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EX-31.1 - EXHIBIT 31.1 - First Trinity Financial CORPex31-1.htm
EX-31.2 - EXHIBIT 31.2 - First Trinity Financial CORPex31-2.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[ X ]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934

 

For the quarterly period ended March 31, 2015

 

[ ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period From                                 to                                   .

 

Commission file number: 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Oklahoma   

 

 

 

34-1991436

(State or other jurisdiction of incorporation or organization)   

 

 

 

(I.R.S. Employer Identification Number)

 

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma 74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑       No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,  non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, "accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer:  ☐ 

Accelerated filer:  ☐

Non-accelerated filer:  ☐

Smaller reporting company:  

       

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

Yes ☐       No ☑

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of May 11, 2015: 7,802,613 shares

 

 
 

 

  

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2015

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

Page Number

     

Item 1. Consolidated Financial Statements

   
     

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

 

3

     

Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 

4

     

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 

5

     

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

  6
     

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 

7

     

Notes to Consolidated Financial Statements (Unaudited)

 

8

     

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

 

31

     

Item 4. Controls and Procedures

 

49

     

Part II. OTHER INFORMATION

   
     

Item 1. Legal Proceedings

 

50

     

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

 

51

     

Item 3. Defaults upon Senior Securities

 

51

     

Item 4. Mine Safety Disclosures

 

51

     

Item 5. Other Information

 

51

     

Item 6. Exhibits

 

51

     

Signatures

  52

 

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

 

   

March 31, 2015

   

December 31, 2014

 

 

 

(Unaudited)

         
Assets                

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $108,212,909 and $107,412,322 as of March 31, 2015 and December 31, 2014, respectively)

  $ 112,520,002     $ 110,651,429  

Available-for-sale equity securities at fair value (cost: $525,901 and $519,595 as of March 31, 2015 and December 31, 2014, respectively)

    672,648       671,357  

Mortgage loans on real estate

    45,579,509       38,649,733  

Investment real estate

    2,435,674       9,165,090  

Policy loans

    1,461,576       1,520,620  

Short-term investments

    1,141,837       1,141,199  

Other long-term investments

    23,048,210       21,781,925  

Total investments

    186,859,456       183,581,353  

Cash and cash equivalents

    17,621,797       10,158,386  

Accrued investment income

    1,756,739       1,682,906  

Recoverable from reinsurers

    1,214,234       1,222,245  

Agents' balances and due premiums

    705,311       562,146  

Deferred policy acquisition costs

    9,847,853       9,287,851  

Value of insurance business acquired

    6,574,456       6,674,414  

Property and equipment, net

    71,069       84,001  

Other assets

    5,176,083       5,747,866  

Total assets

  $ 229,826,998     $ 219,001,168  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 151,496,179     $ 140,554,973  

Future policy benefits

    36,708,320       35,913,730  

Policy claims

    671,407       602,269  

Other policy liabilities

    66,982       87,148  

Total policy liabilities

    188,942,888       177,158,120  

Notes payable

    -       4,076,473  

Deferred federal income taxes

    2,349,193       2,198,753  

Other liabilities

    4,163,805       2,357,484  

Total liabilities

    195,455,886       185,790,830  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,193 issued as of March 31, 2015 and December 31, 2014, respectively, and 7,802,613 and 7,812,038 outstanding as of March 31, 2015 and December 31, 2014, respectively)

    80,502       80,502  

Additional paid-in capital

    28,684,748       28,684,748  

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

    (893,947 )     (855,304 )

Accumulated other comprehensive income

    3,519,930       2,683,543  

Accumulated earnings

    2,979,879       2,616,849  

Total shareholders' equity

    34,371,112       33,210,338  

Total liabilities and shareholders' equity

  $ 229,826,998     $ 219,001,168  

 

See notes to consolidated financial statements (unaudited).

 

 
3

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Revenues

               

Premiums

  $ 2,320,314     $ 2,009,983  

Net investment income

    2,407,560       1,970,808  

Net realized investment gains

    424,002       296,565  

Other income

    4,811       13,312  

Total revenues

    5,156,687       4,290,668  

Benefits, Claims and Expenses

               

Benefits and claims

               

Increase in future policy benefits

    791,311       619,972  

Death benefits

    918,791       722,449  

Surrenders

    142,394       91,446  

Interest credited to policyholders

    1,247,890       1,022,210  

Dividend, endowment and supplementary life contract benefits

    53,433       66,210  

Total benefits and claims

    3,153,819       2,522,287  

Policy acquisition costs deferred

    (971,951 )     (528,162 )

Amortization of deferred policy acquisition costs

    394,460       281,282  

Amortization of value of insurance business acquired

    99,958       105,854  

Commissions

    870,146       510,450  

Other underwriting, insurance and acquisition expenses

    1,230,916       1,133,459  

Total expenses

    1,623,529       1,502,883  

Total benefits, claims and expenses

    4,777,348       4,025,170  

Income before total federal income tax expense

    379,339       265,498  

Current federal income tax expense

    74,965       50,259  

Deferred federal income tax benefit

    (58,656 )     (27,915 )

Total federal income tax expense

    16,309       22,344  

Net income

  $ 363,030     $ 243,154  

Net income per common share basic and diluted

  $ 0.05     $ 0.03  

 

See notes to consolidated financial statements (unaudited).

 

 
4

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Net income

  $ 363,030     $ 243,154  

Other comprehensive income

               

Total net unrealized gains arising during the period

    1,085,720       1,654,985  

Less net realized investment gains

    22,749       296,565  

Net unrealized gains

    1,062,971       1,358,420  

Less adjustment to deferred acquisition costs

    17,489       9,510  

Other comprehensive income before income tax expense

    1,045,482       1,348,910  

Income tax expense

    209,095       269,782  

Total other comprehensive income

    836,387       1,079,128  

Total comprehensive income

  $ 1,199,417     $ 1,322,282  

 

See notes to consolidated financial statements (unaudited).

 

 
5

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 2015 and 2014

(Unaudited)

 

                           

Accumulated

                 
   

Common

   

Additional

           

Other

           

Total

 
   

Stock

   

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Shareholders'

 
   

$.01 Par Value

   

Capital

   

Stock

   

Income

   

Earnings

   

Equity

 

Balance as of January 1, 2014

  $ 80,502     $ 28,684,748     $ (693,731 )   $ 1,878,157     $ 691,338     $ 30,641,014  

Repurchase of common stock

    -       -       (80,000 )     -       -       (80,000 )

Comprehensive income:

                                               

Net income

    -       -       -       -       243,154       243,154  

Other comprehensive income

    -       -       -       1,079,128       -       1,079,128  

Balance as of March 31, 2014

  $ 80,502     $ 28,684,748     $ (773,731 )   $ 2,957,285     $ 934,492     $ 31,883,296  
                                                 

Balance as of January 1, 2015

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

Repurchase of common stock

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

Comprehensive income:

                                               

Net income

    -       -       -       -       363,030       363,030  

Other comprehensive income

    -       -       -       836,387       -       836,387  

Balance as of March 31, 2015

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

 

See notes to consolidated financial statements (unaudited).

