10-Q 1 ftfc20160830_10q.htm FORM 10-Q ftfc20160830_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, 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 November 7, 2016: 7,802,593 shares

 

 
 

 

    

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Page Number
   

Item 1. Consolidated Financial Statements

 
   
Consolidated Statements of Financial Position as of September 30, 2016 (Unaudited) and December 31, 2015 3
   

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

4
   

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

5
   

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

6
   

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

7
   

Notes to Consolidated Financial Statements (Unaudited)

9
   

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

37
   

Item 4. Controls and Procedures

68
   

Part II. OTHER INFORMATION

 
   

Item 1. Legal Proceedings

68
   

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

70
   

Item 3. Defaults upon Senior Securities

70
   

Item 4. Mine Safety Disclosures

70
   

Item 5. Other Information

70
   

Item 6. Exhibits

70
   

Signatures

71

 

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, 2016

   

December 31, 2015

 
   

(Unaudited)

         
Assets                
Investments                
Available-for-sale fixed maturity securities at fair value (amortized cost: $128,986,347 and $138,028,455 as of September 30, 2016 and December 31, 2015, respectively)   $ 134,592,061     $ 134,556,027  
Available-for-sale equity securities at fair value (cost: $683,928 and $790,215 as of September 30, 2016 and December 31, 2015, respectively)     813,424       892,800  

Mortgage loans on real estate

    67,897,303       58,774,918  

Investment real estate

    2,416,063       2,326,558  

Policy loans

    1,561,972       1,486,317  

Short-term investments

    50,004       599,855  

Other long-term investments

    41,658,491       31,566,927  
Total investments     248,989,318       230,203,402  
Cash and cash equivalents     26,703,311       9,047,586  
Accrued investment income     2,148,495       2,205,469  
Recoverable from reinsurers     1,281,156       1,243,618  
Agents' balances and due premiums     1,414,608       1,070,050  
Deferred policy acquisition costs     16,422,517       13,015,679  
Value of insurance business acquired     6,007,025       6,288,200  
Other assets     10,098,112       6,055,838  
Total assets   $ 313,064,542     $ 269,129,842  
Liabilities and Shareholders' Equity                
Policy liabilities                

Policyholders' account balances

  $ 224,998,722     $ 197,688,616  

Future policy benefits

    43,466,880       39,464,124  

Policy claims

    809,219       714,928  

Other policy liabilities

    82,185       76,554  
Total policy liabilities     269,357,006       237,944,222  
Deferred federal income taxes     1,988,584       33,210  
Other liabilities     3,205,152       937,367  
Total liabilities     274,550,742       238,914,799  
Shareholders' equity                
Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of September 30, 2016 and December 31, 2015 and 7,802,593 outstanding as of September 30, 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 September 30, 2016 and December 31, 2015)     (893,947 )     (893,947 )

Accumulated other comprehensive income (loss)

    4,510,942       (2,655,817 )

Accumulated earnings

    6,131,705       4,999,707  
Total shareholders' equity     38,513,800       30,215,043  
Total liabilities and shareholders' equity   $ 313,064,542     $ 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 September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 
Revenues                                

Premiums

  $ 3,197,228     $ 2,496,403     $ 9,426,803     $ 7,141,841  

Net investment income

    3,303,980       2,916,317       9,922,817       7,828,639  

Net realized investment gains

    160,308       280,763       307,250       786,852  

Loss on other-than-temporary impairment

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

Gain on reinsurance assumption

    -       38,923       -       588,923  

Other income

    10,053       40,492       25,259       56,656  
Total revenues     6,671,569       5,771,820       19,682,129       16,097,577  
Benefits, Claims and Expenses                                

Benefits and claims

                               
Increase in future policy benefits     1,357,212       909,156       3,995,230       2,605,117  
Death benefits     881,928       803,941       2,868,216       2,574,150  
Surrenders     205,356       122,655       541,725       400,536  
Interest credited to policyholders     1,754,941       1,459,480       5,090,162       4,052,780  
Dividend, endowment and supplementary life contract benefits     81,040       66,689       214,552       224,793  

