed maturity and equity securities

  $ 41,609,291     $ 3,709,280       177  

 

   

December 31, 2015

 

Fixed maturity securities

                       

Less than 12 months

                       

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

  $ 381,592     $ 20,006       2  

States and political subdivisions

    5,422,934       102,835       26  

Corporate bonds

    46,907,532       2,646,997       186  

Foreign bonds

    9,155,830       879,659       40  

Total less than 12 months

    61,867,888       3,649,497       254  

More than 12 months

                       

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

    1,041,409       88,591       2  

Corporate bonds

    5,646,642       1,587,900       31  

Foreign bonds

    489,008       394,187       3  

Total more than 12 months

    7,177,059       2,070,678       36  

Total fixed maturity securities

    69,044,947       5,720,175       290  

Equity securities

                       

Less than 12 months

                       

Mutual funds

    74,547       10,613       1  

Corporate preferred stock

    109,279       990       1  

Corporate common stock

    41,804       9,043       1  

Total equity securities

    225,630       20,646       3  

Total fixed maturity and equity securities

    69,270,577     $ 5,740,821       293  

 

 
16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

2. Investments (continued)

 

As of March 31, 2016, the Company held 175 available-for-sale fixed maturity securities with an unrealized loss of $3,704,709, fair value of $41,475,108 and amortized cost of $45,179,817. These unrealized losses were primarily due to market interest rate movements in the bond market as of March 31, 2016. The ratio of the fair value to the amortized cost of these 175 securities is 92%.

 

As of December 31, 2015, the Company held 290 available-for-sale fixed maturity securities with an unrealized loss of $5,720,175, fair value of $69,044,947 and amortized cost of $74,765,122. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2015 coupled with a downturn in the Chinese economy, decreases in the value of commodities and a drop in oil prices. The ratio of the fair value to the amortized cost of these 290 securities is 92%. 

 

As of March 31, 2016, the Company has two available-for-sale equity securities with an unrealized loss of $4,571, fair value of $134,183 and cost of $138,754. The ratio of fair value to cost of these securities is 97%. 

 

As of December 31, 2015, the Company had three available-for-sale equity securities with an unrealized loss of $20,646, fair value of $225,630 and cost of $246,276. The ratio of fair value to cost of these securities is 92%.

 

Fixed maturity securities were 93% and 94% investment grade as rated by Standard & Poor’s as of March 31, 2016 and December 31, 2015, 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.

 

There were no impairments during the three months ended March 31, 2016.

 

During second quarter and fourth quarter 2015, the Company impaired its bonds in a mining corporation with a total par value of $600,000 as a result of an analysis of the mining corporation’s ability to fulfill its obligations. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $502,013 for the year ended December 31, 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 experienced no additional other-than-temporary impairments during 2015.

 

Management believes that the Company will fully recover its cost basis in the securities held as of March 31, 2016, 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. 

 

 
17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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 March 31, 2016 and December 31, 2015, are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2016

   

December 31, 2015

 

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

  $ 432,405     $ (3,369,843 )

Adjustment to deferred acquisition costs

    (10,057 )     50,073  

Deferred income taxes

    (84,470 )     663,953  

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

  $ 337,878     $ (2,655,817 )

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $33,000,668 and $31,566,927 as of March 31, 2016 and December 31, 2015, 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 March 31, 2016, by contractual maturity, are summarized as follows:

 

   

March 31, 2016 (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

  $ 7,873,426     $ 7,979,492     $ 3,609,261     $ 3,662,690  

Due after one year through five years

    33,937,097       34,772,880       11,614,289       12,666,031  

Due after five years through ten years

    49,622,220       48,578,765       9,915,123       12,101,472  

Due after ten years

    46,275,304       46,659,824       7,861,995       12,526,061  

Due at multiple maturity dates

    42,835       94,891       -       -  
    $ 137,750,882     $ 138,085,852     $ 33,000,668     $ 40,956,254  

 

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.