 

 
6

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows 

(Unaudited) 

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Operating activities

               

Net income

  $ 363,030     $ 243,154  

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

               

Provision for depreciation

    49,304       103,524  

Accretion of discount on investments

    (229,755 )     (221,043 )

Net realized investment gains

    (424,002 )     (296,565 )

Amortization of policy acquisition cost

    394,460       281,282  

Policy acquisition cost deferred

    (971,951 )     (528,162 )

Mortgage loan origination fees deferred

    (26,000 )     (21,500 )

Amortization of loan origination fees

    9,320       17,923  

Amortization of value of insurance business acquired

    99,958       105,854  

Provision for deferred federal income tax benefit

    (58,656 )     (27,915 )

Interest credited to policyholders

    1,247,890       1,022,210  

Change in assets and liabilities:

               

Accrued investment income

    (73,833 )     (44,414 )

Policy loans

    59,044       (27,035 )

Short-term investments

    (638 )     -  

Allowance for mortgage and premium finance loan losses

    24,603       17,603  

Recoverable from reinsurers

    8,011       (5,609 )

Agents' balances and due premiums

    (143,165 )     8,027  

Other assets

    571,783       627,282  

Future policy benefits

    794,590       620,107  

Policy claims

    69,138       7,281  

Other policy liabilities

    (20,166 )     (2,813 )

Other liabilities

    1,806,321       (22,855 )

Net cash provided by operating activities

    3,549,286       1,856,336  
                 

Investing activities

               

Purchases of fixed maturity securities

    (2,170,526 )     (8,075,994 )

Maturities of fixed maturity securities

    567,000       1,487,000  

Sales of fixed maturity securities

    621,229       1,943,330  

Purchases of equity securities

    (534,687 )     (2,230 )

Sales of equity securities

    526,284       -  

Purchases of mortgage loans

    (8,455,196 )     (4,753,722 )

Payments on mortgage loans

    1,550,599       709,836  

Purchases of other long-term investments

    (2,022,600 )     (1,837,619 )

Payments on other long-term investments

    1,170,576       758,383  

Purchases of real estate

    -       (2,817,857 )

Sale of real estate

    7,083,246       -  

Net cash used in investing activities

    (1,664,075 )     (12,588,873 )
                 

Financing activities

               

Policyholders' account deposits

    12,577,187       8,031,177  

Policyholders' account withdrawals

    (2,883,871 )     (2,100,680 )

Purchases of treasury stock

    (38,643 )     (80,000 )

Proceeds from issuance of notes payable

    -       4,076,473  

Repayment of notes payable

    (4,076,473 )     -  

Net cash provided by financing activities

    5,578,200       9,926,970  
                 

Increase (decrease) in cash

    7,463,411       (805,567 )

Cash and cash equivalents, beginning of period

    10,158,386       10,608,438  

Cash and cash equivalents, end of period

  $ 17,621,797     $ 9,802,871  

 

See notes to consolidated financial statements (unaudited).

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

First Trinity Financial Corporation (the “Company”) 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, Virginia and West Virginia.

 

The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds, collections of past due accounts and accounts involved in litigation.

 

Company Capitalization

 

The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012; and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings.

 

The Company also issued 702,705 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 $5,270,288 with an offsetting credit of $5,270,288 to common stock and additional paid-in capital. The historic impact of these two stock dividend charges of $5,270,288 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of March 31, 2015 of $2,979,879, as shown in the accumulated earnings caption in the March 31, 2015 consolidated statement of financial position.

 

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

 

Acquisition of Other Companies 

 

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The acquisition of FLAC was financed with the working capital of FTFC. On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.

 

 
8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC”) and FLAC, were merged, with FLAC being the surviving company. Immediately following the merger, FLAC changed its name to TLIC.

 

On December 28, 2011, TLIC acquired 100% of the outstanding common stock of FBLIC from FBLIC’s shareholders. The acquisition of FBLIC was accounted for as a purchase. The aggregate purchase price for the acquisition of FBLIC was $13,855,129. The acquisition of FBLIC was financed with the working capital of TLIC.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ended December 31, 2015 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2014.

 

 

Principles of Consolidation

 

The consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

 

Reclassifications

 

Certain reclassifications have been made in the prior year and prior quarter financial statements to conform to current year and current quarter classifications. These reclassifications had no effect on previously reported net income or shareholders' equity.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

 

Common Stock

 

Common stock is fully paid, non-assessable and has a par value of $.01 per share.

 

Treasury Stock

 

Treasury stock represents 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 are no longer outstanding.

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to March 31, 2015 through the date that these financial statements have been issued. On April 15, 2015, the Company loaned $400,000 to its former Chairman. The loan has a term of one year and has a contractual interest rate of 5.50%. The loan is collateralized by 100,000 shares of the Company’s Class A Common stock owned by the former Chairman.

 

Recent Accounting Pronouncements

 

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

        

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

 

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

 

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

 

Revenue from Contracts with Customers

 

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

 

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

 

The updated guidance is effective for the quarter ending March 31, 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.

 

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

 

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

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

        

In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.

 

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

 

 
11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Receivables – Troubled Debt Restructurings by Creditors

 

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. This guidance can be elected for prospective adoption or by using a retrospective transition method. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Amendments to the Consolidation Analysis

 

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

 

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

 

Simplifying the Presentation of Debt Issuance Costs

 

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

 

The updated guidance is effective for reporting periods beginning after December 15, 2015.   Early adoption is permitted.  The adoption of this guidance will not have any effect on the Company’s results of operations, financial position or liquidity.