Total benefits and claims

    4,280,477       3,361,921       12,709,885       9,857,376  
Policy acquisition costs deferred     (2,023,246 )     (1,596,615 )     (5,142,381 )     (3,819,582 )
Amortization of deferred policy acquisition costs     536,901       428,448       1,588,938       1,285,997  
Amortization of value of insurance business acquired     91,966       92,561       281,175       291,918  
Commissions     1,954,586       1,430,501       4,783,307       3,340,116  
Other underwriting, insurance and acquisition expenses     1,244,013       1,189,367       4,123,540       3,599,813  

Total expenses

    1,804,220       1,544,262       5,634,579       4,698,262  
Total benefits, claims and expenses     6,084,697       4,906,183       18,344,464       14,555,638  
Income before total federal income tax expense     586,872       865,637       1,337,665       1,541,939  

Current federal income tax expense

    4,472       218,754       41,982       318,132  

Deferred federal income tax expense (benefit)

    83,814       (834 )     163,685       (157,546 )
Total federal income tax expense     88,286       217,920       205,667       160,586  
Net income   $ 498,586     $ 647,717     $ 1,131,998     $ 1,381,353  
Net income per common share basic and diluted   $ 0.06     $ 0.08     $ 0.15     $ 0.18  

 

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,

 
   

2016

   

2015

   

2016

   

2015

 
Net income   $ 498,586     $ 647,717     $ 1,131,998     $ 1,381,353  
Other comprehensive income (loss)                                

Total net unrealized gains (losses) arising during the period

    1,058,518       (1,524,166 )     9,440,894       (3,436,009 )

Less net realized investment gains (losses)

    206,890       200,657       335,841       (18,521 )
Net unrealized gains (losses)     851,628       (1,724,823 )     9,105,053       (3,417,488 )
Less adjustment to deferred acquisition costs     19,392       (16,661 )     146,605       (34,669 )
Other comprehensive income (loss) before income tax expense     832,236       (1,708,162 )     8,958,448       (3,382,819 )

Income tax expense (benefit)

    166,449       (341,633 )     1,791,689       (676,565 )
Total other comprehensive income (loss)     665,787       (1,366,529 )     7,166,759       (2,706,254 )
Total comprehensive income (loss)   $ 1,164,373     $ (718,812 )   $ 8,298,757     $ (1,324,901 )

 

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, 2016 and 2015

(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, 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  
                                                 
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     -       -       -       -       1,131,998       1,131,998  
Other comprehensive income     -       -       -       7,166,759       -       7,166,759  
Balance as of September 30, 2016   $ 80,502     $ 28,684,598     $ (893,947 )   $ 4,510,942     $ 6,131,705     $ 38,513,800  

 

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,

 
   

2016

   

2015

 
Operating activities                
Net income   $ 1,131,998     $ 1,381,353  
Adjustments to reconcile net income to net cash provided by operating activities:                

Provision for depreciation

    109,587       147,462  

Accretion of discount on investments

    (1,278,028 )     (758,333 )

Net realized investment gains

    (307,250 )     (786,852 )

Loss on other-than-temporary impairment

    -       305,334  

Gain on reinsurance assumption

    -       (588,923 )

Amortization of policy acquisition cost

    1,588,938       1,285,997  

Policy acquisition cost deferred

    (5,142,381 )     (3,819,582 )

Mortgage loan origination fees deferred

    (4,530 )     (74,000 )

Amortization of loan origination fees

    54,032       51,362  

Amortization of value of insurance business acquired

    281,175       291,918  

Provision for deferred federal income tax benefit (expense)

    163,685       (157,546 )

Interest credited to policyholders

    5,090,162       4,052,780  

Change in assets and liabilities:

               
Accrued investment income     56,974       (361,106 )
Policy loans     (75,655 )     51,961  
Short-term investments     549,850       541,655  
Allowance for mortgage loan losses     36,096       48,585  
Recoverable from reinsurers     (37,538 )     24,609  
Agents' balances and due premiums     (344,558 )     (526,319 )
Other assets (excludes $470 of 2016 depreciation)     (4,042,745 )     (1,078,478 )
Future policy benefits     4,002,756       2,628,204  
Policy claims     94,291       53,147  
Other policy liabilities     5,631       (12,996 )
Other liabilities     2,267,785       1,871,421  
Net cash provided by operating activities     4,200,275       4,571,653  
                 
