ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN

12 Months Ended

Dec. 31, 2011

ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN [Abstract]

ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN

5.	ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A.	NET INVESTMENT INCOME - The following table reflects net investment income by type of investment:

		2011		2010
Fixed Maturities Available for Sale	$	4,277,019	$	5,577,292
Equity Securities		971,008		891,777
Trading Securities		(2,342,085)		5,143,204
Mortgage Loans		645,838		1,176,747
Discounted Mortgage Loans		8,231,832		12,897,978
Real Estate		6,820,847		6,600,327
Policy Loans		807,389		864,416
Short-term Investments		156,527		57,339
Cash and Cash Equivalents		8,396		10,761
Total Consolidated Investment Income		19,576,771		33,219,841
Investment Expenses		(8,378,606)		(8,361,004)
Consolidated Net Investment Income	$	11,198,165	$	24,858,837

The following table reflects net realized investment gains (losses) by type of investment:

2011		Gross Realized Gains		Gross Realized (Losses)		Net Realized Gains (Losses)
Fixed Maturities Available for Sale	$	9,290,554	$	(376,567)	$	8,913,987
Equity Securities		0		(126,193)		(126,193)
Real Estate		7,371,693		(50,634)		7,321,059
Real Estate – OTTI		0		(3,360,430)		(3,360,430)
Mortgage Loans – OTTI		0		(982,354)		(982,354)
Consolidated Net Realized Losses	$	16,662,247	$	(4,896,178)	$	11,766,069

2010		Gross Realized Gains		Gross Realized (Losses)		Net Realized Gains (Losses)
Fixed Maturities Available for Sale	$	811,175	$	(3,334)	$	807,841
Fixed Maturities Available for Sale - OTTI		0		(610,254)		(610,254)
Equity Securities		0		(21,360)		(21,360)
Equity Securities – OTTI		0		(726,828)		(726,828)
Real Estate		51,949		0		51,949
Mortgage Loans – OTTI		0		(128,867)		(128,867)
Other		0		(13,019)		(13,019)
Consolidated Net Realized Losses	$	863,124	$	(1,503,662)	$	(640,538)

B. INVESTMENT SECURITIES

The amortized cost and estimated market values of investments in securities including investments available for sale are as follows:

2011		Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Investments available for sale:
Fixed maturities
U.S. Government and govt. agencies and authorities	$	56,794,363	$	13,805,565	$	0	$	70,599,928
States, municipalities and political subdivisions		235,000		6,317		0		241,317
Collateralized mortgage obligations		750,944		11,756		(2,973)		759,727
Public utilities		399,887		62,188		0		462,075
All other corporate bonds		49,334,206		4,901,684		(1,715,760)		52,520,130
		107,514,400		18,787,510		(1,718,733)		124,583,177
Equity securities		16,200,043		1,216,286		(116,701)		17,299,628
Total	$	123,714,443	$	20,003,796	$	(1,835,434)	$	141,882,805

2010		Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Investments available for sale:
Fixed maturities
U.S. Government and govt. agencies and authorities	$	74,596,648	$	4,427,285	$	0	$	79,023,933
States, municipalities and political subdivisions		330,000		5,198		0		335,198
Collateralized mortgage obligations		16,170,099		510,840		(6,677)		16,674,262
Public utilities		904,139		82,886		0		987,025
All other corporate bonds		50,947,807		2,320,965		(2,383,242)		50,885,530
		142,948,693		7,347,174		(2,389,919)		147,905,948
Equity securities		18,940,811		177,400		(96,254)		19,021,957
Total	$	161,889,504	$	7,524,574	$	(2,486,173)	$	166,927,905

The Company held two fixed maturity investments totaling $17,258,542 and three fixed maturity investments of $75,329,675 that exceeded 10% of shareholder’s equity at December 31, 2011 and 2010, respectively.  The Company held no equity investments that exceeded 10% of shareholders’ equity at December 31, 2011 and December 31, 2010.

By insurance statute, the majority of the Company's investment portfolio is invested in investment grade securities to provide ample protection for policyholders.

Below investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers.  In addition, the trading market for these securities is usually more limited than for investment grade debt securities.  Debt securities classified as below-investment grade are those that receive a Standard & Poor's rating of BB or below.