 

 
12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments

 

Fixed Maturity and Equity Securities Available-For-Sale

 

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

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

March 31, 2015 (Unaudited)

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

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

  $ 2,660,706     $ 161,883     $ 30,894     $ 2,791,695  

States and political subdivisions

    1,638,578       36,652       3,523       1,671,707  

Residential mortgage-backed securities

    66,318       53,134       -       119,452  

Corporate bonds

    91,767,774       4,538,852       778,313       95,528,313  

Foreign bonds

    12,079,533       502,975       173,673       12,408,835  

Total fixed maturity securities

    108,212,909       5,293,496       986,403       112,520,002  

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 

Equity securities

 

Cost

   

Gains

   

Losses

   

Value

 

Mutual funds

    83,081       454       -       83,535  

Corporate preferred stock

    256,299       6,555       320       262,534  

Corporate common stock

    186,521       140,058       -       326,579  

Total equity securities

    525,901       147,067       320       672,648  

Total fixed maturity and equity securities

  $ 108,738,810     $ 5,440,563     $ 986,723     $ 113,192,650  

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2014

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

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

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

States and political subdivisions

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

Residential mortgage-backed securities

    68,242       62,193       -       130,435  

Corporate bonds

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

Foreign bonds

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

Total fixed maturity securities

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

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 

Equity securities

 

Cost

   

Gains

   

Losses

   

Value

 

Mutual funds

    80,879       2,586       -       83,465  

Corporate preferred stock

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

Corporate common stock

    184,214       147,603       -       331,817  

Total equity securities

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

Total fixed maturity and equity securities

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

 

 
13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

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

 

           

Unrealized

   

Number of

 

March 31, 2015 (Unaudited)

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

States and political subdivisions

  $ 300,289     $ 3,523       2  

Corporate bonds

    7,558,260       443,485       28  

Foreign bonds

    3,070,382       173,673       14  

Total less than 12 months

    10,928,931       620,681       44  

More than 12 months

                       

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

    1,099,106       30,894       2  

Corporate bonds

    2,705,235       334,828       14  

Total more than 12 months

    3,804,341       365,722       16  

Total fixed maturity securities

    14,733,272       986,403       60  

Equity securities

                       

Less than 12 months

                       

Corporate preferred stock

    49,680       320       1  

Total equity securities

    49,680       320       1  

Total fixed maturity and equity securities

  $ 14,782,952     $ 986,723       61  

 

           

Unrealized

   

Number of

 

December 31, 2014

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

Corporate bonds

  $ 12,258,681     $ 477,590       47  

Foreign bonds

    3,446,676       194,528       16  

Total less than 12 months

    15,705,357       672,118       63  

More than 12 months

                       

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

    1,360,948       69,052       3  

States and political subdivisions

    105,569       863       1  

Corporate bonds

    2,761,555       407,579       14  

Total more than 12 months

    4,228,072       477,494       18  

Total fixed maturity securities

    19,933,429       1,149,612       81  

Equity securities

                       

Greater than 12 months

                       

Corporate preferred stock

    48,300       1,700       1  

Total equity securities

    48,300       1,700       1  

Total fixed maturity and equity securities

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

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

As of March 31, 2015, the Company held 60 available-for-sale fixed maturity securities with an unrealized loss of $986,403, fair value of $14,733,272 and amortized cost of $15,719,675. These unrealized losses were primarily due to market interest rate movements in the bond market as of March 31, 2015. The ratio of the fair value to the amortized cost of these 60 securities is 94%.

 

However, the Company holds three available-for-sale fixed maturity securities in a mining industry company that when combined have unrealized losses of $270,243, fair values of $338,625 and amortized costs of $608,868. Management’s analysis indicates that this mining industry company will more than likely be able to make principal and interest payments through the maturity of these three securities in 2020 and 2021. The ratio of the fair value to the amortized cost of these three securities was 56%. The ratio of the fair value to the amortized cost of the other 57 securities in an unrealized loss position as of March 31, 2015 is 95% with all 57 securities having a fair value to amortized cost ratio above 76%.

 

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

 

As of March 31, 2015, the Company held one available-for-sale equity security with an unrealized loss of $320, fair value of $49,680 and cost of $50,000. The ratio of fair value to cost of this security is 99%.

 

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

 

Fixed maturity securities were 93% and 95% investment grade as rated by Standard & Poor’s as of March 31, 2015 and December 31, 2014, respectively.

 

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value based on all of the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.

 

For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of operations. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of operations in the periods incurred as the difference between fair value and cost.

 

Based on management’s review, the Company experienced no other-than-temporary impairments during the three months ended March 31, 2015 and the year ended December 31, 2014. Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2015, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.  The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment. 

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

Net unrealized gains 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 March 31, 2015 and December 31, 2014, are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2015

   

December 31, 2014

 

Unrealized appreciation on available-for-sale securities

  $ 4,453,840     $ 3,390,869  

Adjustment to deferred acquisition costs

    (53,929 )     (36,440 )

Deferred income taxes

    (879,981 )     (670,886 )

Net unrealized appreciation on available-for-sale securities

  $ 3,519,930     $ 2,683,543  

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $23,048,210 and $21,781,925 as of March 31, 2015 and December 31, 2014, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of March 31, 2015, by contractual maturity, are summarized as follows:

 

   

March 31, 2015 (Unaudited)

 
   

Fixed Maturity Available-For-Sale Securities

   

Other Long-Term Investments

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Due in one year or less

  $ 2,754,581     $ 2,801,862     $ 3,915,108     $ 3,976,523  

Due in one year through five years

    36,096,965       38,044,550       9,452,822       10,405,428  

Due after five years through ten years

    53,807,893       55,404,752       6,632,945       8,482,488  

Due after ten years

    15,487,152       16,149,386       3,047,335       4,705,400  

Due at multiple maturity dates

    66,318       119,452       -       -  
    $ 108,212,909     $ 112,520,002     $ 23,048,210     $ 27,569,839  

 

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.

 

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate and investment real estate for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 

Proceeds

  $ 1,188,229     $ 3,430,330     $ 526,284     $ -     $ 1,550,599     $ 709,836     $ 7,083,246     $ -  

Gross realized gains

    25,841       279,570       996       -       11,051       17,961       390,202       -  

Gross realized losses

    (1,192 )     (966 )     (2,896 )     -       -       -       -       -  

 

 
16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2015 and 2014 and the amount of realized investment gains on fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate and investment real estate for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2015

   

2014

 

Change in unrealized investment gains:

               

Available-for-sale securities:

               

Fixed maturity securities

  $ 1,067,986     $ 1,363,002  

Equity securities

    (5,015 )     (4,582 )

Net realized investment gains (losses):

               

Available-for-sale securities:

               

Fixed maturity securities

    24,649       278,604  

Equity securities

    (1,900 )     -  

Mortgage loans on real estate

    11,051       17,961  

Investment real estate

    390,202       -  

 

Major categories of net investment income for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2015

   

2014

 

Fixed maturity securities

  $ 1,173,781     $ 1,119,896  

Equity securities

    11,529       10,657  

Other long-term investments

    414,242       415,411  

Mortgage loans

    956,144       453,972  

Policy loans

    25,141       24,943  

Real estate

    187,588       173,195  

Short-term and other investments

    48,192       36,297  

Gross investment income

    2,816,617       2,234,371  

Investment expenses

    (409,057 )     (263,563 )

Net investment income

  $ 2,407,560     $ 1,970,808  

 

TLIC and FBLIC are required to hold assets on deposit with various state insurance departments for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of March 31, 2015 and December 31, 2014, these required deposits, included in investment assets, had amortized costs that totaled $3,966,145 and $3,954,696, respectively. As of March 31, 2015 and December 31, 2014, these required deposits had fair values that totaled $4,105,198 and $4,057,740, respectively.