Investing activities                

Purchases of fixed maturity securities

    (6,163,564 )     (26,575,622 )

Maturities of fixed maturity securities

    4,657,000       1,634,000  

Sales of fixed maturity securities

    10,205,935       5,937,843  

Purchases of equity securities

    (14,480 )     (551,229 )

Sales of equity securities

    128,010       533,813  

Reinsurance assumption

    -       64,935  

Purchases of mortgage loans

    (20,669,087 )     (23,665,861 )

Payments on mortgage loans

    11,317,427       7,452,257  

Purchases of other long-term investments

    (11,340,463 )     (11,968,198 )

Payments on other long-term investments

    3,114,728       3,245,071  

Sale of real estate

    -       7,083,246  
Net cash used in investing activities     (8,764,494 )     (36,809,745 )
                 
Financing activities                

Policyholders' account deposits

    32,177,094       45,590,381  

Policyholders' account withdrawals

    (9,957,150 )     (7,416,790 )

Purchases of treasury stock

    -       (38,643 )

Repayment of notes payable

    -       (4,076,473 )
Net cash provided by financing activities     22,219,944       34,058,475  
                 
Increase in cash     17,655,725       1,820,383  
Cash and cash equivalents, beginning of period     9,047,586       10,158,386  
Cash and cash equivalents, end of period   $ 26,703,311     $ 11,978,769  

 

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)

  

During 2016, the Company foreclosed on three residential mortgage loans of real estate totaling $198,622 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value.

 

In conjunction with these foreclosures, the non-cash impact on investing activities is summarized as follows:

 

   

Nine Months Ended

 
   

September 30, 2016

 

Reductions in mortgage loans due to foreclosure

  $ 198,622  

Investment real estate held-for-sale acquired through foreclosure

    (198,622 )
Net cash provided (used) in investing activities   $ -  

 

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, 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.

 

Acquisition of Other Companies 

 

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The acquisition of FLAC was financed with the working capital of FTFC. 

 

On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable 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, 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. 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, 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.

 

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 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.

 

 

 
11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

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.

 

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.

 

 

 
12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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).

 

 

 
13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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.

 

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.

 

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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.

 

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.

 

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.

 

Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued updated guidance for the accounting for credit losses for financial instruments.  The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

 

The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

 

The updated guidance is effective for reporting periods beginning after December 15, 2019.  Early adoption is permitted for reporting periods beginning after December 15, 2018.  The Company will not be able to determine the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is adopted.

 

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

(Unaudited)

  

1. Organization and Significant Accounting Policies (continued)

 

Classification of Certain Cash Receipts and Cash Payment

 

In August 2016, the FASB issued new guidance that clarifies the classification of certain cash receipts and cash payments in the statement of cash flows under eight different scenarios including, but not limited to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv) separately identifiable cash flows and application of the predominance principle. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its statement of cash flows.

 

 

 
16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

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

 

           

Gross

   

Gross

         
   

Amortized Cost

   

Unrealized

   

Unrealized

   

Fair

 
   

or Cost

   

Gains

   

Losses

   

Value

 
   

September 30, 2016 (Unaudited)

 
Fixed maturity securities                                

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

  $ 3,095,489     $ 123,863     $ 7,868     $ 3,211,484  

States and political subdivisions

    8,940,717       530,240       -       9,470,957  

Residential mortgage-backed securities

    36,554       44,073       -       80,627  

Corporate bonds

    101,538,123       5,331,077       1,041,809       105,827,391  

Foreign bonds

    15,375,464       817,184       191,046       16,001,602  
Total fixed maturity securities     128,986,347       6,846,437       1,240,723       134,592,061  
Equity securities                                

Mutual funds

    342,519       1,952       -       344,471  

Corporate preferred stock

    149,725       8,275       -       158,000  

Corporate common stock

    191,684       119,269       -       310,953  
Total equity securities     683,928       129,496       -       813,424  
Total fixed maturity and equity securities   $ 129,670,275     $ 6,975,933     $ 1,240,723     $ 135,405,485  

 

   

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  

 

 

 
17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 2016 and December 31, 2015 are summarized as follows:

 

           

Unrealized

   

Number of

 
   

Fair Value

   

Loss

   

Securities

 
   

September 30, 2016 (Unaudited)

