10-Q 1 ftfc20180930_10q.htm FORM 10-Q ftfc20180930_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, 2018

 

[    ]

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, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” "accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer:  ☐ 

Accelerated filer:  ☐

Non-accelerated filer:  ☐

Smaller reporting company:  ☑

Emerging growth company:   ☐

 

   

 

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

Yes ☐       No ☑

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of November 9, 2018: 7,802,593 shares

 

 

 

 

 

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

 

TABLE OF CONTENTS       

 

PART I. FINANCIAL INFORMATION   

Page Number
   

Item 1.  Consolidated Financial Statements

 

 

 

Consolidated Statements of Financial Position as of September 30, 2018 (Unaudited) and December 31, 2017

3

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

4

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

5

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)

6

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)

7

 

 

Notes to Consolidated Financial Statements (Unaudited)

9

 

 

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

35

 

 

Item 4.  Controls and Procedures

67

 

 

Part II.  OTHER INFORMATION

 

 

 

Item 1.  Legal Proceedings

67

 

 

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

68

 

 

Item 3.  Defaults upon Senior Securities

68

 

 

Item 4.  Mine Safety Disclosures

68

 

 

Item 5.  Other Information

68

 

 

Item 6.  Exhibits

68

 

 

Signatures

69

   
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)

         
   

September 30, 2018

   

December 31, 2017

 

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $134,551,407 and $143,621,947 as of September 30, 2018 and December 31, 2017, respectively)

  $ 132,839,018     $ 149,683,139  

Available-for-sale preferred stock at fair value (cost: $99,945 as of September 30, 2018 and December 31, 2017)

    98,180       100,720  

Equity securities (available-for-sale in 2017) at fair value (cost: $185,655 and $502,919 as of September 30, 2018 and December 31, 2017, respectively)

    201,383       571,427  

Mortgage loans on real estate

    121,505,716       102,496,451  

Investment real estate

    2,442,440       2,382,966  

Policy loans

    1,755,270       1,660,175  

Short-term investments

    135,963       547,969  

Other long-term investments

    58,255,713       55,814,583  

Total investments

    317,233,683       313,257,430  

Cash and cash equivalents

    29,913,662       31,496,159  

Accrued investment income

    2,727,777       2,544,963  

Recoverable from reinsurers

    1,775,081       1,340,700  

Assets held in trust under coinsurance agreement

    15,831,355       -  

Agents' balances and due premiums

    1,517,547       1,485,305  

Deferred policy acquisition costs

    28,172,290       24,555,902  

Value of insurance business acquired

    5,271,221       5,526,645  

Other assets

    11,956,822       10,920,570  

Total assets

  $ 414,399,438     $ 391,127,674  
                 

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 294,738,874     $ 292,909,762  

Future policy benefits

    54,316,902       49,663,099  

Policy claims

    1,030,040       1,148,513  

Other policy liabilities

    68,331       68,490  

Total policy liabilities

    350,154,147       343,789,864  

Funds withheld under coinsurance agreement

    18,720,257       -  

Deferred federal income taxes

    2,398,299       2,961,929  

Other liabilities

    4,034,342       3,123,702  

Total liabilities

    375,307,045       349,875,495  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of September 30, 2018 and December 31, 2017 and 7,802,593 outstanding as of September 30, 2018 and December 31, 2017)

    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, 2018 and December 31, 2017)

    (893,947 )     (893,947 )

Accumulated other comprehensive income (loss)

    (1,331,860 )     4,760,951  

Accumulated earnings

    12,553,100       8,620,075  

Total shareholders' equity

    39,092,393       41,252,179  

Total liabilities and shareholders' equity

  $ 414,399,438     $ 391,127,674  

 

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,

 
   

2018

   

2017

   

2018

   

2017

 

Revenues

                               

Premiums

  $ 4,701,250     $ 4,058,629     $ 13,760,857     $ 11,560,664  

Net investment income

    4,979,031       4,631,892       14,701,414       12,296,827  

Net realized investment gains (losses)

    245,059       (3,486 )     269,531       254,108  

Loss on other-than-temporary impairments

    -       -       -       (224,250 )

Service fees

    66,474       3,560       300,035       10,849  

Other income

    11,977       21,689       58,149       81,527  

Total revenues

    10,003,791       8,712,284       29,089,986       23,979,725  

Benefits, Claims and Expenses

                               

Benefits and claims

                               

Increase in future policy benefits

    1,719,073       1,291,943       4,684,724       3,733,907  

Death benefits

    876,629       1,310,697       3,963,815       3,744,278  

Surrenders

    203,287       186,202       666,128       717,790  

Interest credited to policyholders

    2,329,858       2,293,419       6,941,291       6,530,403  

Dividend, endowment and supplementary life contract benefits

    64,339       68,492       197,034       200,260  

Total benefits and claims

    5,193,186       5,150,753       16,452,992       14,926,638  

Policy acquisition costs deferred

    (1,673,638 )     (2,369,432 )     (6,162,096 )     (7,370,469 )