 

 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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 months ended March 31, 2016 and 2015 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

 

Proceeds

  $ 2,274,413     $ 1,188,229     $ 108,800     $ 526,284     $ 1,572,244     $ 1,550,599     $ -       7,083,246  

Gross realized gains

    7,094       25,841       -       996       3,575       11,051       -       390,202  

Gross realized losses

    (28,352 )     (1,192 )     (1,468 )     (2,896 )     -       -       -       -  

 

The accumulated change in unrealized investment gains (losses) for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2016 and 2015 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate and investment real estate for the three months ended March 31, 2016 and 2015 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2016

   

2015

 

Change in unrealized investment gains (losses):

               

Available-for-sale securities:

               

Fixed maturity securities

  $ 3,807,398     $ 1,067,986  

Equity securities

    (5,150 )     (5,015 )

Net realized investment gains (losses):

               

Available-for-sale securities:

               

Fixed maturity securities

    (21,258 )     24,649  

Equity securities

    (1,468 )     (1,900 )

Mortgage loans on real estate

    3,575       11,051  

Investment real estate

    -       390,202  

 

 
19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

2. Investments (continued)

 

Major categories of net investment income for the three months ended March 31, 2016 and 2015 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2016

   

2015

 

Fixed maturity securities

  $ 1,567,218     $ 1,173,781  

Equity securities

    7,182       11,529  

Other long-term investments

    547,822       414,242  

Mortgage loans

    1,353,071       956,144  

Policy loans

    26,098       25,141  

Real estate

    91,968       187,588  

Short-term and other investments

    72,270       48,192  

Gross investment income

    3,665,629       2,816,617  

Investment expenses

    (305,426 )     (409,057 )

Net investment income

  $ 3,360,203     $ 2,407,560  

 

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, 2016 and December 31, 2015, these required deposits, included in investment assets, had amortized costs that totaled $4,044,956 and $3,989,742, respectively. As of March 31, 2016 and December 31, 2015, these required deposits had fair values that totaled $4,204,493 and $4,034,042, respectively.

 

The Company’s mortgage loans by property type as of March 31, 2016 and December 31, 2015 are summarized as follows:

 

   

(Unaudited)

                 
   

March 31, 2016

   

December 31, 2015

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Commercial mortgage loans

                               

Retail stores

  $ 1,253,705       2.06 %   $ 1,272,881       2.17 %

Office buildings

    188,109       0.31 %     191,774       0.32 %

Total commercial mortgage loans

    1,441,814       2.37 %     1,464,655       2.49 %

Residential mortgage loans

    59,489,968       97.63 %     57,310,263       97.51 %

Total mortgage loans

  $ 60,931,782       100.00 %   $ 58,774,918       100.00 %

 

 
20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

2. Investments (continued)

 

The Company’s investment real estate as of March 31, 2016 and December 31, 2015 is summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2016

   

December 31, 2015

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for sale

    750,047       750,047  

Total land

    963,207       963,207  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (940,578 )     (904,206 )

Buildings net of accumulated depreciation

    1,326,979       1,363,351  

Investment real estate, net of accumulated depreciation

  $ 2,290,186     $ 2,326,558  

 

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.

 

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 acquired during December 2013 and February 2014 with an aggregate carrying value of $6,693,044 as of 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 to Grand Bank (the creditor) originated in March 2014 aggregating $4,076,473. These loans were collateralized by the held for sale buildings and land (including assignment of the tenant leases). 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.

 

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.

 

 
21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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, corporate debt securities and foreign 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.