 

 
17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

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

 

   

March 31, 2015

   

December 31, 2014

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Commercial mortgage loans

                               

Retail stores

  $ 1,603,192       3.52 %   $ 1,635,412       4.23 %

Office buildings

    321,920       0.70 %     327,181       0.85 %

Total commercial mortgage loans

    1,925,112       4.22 %     1,962,593       5.08 %

Residential mortgage loans

    43,654,397       95.78 %     36,687,140       94.92 %

Total mortgage loans

  $ 45,579,509       100.00 %   $ 38,649,733       100.00 %

 

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

 

   

March 31, 2015

   

December 31, 2014

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for sale

    750,047       2,034,478  

Total land

    963,207       2,247,638  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (795,090 )     (758,718 )

Buildings net of accumulated depreciation

    1,472,467       1,508,839  

Building - held for sale

    -       5,408,613  

Total buildings

    1,472,467       6,917,452  

Investment real estate, net of accumulated depreciation

  $ 2,435,674     $ 9,165,090  

 

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-fourth of this land. This building and one and one-half acre of land is held for the production of income. The remaining five acres of land are held for sale. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. This land is held for sale. FTCC also owned a small, undeveloped land parcel in Carthage, Mississippi that was sold during 2014.

 

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

 

In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land. Also in February 2014, TLIC purchased three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land. These buildings and land were also held for sale.

 

 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

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

 

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

 

 

3. Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) on the measurement date.  The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.

 

The Company holds fixed maturity and equity securities that are measured and reported at fair market value on the statement of financial position. The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value, as follows:

 

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

 

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

 

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

 

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

 

 
19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 is summarized as follows:

 

March 31, 2015 (Unaudited)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,791,695     $ -     $ 2,791,695  

States and political subdivisions

    -       1,671,707       -       1,671,707  

Residential mortgage-backed securities

    -       119,452       -       119,452  

Corporate bonds

    -       95,528,313       -       95,528,313  

Foreign bonds

    -       12,408,835       -       12,408,835  

Total fixed maturity securities

  $ -     $ 112,520,002     $ -     $ 112,520,002  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ 3,592     $ 79,943     $ -     $ 83,535  

Corporate preferred stock

    209,554       52,980       -       262,534  

Corporate common stock

    280,079       -       46,500       326,579  

Total equity securities

  $ 493,225     $ 132,923     $ 46,500     $ 672,648  

 

December 31, 2014

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,750,013     $ -     $ 2,750,013  

States and political subdivisions

    -       1,204,153       -       1,204,153  

Residential mortgage-backed securities

    -       130,435       -       130,435  

Corporate bonds

    -       95,193,298       -       95,193,298  

Foreign bonds

    -       11,373,530       -       11,373,530  

Total fixed maturity securities

  $ -     $ 110,651,429     $ -     $ 110,651,429  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ 3,592     $ 79,873     $ -     $ 83,465  

Corporate preferred stock

    203,999       52,076       -       256,075  

Corporate common stock

    285,317       -       46,500       331,817  

Total equity securities

  $ 492,908     $ 131,949     $ 46,500     $ 671,357  

 

As of both March 31, 2015 and December 31, 2014, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. These private placement stocks represent investments in small insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.

 

Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and equity securities available-for-sale are primarily based on prices supplied by a third party investment service. The third party investment service provides quoted prices in the market which use observable inputs in developing such rates.

 

 
20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government, U.S. government agencies, states and political subdivisions, mortgage-backed securities, corporate bonds and foreign bonds.

 

The Company’s equity securities are included in Level 1 and Level 2 and the private placement common stocks are included in Level 3. Level 1 for those equity securities classified as such is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and are based upon unadjusted prices. Level 2 for those equity securities classified as such is appropriate since they are not actively traded as of the measurement dates.

 

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

 

 
21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of March 31, 2015 and December 31, 2014, 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:

 

   

March 31, 2015 (Unaudited)

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,925,112     $ 1,958,153     $ -     $ -     $ 1,958,153  

Residential

    43,654,397       45,872,031       -       -       45,872,031  

Policy loans

    1,461,576       1,461,576       -       -       1,461,576  

Short-term investments

    1,141,837       1,141,837       1,141,837       -       -  

Other long-term investments

    23,048,210       27,569,839       -       -       27,569,839  

Cash and cash equivalents

    17,621,797       17,621,797       17,621,797       -       -  

Accrued investment income

    1,756,739       1,756,739       -       -       1,756,739  

Loans from premium financing

    123,886       123,886       -       -       123,886  

Total financial assets

  $ 90,733,554     $ 97,505,858     $ 18,763,634     $ -     $ 78,742,224  

Financial liabilities

                                       

Policyholders' account balances

  $ 151,496,179     $ 132,634,781     $ -     $ -     $ 132,634,781  

Policy claims

    671,407       671,407       -       -       671,407  

Total financial liabilities

  $ 152,167,586     $ 133,306,188     $ -     $ -     $ 133,306,188  
                                         

 

   

December 31, 2014

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,962,593     $ 2,000,041     $ -     $ -     $ 2,000,041  

Residential

    36,687,140       38,613,679       -       -       38,613,679  

Policy loans

    1,520,620       1,520,620       -       -       1,520,620  

Short-term investments

    1,141,199       1,141,199       1,141,199       -       -  

Other long-term investments

    21,781,925       25,912,178       -       -       25,912,178  

Cash and cash equivalents

    10,158,386       10,158,386       10,158,386       -       -  

Accrued investment income

    1,682,906       1,682,906       -       -       1,682,906  

Loans from premium financing

    123,886       123,886       -       -       123,886  

Total financial assets

  $ 75,058,655     $ 81,152,895     $ 11,299,585     $ -     $ 69,853,310  

Financial liabilities

                                       

Policyholders' account balances

  $ 140,554,973     $ 126,144,182     $ -     $ -     $ 126,144,182  

Notes payable

    4,076,473       4,076,473       -       -       4,076,473  

Policy claims

    602,269       602,269       -       -       602,269  

Total financial liabilities

  $ 145,233,715     $ 130,822,924     $ -     $ -     $ 130,822,924  

 

 
22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

 

The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:

 

Fixed Maturity Securities and Equity Securities

 

The fair value of fixed maturity securities and equity securities are based on the principles previously discussed as Level 1, Level 2 and Level 3.

 

Mortgage Loans on Real Estate

 

The fair values for mortgage loans are estimated using discounted cash flow analyses. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread. For commercial mortgage loans, the discount rate used was assumed to be the interest rate on the last commercial mortgage acquired by the Company.