Amortization of deferred policy acquisition costs

    682,295       890,135       2,677,918       2,318,277  

Amortization of value of insurance business acquired

    83,935       88,625       255,424       298,089  

Commissions

    1,934,194       2,051,910       5,963,852       6,641,883  

Other underwriting, insurance and acquisition expenses

    1,849,373       1,362,524       4,981,401       4,588,947  

Total expenses

    2,876,159       2,023,762       7,716,499       6,476,727  

Total benefits, claims and expenses

    8,069,345       7,174,515       24,169,491       21,403,365  

Income before total federal income tax expense (benefit)

    1,934,446       1,537,769       4,920,495       2,576,360  

Current federal income tax expense (benefit)

    -       (1,320 )     -       18,589  

Deferred federal income tax expense

    409,687       294,437       1,055,978       501,597  

Total federal income tax expense

    409,687       293,117       1,055,978       520,186  

Net income

  $ 1,524,759     $ 1,244,652     $ 3,864,517     $ 2,056,174  

Net income per common share basic and diluted

  $ 0.20     $ 0.16     $ 0.50     $ 0.26  

 

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,

 
   

2018

   

2017

   

2018

   

2017

 

Net income

  $ 1,524,759     $ 1,244,652     $ 3,864,517     $ 2,056,174  

Other comprehensive income (loss)

                               

Total net unrealized investment gains (losses) arising during the period

    (717,379 )     703,274       (7,531,191 )     4,423,541  

Cumulative effect, adoption of accounting guidance for equity securities

    -       -       (68,508 )     -  

Less net realized investment gains (losses) having no credit losses

    205,453       (3,486 )     244,930       (36,799 )

Net unrealized investment gains (losses)

    (922,832 )     706,760       (7,844,629 )     4,460,340  

Less adjustment to deferred acquisition costs

    (14,204 )     10,532       (132,210 )     79,810  

Other comprehensive income (loss) before federal income tax expense

    (908,628 )     696,228       (7,712,419 )     4,380,530  

Federal income tax expense (benefit)

    (190,813 )     139,246       (1,619,608 )     876,107  

Total other comprehensive income (loss)

    (717,815 )     556,982       (6,092,811 )     3,504,423  

Total comprehensive income (loss)

  $ 806,944     $ 1,801,634     $ (2,228,294 )   $ 5,560,597  

 

 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, 2018 and 2017

(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, 2017

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 818,676     $ 7,590,446     $ 36,280,275  

Comprehensive income:

                                               

Net income

    -       -       -       -       2,056,174       2,056,174  

Other comprehensive income

    -       -       -       3,504,423       -       3,504,423  

Balance as of September 30, 2017

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 4,323,099     $ 9,646,620     $ 41,840,872  
                                                 

Balance as of January 1, 2018

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 4,760,951     $ 8,620,075     $ 41,252,179  

Comprehensive loss:

                                               

Net income

    -       -       -       -       3,864,517       3,864,517  

Cumulative effect, adoption of accounting guidance for equity securities

    -       -       -       -       68,508       68,508  

Other comprehensive loss

    -       -       -       (6,092,811 )     -       (6,092,811 )

Balance as of September 30, 2018

  $ 80,502     $ 28,684,598     $ (893,947 )   $ (1,331,860 )   $ 12,553,100     $ 39,092,393  

 

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,

 
   

2018

   

2017

 

Operating activities

               

Net income

  $ 3,864,517     $ 2,056,174  

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

               

Provision for depreciation

    109,116       109,435  

Accretion of discount on investments

    (2,951,473 )     (2,298,768 )

Net realized investment gains

    (269,531 )     (254,108 )

Loss on other-than-temporary impairment

    -       224,250  

Amortization of policy acquisition cost

    2,677,918       2,318,277  

Policy acquisition cost deferred

    (6,162,096 )     (7,370,469 )

Amortization of loan origination fees

    32,376       44,351  

Amortization of value of insurance business acquired

    255,424       298,089  

Allowance for mortgage loan losses

    61,083       105,024  

Provision for deferred federal income tax expense

    1,055,978       501,597  

Interest credited to policyholders

    6,941,291       6,530,403  

Change in assets and liabilities:

               

Policy loans

    (95,095 )     (28,655 )

Short-term investments

    412,006       -  

Accrued investment income

    (182,814 )     (441,475 )

Recoverable from reinsurers

    (434,381 )     101,829  

Assets held in trust under coinsurance agreement

    (15,831,355 )     -  

Agents' balances and due premiums

    (32,242 )     (183,349 )