 

 
22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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, 2016 and December 31, 2015 is summarized as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

March 31, 2016 (Unaudited)

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 3,480,991     $ -     $ 3,480,991  

States and political subdivisions

    -       9,255,800       -       9,255,800  

Residential mortgage-backed securities

    -       94,891       -       94,891  

Corporate bonds

    -       108,704,681       -       108,704,681  

Foreign bonds

    -       16,549,489       -       16,549,489  

Total fixed maturity securities

  $ -     $ 138,085,852     $ -     $ 138,085,852  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ -     $ 333,274     $ -     $ 333,274  

Corporate preferred stock

    103,440       52,832       -       156,272  

Corporate common stock

    245,888       -       46,500       292,388  

Total equity securities

  $ 349,328     $ 386,106     $ 46,500     $ 781,934  

 

   

December 31, 2015

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,820,754     $ -     $ 2,820,754  

States and political subdivisions

    -       8,952,605       -       8,952,605  

Residential mortgage-backed securities

    -       93,826       -       93,826  

Corporate bonds

    -       106,750,939       -       106,750,939  

Foreign bonds

    -       15,937,903       -       15,937,903  

Total fixed maturity securities

  $ -     $ 134,556,027     $ -     $ 134,556,027  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ -     $ 324,941     $ -     $ 324,941  

Corporate preferred stock

    211,278       53,760       -       265,038  

Corporate common stock

    256,321       -       46,500       302,821  

Total equity securities

  $ 467,599     $ 378,701     $ 46,500     $ 892,800  

 

As of March 31, 2016 and December 31, 2015, Level 3 financial instruments consisted of two private placement common stocks that have no active trading.

 

These private placement stocks represent investments in small 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 these small insurance holding companies commence operations.

 

 
23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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.

 

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 are 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, 2016.

 

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.

 

 
24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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, 2016 and December 31, 2015, 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:

 

   

Carrying

Amount

   

Fair

Value

   

Level 1

   

Level 2

   

Level 3

 
   

March 31, 2016 (Unaudited)

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,441,814     $ 1,461,614     $ -     $ -     $ 1,461,614  

Residential

    59,489,968       60,067,718       -       -       60,067,718  

Policy loans

    1,494,578       1,494,578       -       -       1,494,578  

Short-term investments

    50,060       50,060       50,060       -       -  

Other long-term investments

    33,000,668       40,956,254       -       -       40,956,254  

Cash and cash equivalents

    9,701,242       9,701,242       9,701,242       -       -  

Accrued investment income

    2,274,436       2,274,436       -       -       2,274,436  

Loans from premium financing, net

    155,195       155,195       -       -       155,195  

Total financial assets

  $ 107,607,961     $ 116,161,097     $ 9,751,302     $ -     $ 106,409,795  

Financial liabilities

                                       

Policyholders' account balances

  $ 200,756,060     $ 184,429,254     $ -     $ -     $ 184,429,254  

Policy claims

    805,429       805,429       -       -       805,429  

Total financial liabilities

  $ 201,561,489     $ 185,234,683     $ -     $ -     $ 185,234,683  

 

   

December 31, 2015

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,464,655     $ 1,486,601     $ -     $ -     $ 1,486,601  

Residential

    57,310,263       57,356,546       -       -       57,356,546  

Policy loans

    1,486,317       1,486,317       -       -       1,486,317  

Short-term investments

    599,855       599,855       599,855       -       -  

Other long-term investments

    31,566,927       37,755,989       -       -       37,755,989  

Cash and cash equivalents

    9,047,586       9,047,586       9,047,586       -       -  

Accrued investment income

    2,205,469       2,205,469       -       -       2,205,469  

Loans from premium financing, net

    123,824       123,824       -       -       123,824  

Total financial assets

  $ 103,804,896     $ 110,062,187     $ 9,647,441     $ -     $ 100,414,746  

Financial liabilities

                                       

Policyholders' account balances

  $ 197,688,616     $ 179,233,152     $ -     $ -     $ 179,233,152  

Policy claims

    714,928       714,928       -       -       714,928  

Total financial liabilities

  $ 198,403,544     $ 179,948,080     $ -     $ -     $ 179,948,080  

 

 
25

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2016

(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 Securities and Equity Securities

 

The fair value of fixed maturity securities 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, Short-Term Investments, Accrued Investment Income, Policy Loans and Loans from Premium Financing

 

The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents and short-term investments 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.

 

 
26

 

 

First Trinity Financial Corporation and Subsidiaries