 

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

 

The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents and short-term investments are included in Level 1 of the fair value hierarchy due to their highly liquid nature.

 

Other Long-Term Investments

 

Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach. Projected cash flows are discounted using the average Citigroup Pension Liability Index in effect at the end of each period.

 

Investment Contracts – Policyholders’ Account Balances

 

The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach.  Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

 

The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.

 

Policy Claims

 

The carrying amounts reported for these liabilities approximate their fair value.

 

Notes Payable

 

The carrying amounts reported for these liabilities approximate their fair value. These notes payable were issued on March 26, 2014 and the current refinancing of these liabilities would result in notes payable yielding approximately the carrying amount as shown in the December 31, 2014 consolidated statement of financial position.

 

 
23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

4. Notes Payable

 

Notes payable as of December 31, 2014 are summarized as follows:

 

   

December 31, 2014

 

Promissory note payable to Grand Bank, secured by real estate and tenant leases located in Indiana, Oklahoma and Texas, 35 monthly payments of interest at 4.50% with a final payment in the 36th month of $3,009,265 of principal plus unpaid accrued interest at 4.50%, maturity date is March 26, 2017

  $ 3,009,265  

Promissory note payable to Grand Bank, secured by real estate and tenant leases located in Missouri, 35 monthly payments of interest at 4.50% with a final payment on the 36th month of $1,067,208 of principal plus unpaid accrued interest at 4.50%, maturity date is March 26, 2017

    1,067,208  

Total promissory notes payable

  $ 4,076,473  

 

On March 11, 2015, the Company sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. The Company recorded a gross profit on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119. In addition, simultaneously with these sales, the Company settled its two notes payable, collateralized by the held for sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473.

 

The $3,009,265 promissory note was collateralized (including assignment of the tenant leases) by three properties, located in Indiana, Oklahoma and Texas, purchased for $4,940,647 in December 2013 and February 2014.

 

In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot building constructed on approximately 8% of this land at a cost of $2,444,203 (including closing costs of $50,516). The building is leased through October 31, 2027 plus four future five year extensions effective on November 1, 2027, November 1, 2032, November 1, 2037 and November 1, 2042. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were as follows: $14,661 in 2014; $14,881 in 2015; $15,104 in 2016; $15,331 in 2017; $15,561 in 2018 and $15,794 in 2019.

 

In December 2013, TLIC also purchased one acre of land in Norman, Oklahoma that included a 9,100 square foot building constructed on approximately 18% of this land at a cost of $1,519,431 (including closing costs of $37,931). The building is leased through August 31, 2028 plus three future five year extensions on September 1, 2028, September 1, 2033 and September 1, 2038. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $8,004 through August 31, 2028.

 

In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land at a cost of $977,013 (including closing costs of $31,063). The building is leased through December 31, 2023 plus four future five year extensions effective on January 1, 2024, January 1, 2029, January 1, 2034 and January 1, 2039. The terms of the lease have the lessee responsible for paying real estate taxes and building insurance. TLIC is responsible for building and ground maintenance. The monthly lease payments were $5,833 through December 31, 2019.

 

The $1,067,208 promissory note was collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864). The building is leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $9,463 through October 31, 2028.

 

 
24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

4. Notes Payable (continued)

 

When the two promissory notes were originated on March 26, 2014, $106,889 of loan origination fees were capitalized with amortization of the capitalized loan origination fees during the 36 month term of the loan. For the year ended December 31, 2014, $26,722 of the loan origination fees has been amortized and the unamortized loan origination fees as of December 31, 2014 were $80,167. The Company incurred $137,581 of interest expense during 2014 on these two notes payable. In connection with the repayments of the two notes payable on March 11, 2015, the Company expensed the loan origination fees remaining as of March 11, 2015 of $72,744. During the period from January 1, 2015 to March 11, 2015, the Company incurred interest expense of $35,181 on the two notes payable and amortized $7,423 of loan origination fees.

 

 

5. Segment Data

 

The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2015

   

2014

 

Revenues:

               

Life insurance operations

  $ 2,863,686     $ 2,513,377  

Annuity operations

    2,184,075       1,661,238  

Corporate operations

    108,926       116,053  

Total

  $ 5,156,687     $ 4,290,668  

Income (loss) before income taxes:

               

Life insurance operations

  $ 102,186     $ (10,567 )

Annuity operations

    115,505       224,041  

Corporate operations

    161,648       52,024  

Total

  $ 379,339     $ 265,498  

Depreciation and amortization expense:

               

Life insurance operations

  $ 345,614     $ 355,287  

Annuity operations

    194,702       149,953  

Corporate operations

    12,726       3,343  

Total

  $ 553,042     $ 508,583  

 

   

(Unaudited)

         
   

March 31, 2015

   

December 31, 2014

 

Assets:

               

Life insurance operations

  $ 44,720,182     $ 44,448,441  

Annuity operations

    178,672,412       167,947,889  

Corporate operations

    6,434,404       6,604,838  

Total

  $ 229,826,998     $ 219,001,168  

 

 
25

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

6. Federal Income Taxes

 

The provision for federal income taxes is based on the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the cumulative temporary differences between balances of assets and liabilities determined under GAAP and the balances using tax bases. A valuation allowance has been established due to the uncertainty of certain loss carryforwards.

 

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions.  The 2011 through 2014 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.

 

 

7. Legal Matters and Contingent Liabilities

 

The Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, filed an action in the District Court of Tulsa County, Oklahoma in 2013, Case No. CJ-2013-03385, against former Company Board of Directors member, Wayne Pettigrew and Mr. Pettigrew’s company, Group & Pension Planners, Inc. (the “Defendants”).  The petition filed in the case alleges that Mr. Pettigrew, during and after the time he was a member of the Company’s Board of Directors, made defamatory statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company.  The defendants are alleged to have made defamatory statements to certain shareholders of the Company, to the press and to the Oklahoma Insurance Department and the Oklahoma Department of Securities.  Mr. Pettigrew has denied the allegations.

 

The Board of Directors, represented by independent counsel, concluded that there was no action to be taken against Mr. Zahn and that the allegations by Mr. Pettigrew were without substance.  The Company has been informed by the Oklahoma Insurance Department that it would take no action and was also informed that the Oklahoma Department of Securities, after its investigation of the allegations, concluded that no proceedings were needed with respect to the alleged matters.

 

It is the Company’s intention to vigorously prosecute this action against the Defendants for damages and for the correction of the defamatory statements.  In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.

 

Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for the Decreasing Term to 95 policies. On November 22, 2013, three individuals who owned Decreasing Term to 95 policies filed a Petition in the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to FBLIC’s decision to not provide a dividend under the Decreasing Term to 95 policies.