Other assets (excludes depreciation of $320 in 2017 and change in receivable for securities sold of ($185,389) and $5,738,274 in 2018 and 2017, respectively)

    (850,863 )     (939,617 )

Future policy benefits

    4,653,803       3,736,262  

Policy claims

    (118,473 )     29,307  

Other policy liabilities

    (159 )     20,633  

Other liabilities (excludes change in payable for securities purchased of $142,361 and ($57,976) in 2018 and 2017, respectively)

    768,279       (4,144,719 )

Net cash provided by (used in) operating activities

    (6,096,691 )     414,471  
                 

Investing activities

               

Purchases of fixed maturity securities

    (11,958,357 )     (32,830,057 )

Maturities of fixed maturity securities

    4,876,000       6,762,000  

Sales of fixed maturity securities

    15,933,074       10,378,173  

Purchases of equity securities

    (53,828 )     (2,832 )

Sales of equity securities

    361,947       -  

Joint venture distributions

    34,877       -  

Purchases of mortgage loans

    (47,077,889 )     (44,857,137 )

Payments on mortgage loans

    28,034,586       16,129,739  

Purchases of other long-term investments

    (6,068,995 )     (14,036,084 )

Payments on other long-term investments

    6,606,259       5,863,095  

Sale on other long-term investments

    -       792,012  

Sale of real estate

    261,470       190,084  

Net change in receivable and payable for securities sold and purchased

    (43,028 )     5,680,298  

Net cash used in investing activities

    (9,093,884 )     (45,930,709 )
                 

Financing activities

               

Policyholders' account deposits

    35,533,959       54,296,750  

Policyholders' account withdrawals

    (21,925,881 )     (14,044,954 )

Net cash provided by financing activities

    13,608,078       40,251,796  
                 

Decrease in cash

    (1,582,497 )     (5,264,442 )

Cash and cash equivalents, beginning of period

    31,496,159       34,223,945  

Cash and cash equivalents, end of period

  $ 29,913,662     $ 28,959,503  

 

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 Investing Activities

(Unaudited)

 

 

During 2017 the Company reclassified an available-for-sale fixed maturity security totaling $729,737 to other long-term investments as recent third party information indicated the security does not qualify for available-for-sale treatment.

 

In connection with this transfer, the non-cash impact on investing activities is summarized as follows:

 

   

Nine Months Ended

 
   

September 30, 2017

 

Reduction in available-for-securities fixed maturity securities

  $ 729,737  

Other long-term investments

    (729,737 )

Net cash used in investing activities

  $ -  

 

 

During 2018 and 2017, the Company foreclosed on residential mortgage loans of real estate totaling $378,411 and $142,455 respectively, and transferred those properties to investment real estate that are now held for sale.

 

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

 

   

Nine Months Ended

   

Nine Months Ended

 
   

September 30, 2018

   

September 30, 2017

 

Reduction in mortgage loans due to foreclosure

  $ 378,411     $ 142,455  

Investment real estate held-for-sale acquired through foreclosure

    (378,411 )     (142,455 )

Net cash used in investing activities

  $ -     $ -  

 

See notes to consolidated financial statements (unaudited).

 

8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(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 has made no premium financing loans since June 30, 2012.

 

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 $2,695,234 including direct cost associated with the acquisition of $195,234. 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.

 

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.

 

9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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 and assumed liabilities of $3,055,916.

 

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 nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ended December 31, 2018 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, 2017.

 

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.

 

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.

 

10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to September 30, 2018 through the date that these financial statements have been issued and reports the following subsequent event.

 

On November 8, 2018, the company executed a $1.5 million line of credit with a bank to provide working capital and funds for expansion.  The terms of the line of credit allowed for advances, repayments and re-borrowings through a maturity date of October 31, 2019.  Any outstanding advances will incur interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year. 

 

Recent Accounting Pronouncements

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance did not have a material effect on the Company’s result 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 was 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 adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

Leases

 

In February 2016, the FASB issued updated guidance regarding leases that generally requires the lessee and lessor to recognize lease assets and lease liabilities on the statement of financial position. A lessee should recognize on the statement of financial position a liability to make lease payments and an asset representing its right-to-use the underlying assets for the lease term. Optional payments to extend the lease or purchase the underlying leased asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise the option(s).

 

11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

If the lease has a term of 12 months or less, a lessee can make an election to recognize lease expenses for such leases on a straight-line basis over the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right-to-use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities.

 

The accounting applied by the lessor is largely unchanged from that applied under previous U.S. GAAP. Key aspects of the lessor accounting model, however, were aligned with the revenue recognition guidance of Codification Topic 606. The previous accounting model for leverage leases continues to apply only to those leveraged leases that commenced before the effective date of Codification Update 2016-02 Leases (Topic 842).