The Company held, below investment grade investments with an amortized cost of $1,843,314 and $138,840 as of December 31, 2011 and 2010, respectively.  The investments are all classified as All Other Corporate bonds.

The fair value of investments with sustained gross unrealized losses at December 31, 2011 and 2010 are as follows:

2011		Less than 12 months			12 months or longer			Total
		Fair value	Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
Collateralized mortgage obligations	$	7,008	(36)	$	97,868	(2,937)	$	104,876	(2,973)
All other corporate bonds		3,915,393	(17,574)		1,268,583	(1,698,186)		5,183,976	(1,715,760)
Total fixed maturity	$	3,922,401	(17,610)	$	1,366,451	(1,701,123)	$	5,288,852	(1,718,733)
Equity securities	$	848,032	(55,141)	$	292,441	(61,560)	$	1,140,473	(116,701)

2010		Less than 12 months			12 months or longer			Total
		Fair value	Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
Collateralized mortgage obligations	$	0	0	$	104,033	(6,677)	$	104,033	(6,677)
All other corporate bonds		13,959,305	(413,862)		2,620,277	(1,969,380)		16,579,582	(2,383,242)
Total fixed maturity	$	13,959,305	(413,862)	$	2,724,310	(1,976,057)	$	16,683,615	(2,389,919)
Equity securities	$	1,082,748	(96,254)	$	0	0	$	1,082,748	(96,254)

As of December 31, 2011, the Company had five fixed maturity investments and two equity investment with unrealized losses less than 12 months, and six fixed maturity investments and one equity investments with unrealized losses greater than 12 months.  As of December 31, 2010, the Company had three fixed maturity investments and two equity investments with unrealized losses less than 12 months, and five fixed maturity investments and no equity investments with unrealized losses greater than 12 months.

The unrealized losses of fixed maturity investments were primarily due to financial market participants’ perception of increased risks associated with the current market environment.  The unrealized losses of equity investments were primarily caused by normal market fluctuations in publicly traded securities.

The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary.  Based on an evaluation of the issues, including, but not limited to, intentions to sell or ability to hold the fixed maturity and equity securities with unrealized losses for a period of time sufficient for them to recover; the length of time and amount of the unrealized loss; and the credit ratings of the issuers of the investments, the Company held nineteen investments and six investments as other-than-temporarily impaired at December 31, 2011 and 2010, respectively. The other-than-temporary impairments during 2011 were due to appraisal valuations and Management’s analysis of discounted mortgage loans and real estate.  The other-than-temporary impairments during 2010 were due to changes in expected future cash flows of investments in stocks as well as in bonds backed by trust preferred securities of banks.  In addition, the Company recognized an other-than-temporary impairment in a mortgage loan as a result of its appraisal valuation.  The other-than-temporary impairments are detailed below:

2011		Beginning Amortized Cost		OTTI Credit Loss		Ending Amortized Cost		Unrealized Loss		Carrying Value
Discounted Mortgage Loans
Cogley	$	72,494	$	(72,494)	$	0	$	0	$	0
Housezing	$	14,002	$	(14,002)	$	0	$	0	$	0
DC Byers	$	165,495	$	(165,495)	$	0	$	0	$	0
Sahlani	$	9,575	$	(9,575)	$	0	$	0	$	0
2011		Beginning Amortized Cost		OTTI Credit Loss		Ending Amortized Cost		Unrealized Loss		Carrying Value
Continued
HJ Management Corp	$	12,704	$	(12,704)	$	0	$	0	$	0
Jarvis Development	$	769,120	$	(39,120)	$	730,000	$	0	$	730,000
Greenway Developers	$	1,268,039	$	(668,039)	$	600,000	$	0	$	600,000
First Pyramid	$	925	$	(925)	$	0	$	0	$	0
Real Estate
Green Top	$	597,537	$	(97,537)	$	500,000	$	0	$	500,000
First Pyramid	$	123,277	$	(23,277)	$	100,000	$	0	$	100,000
Athens Trust	$	2,262,352	$	(1,762,352)	$	500,000	$	0	$	500,000
Ebert & Wolf	$	441,425	$	(191,425)	$	250,000	$	0	$	250,000
Platinum Auto Wash	$	690,620	$	(315,620)	$	375,000	$	0	$	375,000
Pulaski County	$	225,000	$	(75,000)	$	150,000	$	0	$	150,000
RLF Lexington	$	102,004	$	(102,004)	$	0	$	0	$	0
Wingate of St Johns	$	1,596,122	$	(666,122)	$	930,000	$	0	$	930,000
Northwest Florida	$	692,374	$	(62,374)	$	630,000	$	0	$	630,000
Sand Lake	$	564,719	$	(64,719)	$	500,000	$	0	$	500,000