 

The Petition asserts claims for breach of contract and anticipatory breach of contract and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. In addition to these claims, the Petition asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act (“MMPA”). It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.

 

 
26

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

7. Legal Matters and Contingent Liabilities (continued)

 

The Petition also seeks to certify a class of individuals with similar claims but no class has been certified by the Court. FBLIC denies the allegations in the Petition and will continue to defend against them. It is the Company’s intention to vigorously defend the request for class certification, as well as to defend vigorously against the individual allegations. FBLIC filed a motion for partial summary judgment seeking summary judgment on the claims for violation of MMPA. This motion for partial summary judgment asked the court to declare that the MMPA does not apply to insurance companies such as FBLIC and enter judgment for FBLIC on the petition. A hearing for the motion of summary judgment was held on February 25, 2015 and it was subsequently denied by the court on March 2, 2015. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action.

 

 

8. Other Comprehensive Income and Accumulated Other Comprehensive Income

 

The changes in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, 2015 and 2014 (Unaudited)

 
   

Unrealized

           

Accumulated

 
   

Appreciation on

   

Adjustment to

   

Other

 
   

Available-For-Sale

   

Deferred Acquisition

   

Comprehensive

 
   

Securities

   

Costs

   

Income

 

Balance as of January 1, 2015

  $ 2,712,694     $ (29,151 )   $ 2,683,543  

Other comprehensive income before reclassifications, net of tax

    868,576       (13,990 )     854,586  

Less amounts reclassified from accumulated other comprehensive income, net of tax

    18,199       -       18,199  

Other comprehensive income

    850,377       (13,990 )     836,387  

Balance as of March 31, 2015

  $ 3,563,071     $ (43,141 )   $ 3,519,930  
                         

Balance as of January 1, 2014

  $ 1,888,498     $ (10,341 )   $ 1,878,157  

Other comprehensive income before reclassifications, net of tax

    1,323,988       (7,608 )     1,316,380  

Less amounts reclassified from accumulated other comprehensive income, net of tax

    237,252       -       237,252  

Other comprehensive income

    1,086,736       (7,608 )     1,079,128  

Balance as of March 31, 2014

  $ 2,975,234     $ (17,949 )   $ 2,957,285  

 

 
27

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

8. Other Comprehensive Income and Accumulated Other Comprehensive Income (continued)

 

The pretax components of the Company’s other comprehensive income and the related income tax expense for each component for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, 2015 (Unaudited)

 
           

Income Tax

         
           

Expense

         
   

Pretax

   

(Benefit)

   

Net of Tax

 

Other comprehensive income:

                       

Change in net unrealized gains on available-for-sale securities:

                       

Unrealized holding gains arising during the period

  $ 1,085,720     $ 217,144     $ 868,576  

Reclassification adjustment for gains included in income

    (22,749 )     (4,550 )     (18,199 )

Net unrealized gains on investments

    1,062,971       212,594       850,377  

Adjustment to deferred acquisition costs

    (17,489 )     (3,499 )     (13,990 )

Total other comprehensive income

  $ 1,045,482     $ 209,095     $ 836,387  

 

   

Three Months Ended March 31, 2014 (Unaudited)

 
           

Income Tax

         
           

Expense

         
   

Pretax

   

(Benefit)

   

Net of Tax

 

Other comprehensive income:

                       

Change in net unrealized gains on available-for-sale securities:

                       

Unrealized holding gains arising during the period

  $ 1,654,985     $ 330,997     $ 1,323,988  

Reclassification adjustment for gains included in income

    (296,565 )     (59,313 )     (237,252 )

Net unrealized gains on investments

    1,358,420       271,684       1,086,736  

Adjustment to deferred acquisition costs

    (9,510 )     (1,902 )     (7,608 )

Total other comprehensive income

  $ 1,348,910     $ 269,782     $ 1,079,128  

 

Realized gains and losses on the sales of investments are determined based upon the specific identification method and include provisions for other-than-temporary impairments where appropriate.

 

The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statement of operations for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 

Reclassification Adjustments

 

2015

   

2014

 

Unrealized gains on available-for-sale securities:

               

Realized gains on sales of securities (a)

  $ 22,749     $ 296,565  

Income tax expenses (b)

    4,550       59,313  

Total reclassification adjustments

  $ 18,199     $ 237,252  

 

(a)

These items appear within net realized investment gains in the consolidated statement of operations.

(b)

These items appear within federal income taxes in the consolidated statement of operations.

 

 
28

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

9. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing

 

The allowance for possible loan losses from investments in mortgage loans on real estate and loans from premium financing is a reserve established through a provision for possible loan losses charged to expense which represents, in the Company’s judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan and premium financing loan portfolios. The allowance, in the judgment of the Company, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan and premium finance loan portfolios and reduces the carrying value of investments in mortgage loans on real estate and premium finance loans to the estimated net realizable value on the consolidated statement of financial position.

 

While the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the residential and commercial mortgage loan and premium finance loan portfolios, the economy and changes in interest rates. The Company’s allowance for possible mortgage loan and premium finance loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.

 

Mortgage loans and premium finance loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan or premium finance loan agreement. Factors considered by the Company in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan, and the probability of collecting scheduled principal and interest payments when due. Mortgage loans and premium finance loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

 

The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan or premium finance loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.

 

As of March 31, 2015, $538,589 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in $15,327,247 of mortgage loans on real estate with one loan originator. In addition, the Company has an additional $151,069 allowance for possible loan losses in the remaining $30,252,262 of investments in mortgage loans on real estate as of March 31, 2015. As of December 31, 2014, $540,049 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in $12,892,150 of mortgage loans on real estate with one loan originator. In addition, the Company had an additional $126,466 allowance for possible loan losses in the remaining $25,757,583 of investments in mortgage loans on real estate as of December 31, 2014.

 

Through June 30, 2012, FTCC financed amounts up to 80% of the premium on property and casualty insurance policies after a 20% or greater down payment was made by the policy owner. The premiums financed were collateralized by the amount of the unearned premium of the insurance policy. Policies that became delinquent were submitted for cancellation and recovery of the unearned premium, up to the amount of the loan balance, 25 days after a payment became delinquent. Loans from premium financing of $321,244 as of both March 31, 2015 and December 31, 2014, respectively, are carried net of estimated loan losses of $197,358 as of both March 31, 2015 and December 31, 2014, respectively. The Company has made no premium financing loans since June 30, 2012. FTCC currently has no operations other than minor premium refunds, collections of past due accounts and accounts involved in litigation.