 

Entities will generally continue to account for leases that commenced before the effective date of this update in accordance with previous U.S. GAAP unless the lease is modified. Lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP. The updated guidance may be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2018.  In July 2018, the FASB issued updated guidance (Accounting Standards Update 2018-11) that provides entities with an additional (and optional) transition method to adopt the new standard on leases. Under this new transition method, an entity initially applies the new standard on leases at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new standard on leases will continue to be in accordance with current GAAP (Topic 840, Leases).  An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The Company expects to adopt this guidance in January 2019.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Financial Instruments — Credit Losses:  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. mortgage loans and reinsurance amounts recoverable) 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. Based on the financial instruments currently held by the Company, the Company expects there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.

 

12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

 

In August 2016, the FASB issued specific guidance to reduce the existing diversity in practice in how eight specific cash flow issues of certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted.  The adoption of this guidance did not have a material effect on the Company’s cash flows statement.

 

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

 

In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. 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.

 

Business Combinations – Clarifying the Definition of a Business

 

In January 2017, the FASB issued guidance to clarify the definition of a business to assist reporting entities in evaluating whether transactions should be accounted for as an acquisition or disposal of assets or businesses. This update provides a screen to determine when an integrated set of assets or activities is not a business and the requirements to be met to be considered a business.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted in certain situations.  The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Intangibles – Goodwill and Other - Simplifying the Test for Goodwill Impairment

 

In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2019, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  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 — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

 

In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic post retirement cost (net benefit costs). Net benefit costs comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees.  The update requires that the employer service cost component be reported in the same lines as other employee compensation cost and that the other components (non-service costs) be presented separately from the service cost and outside of a subtotal of income from operations if one is presented.  The update also allows only the service cost component to be eligible for capitalization in assets when applicable.

 

13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

The updated guidance is effective for reporting periods beginning after December 15, 2017. The update is to be applied retrospectively with respect to the presentation of service cost and non-service cost and prospectively with respect to applying the service cost only eligible for capitalization in assets guidance. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements. This pronouncement did not impact the Company since it does not have any pension or postretirement benefit plans and has no intention to adopt such plans.

 

 Compensation — Stock Compensation: Scope of Modification Accounting

 

In May 2017, the FASB issued updated guidance related to a change to the terms or conditions (modification) of a share-based payment award.  The updated guidance provides that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the modified award (equity or liability instrument) are the same as the original award immediately before the modification.

 

The updated guidance is effective for the quarter ending March 31, 2018.  The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted in any interim periods for which financial statements have not yet been made available for issuance. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Target Improvement to Accounting for Hedging Activities

 

In August 2017, the FASB issued updated authoritative guidance for the application of hedge accounting. The updated guidance updates certain recognition and measurement requirements for hedge accounting. The objective of the guidance is to more closely align the economics of a company’s risk management activities in its financial results and reduce the complexity of applying hedge accounting. The updates include the expansion of hedging strategies that are eligible for hedge accounting, elimination of the separate measurement and reporting of hedge ineffectiveness, presentation of the changes in the fair value of the hedging instrument in the same consolidated statement of operations line as the earnings effect of the hedged item and simplification of hedge effectiveness assessments. This guidance also includes new disclosures and will be applied using a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.

 

The updated guidance is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted for reporting periods beginning before December 15, 2018. The Company does not currently and does not intend to participate in hedging activities and there is therefore no impact on the Company’s results of operations, financial position or liquidity. This pronouncement would be adopted if the Company begins to participate in hedging activities in the future.

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

On February 14, 2018, the FASB issued updated guidance that allows a reclassification of the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to accumulated other comprehensive income. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Cuts and Jobs Act of 2017 related to items in accumulated other comprehensive income. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the Tax Cuts and Jobs Act of 2017 related to items remaining in accumulated other comprehensive income are recognized or at the beginning of the period of adoption. Early adoption is permitted. The Company adopted the updated guidance effective December 31, 2017. The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

 

In August 2018, the FASB issued updated guidance to align the accounting for implementation costs incurred in a software hosting arrangement (i.e., a cloud computing arrangement) that is a service contract with the guidance for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, the updated guidance requires an entity to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. The updated guidance also requires the entity to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement.

 

The updated guidance is effective for reporting periods beginning after December 15, 2019. 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.

 

Targeted Improvements to the Accounting for Long-Duration Contracts

 

In August 2018, the FASB also issued updated guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures. The expanded disclosure requires an insurance entity to provide disaggregated rollforwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.

 

The updated guidance is effective for reporting periods beginning after December 15, 2020. Early adoption is permitted. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented. With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. Based on the long-duration contracts currently held by the Company, the Company expects there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the long-term contracts held by the Company and the economic conditions at that time.