2010		Beginning Amortized Cost		OTTI Credit Loss		Ending Amortized Cost		Unrealized Loss		Carrying Value
Bonds
Preferred Term Securities I	$	416,157	$	(136,935)	$	279,222	$	(206,924)	$	72,298
Preferred Term Securities II	$	2,161,808	$	(473,319)	$	1,688,489	$	(1,621,946)	$	66,543
Common Stock
Investors Heritage Capital Corp	$	618,348	$	(215,174)	$	403,174	$	0	$	403,174
Amen Properties, Inc.	$	1,628,432	$	(456,032)	$	1,172,400	$	0	$	1,172,400
SFF Royalty	$	1,934,336	$	(68,643)	$	1,865,693	$	0	$	1,865,693
Discounted Mortgage Loans
Jarvis Development	$	858,867	$	(128,867)	$	730,000	$	0	$	730,000

The amortized cost and estimated market value of debt securities at December 31, 2011, by contractual maturity, is shown below.  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.

Fixed Maturities Available for Sale December 31, 2011		Amortized Cost		Estimated Market Value
Due after one year through five years	$	17,463,652	$	18,910,614
Due after five years through ten years		26,784,234		30,492,848
Due after ten years		62,515,570		74,419,988
Collateralized mortgage obligations		750,944		759,727
Total	$	107,514,400	$	124,583,177

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the consolidated statements of operations.  Trading securities include exchange traded equities, exchange traded equity options, and futures.  The fair value of trading securities included in assets was $8,519,064 and $37,029,550 as of December 31, 2011 and 2010, respectively.  The fair value of trading securities included in liabilities was $(5,471,475) and $(18,429,677) as of December 31, 2011 and 2010, respectively. Trading securities’ unrealized gains were $4,319,155 and $5,574,151 as of December 31, 2011 and 2010, respectively.  Unrealized losses due to trading securities were $(4,130,240) and $(3,770,422) as of December 31, 2011 and 2010, respectively.  Trading securities carried as liabilities are securities sold short.  A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.  Realized gains and (losses) from trading securities were $(3,464,352) and $184,546 for the year ended December 31, 2011 and 2010, respectively. Trading securities are classified in cash flows from operating activities. Trading revenue charged to net income from trading securities was:

	December 31, 2011		December 31, 2010
	Net Realized and Unrealized Gains (Losses)		Net Realized and Unrealized Gains (Losses)
$	(3,275,437)	$	1,988,275

As of December 31, 2011, the Company held derivative instruments in the form of exchange-traded equity options and futures. The Company currently does not designate derivatives as hedging instruments. Exchange traded equity options and futures are matched with exchange traded equity securities in the Company’s trading portfolio, with the primary objective of generating a fair return while reducing risk.  These derivatives are carried at fair value, with unrealized gains and losses recognized in investment income.  The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2011 was $3,217,420 and $(4,187,885), respectively.  The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2010 was $2,244,478 and $(17,246,957), respectively. Realized losses due to derivatives were $(1,343,588) and $(305,247) during 2011 and 2010, respectively. Unrealized gains included in trading security assets due to derivatives were $536,761 and $1,579,071 as of December 31, 2011 and December 31, 2010, respectively. Unrealized losses included in trading security liabilities due to derivatives were $(2,476,008) and $(3,392,010) as of December 31, 2011 and December 31, 2010, respectively.

C. INVESTMENTS ON DEPOSIT – At December 31, 2011, investments carried at approximately $9,231,000 were on deposit with various state insurance departments.