 

 
29

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

9. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing

 (continued)

 

The balances of and changes in the Company’s credit losses related to mortgage loans on real estate and loans from premium financing as of and for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

As of and for the Three Months Ended March 31,

 
   

Residential Mortgage Loans

   

Commercial Mortgage Loans

   

Premium Finance Loans

   

Total

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 

Allowance, beginning

  $ 116,604     $ 50,210     $ 9,862     $ 7,985     $ 197,358     $ 206,858     $ 323,824     $ 265,053  

Charge offs

    -       -       -       -       -       -       -       -  

Recoveries

    -       -       -       -       -       -       -       -  

Provision

    24,791       15,188       (188 )     2,415       -       -       24,603       17,603  

Allowance, ending

  $ 141,395     $ 65,398     $ 9,674     $ 10,400     $ 197,358     $ 206,858     $ 348,427     $ 282,656  
                                                                 

Allowance, ending:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ 192,876     $ 202,376     $ 192,876     $ 202,376  

Collectively evaluated for impairment

  $ 141,395     $ 65,398     $ 9,674     $ 10,400     $ 4,482     $ 4,482     $ 155,551     $ 80,280  
                                                                 

Carrying Values:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ 316,762     $ 335,761     $ 316,762     $ 335,761  

Collectively evaluated for impairment

  $ 43,654,397     $ 21,107,941     $ 1,925,112     $ 2,079,568     $ 4,482     $ 4,482     $ 45,583,991     $ 23,191,991  

 

The Company utilizes the ratio of the carrying value of individual residential and commercial mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s residential and commercial mortgage loans on real estate by credit quality using this ratio as of March 31, 2015 and December 31, 2014 are summarized as follows:

 

       

Residential Mortgage Loans

   

Commercial Mortgage Loans

   

Total Mortgage Loans

 

Loan to Value Ratio

 

March 31, 2015

   

December 31, 2014

   

March 31, 2015

   

December 31, 2014

   

March 31, 2015

   

December 31, 2014

 
71% to 80%   $ 11,630,199     $ 9,049,051     $ -     $ -     $ 11,630,199     $ 9,049,051  
61% to  70%     14,210,799       11,129,632       930,747       938,703       15,141,546       12,068,335  
51% to  60%     6,953,329       6,176,648       197,952       201,352       7,151,281       6,378,000  
41% to  50%     8,652,742       7,734,658       398,053       409,338       9,050,795       8,143,996  
31% to  40%     1,408,933       1,635,865       398,360       405,152       1,807,293       2,041,017  
21% to  30%     288,338       448,381       -       -       288,338       448,381  
11% to  20%     383,504       87,634       -       -       383,504       87,634  
1%  to  10%     126,553       425,271       -       8,048       126,553       433,319  
  Total     $ 43,654,397     $ 36,687,140     $ 1,925,112     $ 1,962,593     $ 45,579,509     $ 38,649,733  

 

 
30

 

 

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

 

Overview

 

First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets.

 

As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC and FBLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households 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, Virginia and West Virginia through independent agents.

 

We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.

 

Acquisitions 

 

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of FLAC, included in the life insurance and annuity segments, for $2,500,000 and had additional acquisition related expenses of $195,000. In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of FBLIC, also included in the life insurance and annuity segments, for $13,855,129.

 

Our profitability in the life insurance and annuity segments is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired, administer life insurance company acquisitions at an expense level that validates the acquisition cost and invest the premiums and annuity considerations in assets that earn investment income with a positive spread.

 

Critical Accounting Policies and Estimates 

 

The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, allowance for loan losses from mortgages and premium financing, value of insurance business acquired, policy liabilities, regulatory requirements, contingencies and litigation. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

For a description of the Company’s critical accounting policies and estimates, please refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  The Company considers its most critical accounting estimates to be those applied to investments in fixed maturity and equity securities, mortgage loans on real estate, deferred policy acquisition costs, value of insurance business acquired and future policy benefits. There have been no material changes to the Company’s critical accounting policies and estimates since December 31, 2014.

 

 
31

 

 

Recent Accounting Pronouncements

 

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

        

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

 

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

 

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

 

Revenue from Contracts with Customers

 

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

 

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

 

The updated guidance is effective for the quarter ending March 31, 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.

 

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

 

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

 

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

 

 
32

 

 

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

 

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

 

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

 

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

 

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

 

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

        

In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.

 

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

 

Receivables – Troubled Debt Restructurings by Creditors

 

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. This guidance can be elected for prospective adoption or by using a retrospective transition method. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Amendments to the Consolidation Analysis

 

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

 

 
33

 

 

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

 

Simplifying the Presentation of Debt Issuance Costs

 

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

 

The updated guidance is effective for reporting periods beginning after December 15, 2015.   Early adoption is permitted.  The adoption of this guidance will not have any effect on the Company’s results of operations, financial position or liquidity.

 

Business Segments

 

FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology. 

 

Our business segments are as follows:

 

 

Life insurance operations, consisting of the life insurance operations of TLIC and FBLIC;

 

Annuity operations, consisting of the annuity operations of TLIC and FBLIC and

 

Corporate operations, which includes the results of the parent company and FTCC after the elimination of intercompany amounts.

 

Please see below and Note 5 to the Consolidated Financial Statements for the three months ended March 31, 2015 and 2014 and as of March 31, 2015 and December 31, 2014 for additional information regarding segment information.

 

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.

 

 
34

 

 

FINANCIAL HIGHLIGHTS

 

Consolidated Condensed Results of Operations for the Three Months Ended March 31, 2015 and 2014

 

   

(Unaudited)

    Increase     Percentage  
   

Three Months Ended March 31,

   

(Decrease)

   

Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Premiums

  $ 2,320,314     $ 2,009,983     $ 310,331       15.4 %

Net investment income

    2,407,560       1,970,808       436,752       22.2 %

Net realized investment gains

    424,002       296,565       127,437       43.0 %

Other income

    4,811       13,312       (8,501 )     -63.9 %

Total revenues

    5,156,687       4,290,668       866,019       20.2 %

Benefits and claims

    3,153,819       2,522,287       631,532       25.0 %

Expenses

    1,623,529       1,502,883       120,646       8.0 %

Total benefits, claims and expenses

    4,777,348       4,025,170       752,178       18.7 %

Income before federal income tax expense

    379,339       265,498       113,841       42.9 %

Federal income tax expense

    16,309       22,344       (6,035 )     -27.0 %

Net income

  $ 363,030     $ 243,154     $ 119,876       49.3 %

Net income per common share basic and diluted

  $ 0.05     $ 0.03     $ 0.02          

 

Consolidated Condensed Financial Position as of March 31, 2015 and December 31, 2014

 

   

(Unaudited)

    December 31,    

Increase (Decrease)

   

Percentage Change

 
   

March 31, 2015

   

 2014

    2015 to 2014     2015 to 2014  
                                 
                                 