 

15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

 

2. Investments

 

Investments in fixed maturity and preferred stock available-for-sale and equity securities as of September 30, 2018 and December 31, 2017 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized Cost

   

Unrealized

   

Unrealized

   

Fair

 
   

or Cost

   

Gains

   

Losses

   

Value

 
   

September 30, 2018 (Unaudited)

 

Fixed maturity securities

                               

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

  $ 2,979,866     $ 9,761     $ 119,300     $ 2,870,327  

States and political subdivisions

    9,314,448       101,294       61,109       9,354,633  

Residential mortgage-backed securities

    24,918       31,552       -       56,470  

Corporate bonds

    101,310,347       955,437       2,081,931       100,183,853  

Asset-backed

    253,676       1,462       -       255,138  

Foreign bonds

    20,668,152       83,698       633,253       20,118,597  

Total fixed maturity securities

    134,551,407       1,183,204       2,895,593       132,839,018  
                                 

Preferred stock

    99,945       95       1,860       98,180  
                                 

Equity securities

                               

Mutual funds

    91,981       -       15,245       76,736  

Corporate common stock

    93,674       30,973       -       124,647  

Total equity securities

    185,655       30,973       15,245       201,383  
                                 

Total fixed maturity, preferred stock and equity securities

  $ 134,837,007     $ 1,214,272     $ 2,912,698     $ 133,138,581  

 

   

December 31, 2017

 

Fixed maturity securities

                               

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

  $ 2,989,688     $ 48,720     $ 65,341     $ 2,973,067  

States and political subdivisions

    9,368,393       337,442       20,148       9,685,687  

Residential mortgage-backed securities

    29,573       41,736       -       71,309  

Corporate bonds

    109,340,273       5,248,291       491,556       114,097,008  

Foreign bonds

    21,894,020       1,134,999       172,951       22,856,068  

Total fixed maturity securities

    143,621,947       6,811,188       749,996       149,683,139  
                                 

Preferred stock

    99,945       775       -       100,720  
                                 

Equity securities

                               

Mutual funds

    347,942       1,124       -       349,066  

Corporate common stock

    154,977       67,384       -       222,361  

Total equity securities

    502,919       68,508       -       571,427  
                                 

Total fixed maturity, preferred stock and equity securities

  $ 144,224,811     $ 6,880,471     $ 749,996     $ 150,355,286  

 

16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(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, 2018 and December 31, 2017 are summarized as follows:

 

           

Unrealized

   

Number of

 
   

Fair Value

   

Loss

   

Securities

 
   

September 30, 2018 (Unaudited)

 

Fixed maturity securities

                       

Less than 12 months in an unrealized loss position

                       

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

  $ 119,951     $ 5,098       1  

States and political subdivisions

    2,824,688       25,056       18  

Corporate bonds

    57,136,200       1,697,585       211  

Foreign bonds

    13,757,533       538,846       48  

Total less than 12 months in an unrealized loss position

    73,838,372       2,266,585       278  

More than 12 months in an unrealized loss position

                       

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

    1,440,760       114,202       5  

States and political subdivisions

    509,217       36,053       4  

Corporate bonds

    3,686,822       384,346       16  

Foreign bonds

    639,015       94,407       2  

Total more than 12 months in an unrealized loss position

    6,275,814       629,008       27  

Total fixed maturity securities in an unrealized loss position

    80,114,186       2,895,593       305  
                         

Preferred stock, less than 12 months in an unrealized loss position

    48,140       1,860       1  
                         

Equity securities (mutual funds), less than 12 months in an unrealized loss position

    76,736       15,245       1  
                         

Total fixed maturity, preferred stock and equity securities in an unrealized loss position

  $ 80,239,062     $ 2,912,698     $ 307  

 

   

December 31, 2017

 

Fixed maturity securities

                       

Less than 12 months in an unrealized loss position

                       

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

  $ 326,163     $ 3,897       2  

States and political subdivisions

    608,342       6,889       3  

Corporate bonds

    5,995,898       130,337       23  

Foreign bonds

    2,061,178       98,520       7  

Total less than 12 months in an unrealized loss position

    8,991,581       239,643       35  

More than 12 months in an unrealized loss position

                       

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

    1,338,617       61,444       5  

States and political subdivisions

    579,008       13,259       4  

Corporate bonds

    5,139,898       361,219       20  

Foreign bonds

    501,875       74,431       3  

Total more than 12 months in an unrealized loss position

    7,559,398       510,353       32  

Total fixed maturity securities in an unrealized loss position

  $ 16,550,979     $ 749,996     $ 67  

 

17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

2. Investments (continued)

 

As of September 30, 2018, the Company held 305 available-for-sale fixed maturity securities with an unrealized loss of $2,895,593, fair value of $80,114,186 and amortized cost of $83,009,779. These unrealized losses were primarily due to market interest rate movements in the bond market as of September 30, 2018. The ratio of the fair value to the amortized cost of these 305 securities is 97%.