D. MORTGAGE LOANS - The Company has in place a monitoring system to provide management with information regarding potential troubled loans.  Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent.  Management is provided with a monthly listing of loans that are 60 days or more past due along with a brief description of what steps are being taken to resolve the delinquency.  All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans.  Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified.  Interest accruals are analyzed based on the likelihood of repayment.  In no event will interest continue to accrue when accrued interest along with the outstanding principal exceeds the net realizable value of the property.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status. Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of foreclosure and/or negative financial impact.  There are no mortgage loans past due as of December 31, 2011 or 2010.   A mortgage loan reserve is established and adjusted based on management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The Company had no mortgage loan allowance during 2011 and 2010.

E. DISCOUNT MORTGAGE LOANS - During the fourth quarter of 2009, the Company began purchasing discounted commercial mortgage loans.  Management has extensive background and experience in the analysis and valuation of commercial real estate and believes there are significant opportunities currently available in the discounted mortgage loan arena.  Experienced personnel of FSNB have also been utilized in the analysis phase.  This experience dates back to discounted loans during the Resolution Trust days where such loans were being sold from defunct savings and loans in the early 1990’s.  The discounted loans are available through the FDIC sale of assets of closed banks and from banks wanting to reduce their loan portfolios.  The loans are available on a loan by loan bid process.  Prior to placing a bid, each loan is reviewed to determine interest level utilizing such information as type of collateral, location of collateral, interest rate, current loan status and available cashflows or other sources of repayment.  Once it is determined interest in the loan remains, the collateral is physically inspected.  Following physical inspection, if interest still remains, a bid price is determined and a bid is submitted.  Once a loan has been acquired, contact is made with the appropriate individuals to begin a dialog with a goal of determining the borrower’s willingness to work together.  There are generally three paths a discounted loan will take:  the borrowers pay as required; a settlement is reached with the loan being paid off at a discounted value; or the loan is foreclosed.   During the fourth quarter of 2009, the Company had acquired $118,368,661 of discounted mortgage loans at a total cost of $35,224,022, representing an average purchase price to outstanding loan of 29.8%.  During 2009, the Company recorded approximately $1,000,000 in income from this loan activity.  During 2010, the Company acquired an additional $111,258,867 of discounted mortgage loans at a total cost of $36,283,278, representing an average purchase price to outstanding loan of 32.6%.  Additionally, during 2010, the Company settled, sold or had paid off discounted mortgage loans totaling $23,607,100.  During 2010, the Company recorded approximately $12,898,000 in income from the discounted mortgage loan activity, including $7,645,258 in discount accruals.  During 2011, the Company acquired an additional $17,930,217 of discounted mortgage loans at a total cost of $6,673,601, representing an average purchase price to outstanding loan of 10.7%.  Additionally, during 2011, the Company settled, sold or had paid off mortgage loans totaling $29,916,298.  During 2011, the Company recorded approximately $8,232,000 in income from the discounted mortgage loan activity, including $3,940,274 in discount accruals.  While the Company reported income from the discounted loans, the majority of the income was the result of one-time events that occurred during the year.  The Company does not anticipate the same return going forward from the discounted commercial mortgage loan portfolio.   At December 31, 2011, the Company holds $9,272,919 in mortgage loans, which represents approximately 2% of total assets and $27,467,920 in discounted mortgage loans, which represents 6% of total assets.  Most mortgage loans are first position loans.  Loans issued are generally limited to no more than 80% of the appraised value of the property.  During 2011, the Company recognized an other-than-temporary impairment of $982,354 on these loans as a result of its appraisal valuation and management’s analysis and determination of value.   As of December 31, 2011, the Company’s discounted mortgage loan portfolio contained 87 loans with a carrying value of $27,467,920.  The loans’ payment performance during the past year is shown as follows:

Payment Frequency	Number of Loans		Carrying Value
No payments received	28	$	2,962,026
One-time payment received	5		622,142
Irregular payments received	23		9,832,242
Periodic payments received	31		14,051,510
Total	87	$	27,467,920

The following table summarizes discounted mortgage loan holdings of the Company:

Category		2011		2010
In good standing	$	6,657,971	$	9,665,059
Overdue interest over 90 days		5,907,192		16,192,815
Restructured		7,726,156		4,306,800
In process of foreclosure		7,176,601		17,359,186
Total discounted mortgage loans	$	27,467,920	$	47,523,860
Total foreclosed discounted mortgage loans during the year	$	21,059,386	$	8,939,548

F. REAL ESTATE – Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the income statement. Based upon management’s evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any declines in estimated fair value. Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the consolidated statements of income.