 
Fixed maturity securities                        

Less than 12 months

                       
U.S. government and U.S. government agencies   $ 1,241,573     $ 7,868       3  
Corporate bonds     5,129,945       130,041       18  
Foreign bonds     296,583       2,610       1  

Total less than 12 months

    6,668,101       140,519       22  

More than 12 months

                       
Corporate bonds     8,599,757       911,768       39  
Foreign bonds     2,659,276       188,436       13  

Total more than 12 months

    11,259,033       1,100,204       52  
Total fixed maturity securities   $ 17,927,134     $ 1,240,723       74  

 

   

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  

 

As of September 30, 2016, the Company held 74 available-for-sale fixed maturity securities with an unrealized loss of $1,240,723, fair value of $17,927,134 and amortized cost of $19,167,857. The ratio of the fair value to the amortized cost of these 74 securities is 94%.

 

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%.

 

 

 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

(Unaudited)

 

2. Investments (continued)

 

As of September 30, 2016, the Company had no equity security with an unrealized loss.

 

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 92% and 94% investment grade as rated by Standard & Poor’s as of September 30, 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 nine months ended September 30, 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 $304,256 and $502,013 for the six months ended June 30, 2015 and year ended December 31, 2015, respectively. 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 September 30, 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. 

 

 

 
19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 2016 and December 31, 2015, are summarized as follows:

 

   

(Unaudited)

         
   

September 30, 2016

   

December 31, 2015

 
Unrealized appreciation (depreciation) on available-for-sale securities   $ 5,735,210     $ (3,369,843 )

Adjustment to deferred acquisition costs

    (96,532 )     50,073  

Deferred income taxes

    (1,127,736 )     663,953  
Net unrealized appreciation (depreciation) on available-for-sale securities   $ 4,510,942     $ (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 $41,658,491 and $31,566,927 as of September 30, 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 September 30, 2016, by contractual maturity, are summarized as follows:

 

   

September 30, 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

  $ 7,796,909     $ 7,872,902     $ 5,309,897     $ 5,381,733  

Due in one year through five years

    32,037,852       33,262,422       15,581,268       17,021,625  

Due after five years through ten years

    44,835,640       46,380,935       11,549,032       14,358,534  

Due after ten years

    44,279,392       46,995,175       9,218,294       15,656,812  

Due at multiple maturity dates

    36,554       80,627       -       -  
    $ 128,986,347     $ 134,592,061     $ 41,658,491     $ 52,418,704  

 

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.

 

 

 
20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 and nine months ended September 30, 2016 and 2015 are summarized as follows:

 

   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

 
   

Three Months Ended September 30, (Unaudited)

 

Proceeds

  $ 7,368,724     $ 4,983,682     $ -     $ -     $ 7,655,905     $ 3,328,222     $ -     $ -  

Gross realized gains

    242,910       225,058       -       -       -       79,028       -       -  

Gross realized losses

    (36,020 )     (23,323 )     -       -       (46,582 )     -       -       -  
Loss on other-than-temporary impairment     -       (1,078 )     -       -       -       -       -       -  

 

   

Nine Months Ended September 30, (Unaudited)

 

Proceeds

  $ 14,862,935     $ 7,571,843     $ 128,010     $ 533,813     $ 11,317,427     $ 7,452,257     $ -     $ 7,083,246  

Gross realized gains

    405,960       313,690       8,711       996       -       109,837       -       390,202  

Gross realized losses

    (77,362 )     (24,977 )     (1,468 )     (2,896 )     (28,591 )     -       -       -  
Loss on other-than-temporary impairment     -       (305,334 )     -       -       -       -       -       -  

 

The accumulated change in net unrealized investment gains (losses) for fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2016 and 2015 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, 2016 and 2015 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

   

Nine Months Ended September 30, (Unaudited)

 
   

2016

   

2015

   

2016

   

2015

 
Change in unrealized investment gains:                                

Available-for-sale securities:

                               
Fixed maturity securities   $ 817,963     $ (1,689,567 )   $ 9,078,142     $ (3,345,103 )
Equity securities     33,665       (35,256 )     26,911       (72,385 )
Net realized investment gains (losses):                                

Available-for-sale securities:

                               
Fixed maturity securities     206,890       200,657       328,598       (16,621 )
Equity securities     -       -       7,243       (1,900 )

Mortgage loans on real estate

    (46,582 )     79,028       (28,591 )     109,837  

Investment real estate

    -       -       -       390,202  

 

 

 
21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

(Unaudited)

 

2. Investments (continued)

 

Major categories of net investment income for the three and nine months ended September 30, 2016 and 2015 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

   

Nine Months Ended September 30, (Unaudited)

 
   

2016

   

2015

   

2016

   

2015

 

Fixed maturity securities

  $ 1,435,041     $ 1,400,291     $ 4,535,560     $ 3,819,806  

Equity securities

    6,728       8,797       20,568       29,051  

Other long-term investments

    687,042       501,221       1,857,366       1,340,050  

Mortgage loans

    1,417,445       1,172,040       4,098,943       3,108,912  

Policy loans

    27,348       25,248       79,937       75,554  

Real estate

    62,391       97,657       246,327       357,067  

Short-term and other investments

    56,806       46,018       198,950       159,644  
Gross investment income     3,692,801       3,251,272       11,037,651       8,890,084  

Investment expenses

    (388,821 )     (334,955 )     (1,114,834 )     (1,061,445 )
Net investment income   $ 3,303,980     $ 2,916,317     $ 9,922,817     $ 7,828,639  

 

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, 2016 and December 31, 2015, these required deposits, included in investment assets, had amortized costs that totaled $4,087,455 and $3,989,742, respectively. As of September 30, 2016 and December 31, 2015, these required deposits had fair values that totaled $4,244,136 and $4,034,042, respectively.

 

The Company’s mortgage loans by property type as of September 30, 2016 and December 31, 2015 are summarized as follows:

 

   

(Unaudited)

                 
   

September 30, 2016

   

December 31, 2015

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Commercial mortgage loans

                               
Retail stores   $ 1,094,697       1.61 %   $ 1,272,881       2.17 %
Office buildings     183,383       0.27 %     191,774       0.32 %

Total commercial mortgage loans

    1,278,080       1.88 %     1,464,655       2.49 %

Residential mortgage loans

    66,619,223       98.12 %     57,310,263       97.51 %

Total mortgage loans

  $ 67,897,303       100.00 %   $ 58,774,918       100.00 %

 

 

 
22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

(Unaudited)

 

2. Investments (continued)

 

The Company’s investment real estate as of September 30, 2016 and December 31, 2015 is summarized as follows:

 

   

(Unaudited)

         
   

September 30, 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

    (1,013,323 )     (904,206 )
Buildings net of accumulated depreciation     1,254,234       1,363,351  

Residential real estate - held for sale

    198,622       -  
Total residential real estate     198,622       -  

Investment real estate, net of accumulated depreciation

  $ 2,416,063     $ 2,326,558  

 

During 2016, the Company foreclosed on three residential mortgage loans on real estate totaling $198,622 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value.

 

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:

 

 

 
23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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

 

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

 

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

 

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

 

 

 
24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 2016 and December 31, 2015 is summarized as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

September 30, 2016 (Unaudited)

 
Fixed maturity securities, available-for-sale                                

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

  $ -     $ 3,211,484     $ -     $ 3,211,484  

States and political subdivisions

    -       9,470,957       -       9,470,957  

Residential mortgage-backed securities

    -       80,627       -       80,627  

Corporate bonds

    -       105,827,391       -       105,827,391  

Foreign bonds

    -       16,001,602       -       16,001,602  
Total fixed maturity securities   $ -     $ 134,592,061     $ -     $ 134,592,061  
                                 
Equity securities, available-for-sale                                

Mutual funds

  $ -     $ 344,471     $ -     $ 344,471  

Corporate preferred stock

    104,720       53,280       -       158,000  

Corporate common stock

    264,453       -       46,500       310,953  
Total equity securities   $ 369,173     $ 397,751     $ 46,500     $ 813,424  

 

   

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 both September 30, 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 financial holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the financial holding company commences operations.

 

 

 
25

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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, states 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 the measurement dates.

 

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.

 

 

 
26

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 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

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 
   

September 30, 2016 (Unaudited)

 
Financial assets                                        

Mortgage loans on real estate

                                       
Commercial