 

As of December 31, 2017, the Company held 67 available-for-sale fixed maturity securities with an unrealized loss of $749,996, fair value of $16,550,979 and amortized cost of $17,300,975. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2017. The ratio of the fair value to the amortized cost of these 67 securities is 96%.

 

As of September 30, 2018, the Company held one preferred stock with an unrealized loss of $1,860, fair value of $48,140 and cost of $50,000. The ratio of fair value to cost of this preferred stock is 96%.

 

As of September 30, 2018, the Company held one equity security with an unrealized loss of $15,245, fair value of $76,736 and cost of $91,981. The ratio of fair value to cost of this security is 83%.

 

As of December 31, 2017, the Company had no equity securities and preferred stock with unrealized losses.

 

Fixed maturity securities were 96% and 93% investment grade as rated by Standard & Poor’s as of September 30, 2018 and December 31, 2017, 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.

 

The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities for the three and nine months ended September 30, 2018 and the year ended December 31, 2017.

 

Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 2018, 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. 

 

18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

2. Investments (continued)

 

Net unrealized gains (losses) included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of September 30, 2018 and December 31, 2017, are summarized as follows:

 

   

(Unaudited)

         
   

September 30, 2018

   

December 31, 2017

 

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

  $ (1,714,154 )   $ 6,130,475  

Adjustment to deferred acquisition costs

    28,255       (103,955 )

Deferred income taxes

    354,039       (1,265,569 )

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

  $ (1,331,860 )   $ 4,760,951  

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $58,255,713 and $55,814,583 as of September 30, 2018 and December 31, 2017, 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, 2018, by contractual maturity, are summarized as follows:

 

   

September 30, 2018 (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

  $ 4,276,974     $ 4,294,839     $ 8,397,085     $ 8,499,751  

Due after one year through five years

    25,798,481       25,921,074       24,362,037       26,306,144  

Due after five years through ten years

    40,802,369       39,975,538       16,759,405       20,207,607  

Due after ten years

    63,648,665       62,591,097       8,737,186       13,371,726  

Due at multiple maturity dates

    24,918       56,470       -       -  
                                 
    $ 134,551,407     $ 132,839,018     $ 58,255,713     $ 68,385,228  

 

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.

 

19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(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, investment real estate and other long-term investments for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Investment Real Estate

 
   

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Proceeds

  $ 12,320,142     $ 4,536,924     $ 346,535     $ -     $ 206,617     $ -  

Gross realized gains

    305,883       37,337       25,683       -       52,971       -  

Gross realized losses

    (100,430 )     (40,823 )     (58 )     -       -       -  

Loss on other-than-temporary impairment

    -       -       -       -       -       -  

 

   

Three Months Ended September 30, (Unaudited)

 
   

Other Long-Term Investments

 
   

2018

   

2017

 

Proceeds

  $ -     $ -  

Gross realized gains

    -       -  

Gross realized losses

    -       -  

Loss on other-than-temporary impairment

    -       -  

 

   

Nine Months Ended September 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Investment Real Estate

 
   

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Proceeds

  $ 20,809,074     $ 17,140,173     $ 361,947     $ -     $ 261,470     $ 190,084  

Gross realized gains

    386,403       564,589       25,790       -       52,971       6,050  

Gross realized losses

    (141,473 )     (377,138 )     (58 )     -       (1,322 )     (1,668 )

Loss on other-than-temporary impairment

    -       (224,250 )     -       -       -       -  

 

   

Nine Months Ended September 30, (Unaudited)

 
   

Other Long-Term Investments

 
   

2018

   

2017

 

Proceeds

  $ -     $ 792,012  

Gross realized gains

    -       62,275  

Gross realized losses

    -       -  

Loss on other-than-temporary impairment

    -       -  

 

20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

2. Investments (continued)

 

The accumulated change in unrealized investment gains (losses) for fixed maturity and preferred stock available-for-sale and equity securities for the three and nine months ended September 30, 2018 and 2017 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale, equity securities, investment real estate and other long-term investments for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

   

Nine Months Ended September 30, (Unaudited)

 
   

2018

   

2017

   

2018

   

2017

 

Change in unrealized investment gains (losses):

                               

Available-for-sale securities:

                               

Fixed maturity securities

  $ (921,992 )   $ 694,379     $ (7,773,581 )   $ 4,429,221  

Preferred stock

    (840 )     82       (2,540 )     5,660  

Equity securities

    -       12,299       -       25,459  
                                 

Net realized investment gains (losses):

                               

Available-for-sale securities:

                               

Fixed maturity securities

    205,453       (3,486 )     244,930       187,451  

Equity securities, sale of securities

    25,625       -       25,732       -  

Equity securities, changes in fair value

    (38,990 )     -       (52,780 )     -  

Investment real estate

    52,971       -       51,649       4,382  

Other long-term investments

    -       -       -       62,275  

 

Major categories of net investment income for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

   

Nine Months Ended September 30, (Unaudited)

 
   

2018

   

2017

   

2018

   

2017

 

Fixed maturity securities

  $ 1,492,224     $ 1,731,931     $ 4,792,648     $ 4,887,826  

Preferred stock and equity securities

    24,280       4,382       57,397       14,540  

Other long-term investments

    995,100       967,959       2,974,163       2,707,438  

Mortgage loans

    2,877,910       2,431,884       8,253,828       6,101,462  

Policy loans

    31,055       28,640       90,480       84,657  

Real estate

    94,102       93,943       282,108       281,366  

Short-term and other investments

    92,711       20,227       160,392       117,764  

Gross investment income

    5,607,382       5,278,966       16,611,016       14,195,053  

Investment expenses

    (628,351 )     (647,074 )     (1,909,602 )     (1,898,226 )

Net investment income

  $ 4,979,031     $ 4,631,892     $ 14,701,414     $ 12,296,827  

 

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, 2018 and December 31, 2017, these required deposits, included in investment assets, had amortized costs that totaled $4,355,887 and $4,308,853, respectively. As of September 30, 2018 and December 31, 2017, these required deposits had fair values that totaled $4,238,579 and $4,307,439, respectively.

 

21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

2. Investments (continued)

 

The Company’s mortgage loans by property type as of September 30, 2018 and December 31, 2017 are summarized as follows:

 

   

(Unaudited)

         
   

September 30, 2018

   

December 31, 2017

 
                 

Residential mortgage loans

  $ 112,856,562     $ 100,700,241  
                 

Commercial mortgage loans by property type

               

Apartment

    696,500       -  

Industrial

    1,528,587       430,613  

Lodging

    113,160       -  

Office building

    1,766,622       137,703  

Retail

    4,544,285       1,227,894  
                 

Total commercial mortgage loans by property type

    8,649,154       1,796,210  
                 

Total mortgage loans

  $ 121,505,716     $ 102,496,451  

 

There were 14 loans with a remaining principal balance of $1,049,742 that were more than 90 days past due as of September 30, 2018. There were 23 loans with a remaining principal balance of $3,094,155 that were more than 90 days past due as of December 31, 2017.

 

There were no mortgage loans in default and in the foreclosure process as of September 30, 2018 and December 31, 2017. The Company, however, holds $520,867 and $352,277 of previously foreclosed residential mortgage loans as residential real estate held for sale as of September 30, 2018 and December 31, 2017, respectively.

 

The Company’s investment real estate as of September 30, 2018 and December 31, 2017 is summarized as follows:

 

   

(Unaudited)

         
   

September 30, 2018

   

December 31, 2017

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for investment

    745,155       745,155  

Total land

    958,315       958,315  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (1,304,299 )     (1,195,183 )

Buildings net of accumulated depreciation

    963,258       1,072,374  

Residential real estate - held for sale

    520,867       352,277  

Total residential real estate

    520,867       352,277  

Investment real estate, net of accumulated depreciation

  $ 2,442,440     $ 2,382,966  

 

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 land on one of the four lots is held for the production of income. The other three lots of land owned in Topeka, Kansas are held for investment. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri.

 

22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

2. Investments (continued)

 

During 2018 the Company foreclosed on residential mortgage loans of real estate totaling $378,411 and transferred those properties to investment real estate held for sale. During 2018, the Company sold investment real estate property with an aggregate carrying value of $209,821. The Company recorded a gross realized investment gain on sale of $51,649 based on an aggregate sales price of $261,470.

 

During 2017 the Company foreclosed on residential mortgage loans of real estate totaling $207,482 and transferred those properties to investment real estate held for sale. During 2017, the Company sold investment real estate property with an aggregate carrying value of $185,702. The Company recorded a gross realized investment gain on sale of $4,382 based on an aggregate sales price of $190,084.

 

 

 

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, preferred stock 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 preferred stock and equity securities that are traded in an active exchange market.

 

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

 

23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(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, 2018 and December 31, 2017 is summarized as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

September 30, 2018 (Unaudited)

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,870,327     $ -     $ 2,870,327  

States and political subdivisions

    -       9,354,633       -       9,354,633  

Residential mortgage-backed securities

    -       56,470       -       56,470  

Corporate bonds

    -       100,183,853       -       100,183,853  

Asset-backed

    -       255,138       -       255,138  

Foreign bonds

    -       20,118,597       -       20,118,597  

Total fixed maturity securities

  $ -     $ 132,839,018     $ -     $ 132,839,018  
                                 

Preferred stock, available-for-sale

  $ 98,180     $ -     $ -     $ 98,180  
                                 

Equity securities

                               

Mutual funds

  $ -     $ 76,736     $ -     $ 76,736  

Corporate common stock

    62,078       -       62,569       124,647  

Total equity securities

  $ 62,078     $ 76,736     $ 62,569     $ 201,383  

 

   

December 31, 2017

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,973,067     $ -     $ 2,973,067  

States and political subdivisions

    -       9,685,687       -       9,685,687  

Residential mortgage-backed securities

    -       71,309       -       71,309  

Corporate bonds

    -       114,097,008       -       114,097,008  

Foreign bonds

    -       22,856,068       -       22,856,068  

Total fixed maturity securities

  $ -     $ 149,683,139     $ -     $ 149,683,139  
                                 

Preferred stock, available-for-sale

  $ 100,720     $ -     $ -     $ 100,720  
                                 

Equity securities

                               

Mutual funds

  $ -     $ 349,066     $ -     $ 349,066  

Corporate common stock

    160,861       -       61,500       222,361  

Total equity securities

  $ 160,861     $ 349,066     $ 61,500     $ 571,427  

 

As of September 30, 2018 and December 31, 2017, Level 3 financial instruments consisted of two private placement common stocks that have no active trading and a joint venture investment with a mortgage loan originator.

 

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 significant operations. The joint venture investment with a mortgage loan originator is accounted for under the equity method of accounting.

 

24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

3. Fair Value Measurements (continued)

 

Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and preferred stock available-for-sale and equity securities 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, asset-backed and foreign bonds.

 

The Company’s preferred stock is included in Level 1 and equity securities are included in Level 1 and Level 2 and the private placement common stocks and joint venture investment are included in Level 3. Level 1 for the preferred stock and 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.

 

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

 

The change in the fair value of the Company’s Level 3 equity securities for the nine months ended September 30, 2018 and 2017 is summarized as follows:

 

   

Unaudited

 
   

Nine Months Ended September 30,

 
   

2018

   

2017

 
                 

Beginning balance

  $ 61,500     $ 61,500  

Purchases

    10,200       -  

Joint venture net income

    40,746       -  

Sales

    (15,000 )     -  

Joint venture distribution

    (34,877 )     -  

Ending balance

  $ 62,569     $ 61,500  

 

25

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(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, 2018 and December 31, 2017, 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, 2018 (Unaudited)

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 8,649,154     $ 8,560,861     $ -     $ -     $ 8,560,861  

Residential

    112,856,562       109,871,804       -       -       109,871,804  

Policy loans

    1,755,270       1,755,270       -       -       1,755,270  

Short-term investments

    135,963       135,963       135,963       -       -  

Other long-term investments

    58,255,713       68,385,228       -       -       68,385,228  

Cash and cash equivalents

    29,913,662       29,913,662       29,913,662       -       -  

Accrued investment income

    2,727,777       2,727,777       -       -       2,727,777  

Total financial assets

  $ 214,294,101     $ 221,350,565     $ 30,049,625     $ -     $ 191,300,940  
                                         

Financial liabilities

                                       

Policyholders' account balances

  $ 294,738,874     $ 241,572,894     $ -     $ -     $ 241,572,894  

Policy claims

    1,030,040       1,030,040       -       -       1,030,040  

Total financial liabilities

  $ 295,768,914     $ 242,602,934     $ -     $ -     $ 242,602,934  

 

   

December 31, 2017

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,796,210     $ 1,783,385     $ -     $ -     $ 1,783,385  

Residential

    100,700,241       102,192,001       -       -       102,192,001  

Policy loans

    1,660,175       1,660,175       -       -       1,660,175  

Short-term investments

    547,969       547,969       547,969       -       -  

Other long-term investments

    55,814,583       68,298,585       -       -       68,298,585  

Cash and cash equivalents

    31,496,159       31,496,159       31,496,159       -       -  

Accrued investment income

    2,544,963       2,544,963       -       -       2,544,963  

Total financial assets

  $ 194,560,300     $ 208,523,237     $ 32,044,128     $ -     $ 176,479,109  
                                         

Financial liabilities

                                       

Policyholders' account balances

  $ 292,909,762     $ 243,234,637     $ -     $ -     $ 243,234,637  

Policy claims

    1,148,513       1,148,513       -       -       1,148,513  

Total financial liabilities

  $ 294,058,275     $ 244,383,150     $ -     $ -     $ 244,383,150  

 

26

 

  

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(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:

 

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 (includes apartment, industrial, lodging, office building and retail), the discount rate used was assumed to be the interest rate on the last commercial mortgage loan acquired by the Company.

 

Cash and Cash Equivalents, Short-Term Investments, Accrued Investment Income and Policy Loans

 

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.

 

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