Investment assets

  $ 186,859,456     $ 183,581,353     $ 3,278,103       1.8 %

Other assets

    42,967,542       35,419,815       7,547,727       21.3 %

Total assets

  $ 229,826,998     $ 219,001,168     $ 10,825,830       4.9 %
                                 

Policy liabilities

  $ 188,942,888     $ 177,158,120     $ 11,784,768       6.7 %

Notes payable

    -       4,076,473       (4,076,473 )     -100.0 %

Deferred federal income taxes

    2,349,193       2,198,753       150,440       6.8 %

Other liabilities

    4,163,805       2,357,484       1,806,321       76.6 %

Total liabilities

    195,455,886       185,790,830       9,665,056       5.2 %

Shareholders' equity

    34,371,112       33,210,338       1,160,774       3.5 %

Total liabilities and shareholders' equity

  $ 229,826,998     $ 219,001,168     $ 10,825,830       4.9 %
                                 

Shareholders' equity per common share

  $ 4.41     $ 4.25     $ 0.16          

 

 
35

 

 

Results of Operations – Three Months Ended March 31, 2015 and 2014

 

Revenues

 

Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period.

 

Our revenues for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

(Unaudited)

   

Increase

    Percentage  
   

Three Months Ended March 31,

   

(decrease)

   

 Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Premiums

  $ 2,320,314     $ 2,009,983     $ 310,331       15.4 %

Net investment income

    2,407,560       1,970,808       436,752       22.2 %

Net realized investment gains

    424,002       296,565       127,437       43.0 %

Other income

    4,811       13,312       (8,501 )     -63.9 %

Total revenues

  $ 5,156,687     $ 4,290,668     $ 866,019       20.2 %

 

The $866,019 increase in total revenues for the three months ended March 31, 2015 is discussed below.

 

Premiums

 

Our premiums for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

(Unaudited)

            Percentage  
   

Three Months Ended March 31,

   

Increase

   

 Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Whole life and term first year

  $ 21,241     $ 19,532     $ 1,709       8.7 %

Whole life and term renewal

    762,835       721,574       41,261       5.7 %

Final expense first year

    391,821       186,785       205,036       109.8 %

Final expense renewal

    1,144,417       1,082,092       62,325       5.8 %

Total premiums

  $ 2,320,314     $ 2,009,983     $ 310,331       15.4 %

 

The $310,331 increase in premiums for the three months ended March 31, 2015 is primarily due to a $205,036 increase in final expense first year premiums due to increased production from the expansion of FBLIC into additional states. There was also a $62,325 increase in final expense renewal premiums reflecting the persistency of prior years’ final expense production. The increase in whole life and term renewal premiums was primarily due to $65,995 of supplemental contract with life contingency considerations.

 

 
36

 

 

Net Investment Income

 

The major components of our net investment income for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

(Unaudited)

   

Increase

    Percentage  
   

Three Months Ended March 31,

   

(Decrease)

   

Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Fixed maturity securities

  $ 1,173,781     $ 1,119,896     $ 53,885       4.8 %

Equity securities

    11,529       10,657       872       8.2 %

Other long-term investments

    414,242       415,411       (1,169 )     -0.3 %

Mortgage loans

    956,144       453,972       502,172       110.6 %

Policy loans

    25,141       24,943       198       0.8 %

Real estate

    187,588       173,195       14,393       8.3 %

Short-term and other investments

    48,192       36,297       11,895       32.8 %

Gross investment income

    2,816,617       2,234,371       582,246       26.1 %

Investment expenses

    (409,057 )     (263,563 )     145,494       -55.2 %

Net investment income

  $ 2,407,560     $ 1,970,808     $ 436,752       22.2 %

 

The $582,246 increase in gross investment income for the three months ended March 31, 2015 is due to the 2015 investments in mortgage loans and fixed maturity securities. In the twelve months since March 31, 2014, our investments in mortgage loans have increased approximately $22.4 million. In addition, in the twelve months since March 31, 2014, our investments in fixed maturity securities have increased approximately $6.0 million.

 

The $145,494 increase in investment expenses for the three months ended March 31, 2015 is primarily related to fees and expenses associated with the increased investments in mortgage loans and expenses incurred with the sale of investment real estate on March 11, 2015. The investment real estate sale included expensing the remaining loan origination fees, interest on the note payable and closing costs.

 

Net Realized Investment Gains

 

There was a $127,437 increase in net realized investment gains for the three months ended March 31, 2015.

 

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $24,649 for the three months ended March 31, 2015 resulted from proceeds of $1,188,229 for these securities that had carrying values of $1,163,580 at the 2015 disposal dates.

 

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $278,604 for the three months ended March 31, 2014 resulted from proceeds of $3,430,330 for these securities that had carrying values of $3,151,726 at the 2014 disposal dates.

 

The net realized investment losses from the sales of equity securities available-for-sale of $1,900 for the three months ended March 31, 2015 resulted from proceeds of $526,284 for these securities that had carrying values of $528,184 at the 2015 disposal dates.

 

The net realized investment gains from mortgage loans on real estate of $11,051for the three months ended March 31, 2015 resulted from the early pay off of mortgage loans that the Company had acquired at a discount price.

 

The net realized investment gains from mortgage loans on real estate of $17,961 for the three months ended March 31, 2014 resulted from the early pay off of mortgage loans that the Company had acquired at a discount price.

 

 
37

 

 

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

 

We have recorded no other-than-temporary impairments in 2015 and 2014.

 

Total Benefits, Claims and Expenses

 

Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period.

 

Our benefits, claims and expenses for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

(Unaudited)

    Increase     Percentage  
   

Three Months Ended March 31,

   

 (Decrease)

   

Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Benefits and claims

                               

Increase in future policy benefits

  $ 791,311     $ 619,972     $ 171,339       27.6 %

Death benefits

    918,791       722,449       196,342       27.2 %

Surrenders

    142,394       91,446       50,948       55.7 %

Interest credited to policyholders

    1,247,890       1,022,210       225,680       22.1 %

Dividend, endowment and supplementary life contract benefits

    53,433       66,210       (12,777 )     -19.3 %

Total benefits and claims

    3,153,819       2,522,287       631,532       25.0 %

Expenses

                               

Policy acquisition costs deferred

    (971,951 )     (528,162 )     (443,789 )     84.0 %

Amortization of deferred policy acquisition costs

    394,460       281,282       113,178       40.2 %

Amortization of value of insurance business acquired

    99,958       105,854       (5,896 )     -5.6 %

Commissions

    870,146       510,450       359,696       70.5 %

Other underwriting, insurance and acquisition expenses

    1,230,916       1,133,459       97,457       8.6 %

Total expenses

    1,623,529       1,502,883       120,646       8.0 %

Total benefits, claims and expenses

  $ 4,777,348     $ 4,025,170     $ 752,178       18.7 %

 

The $752,178 increase in total benefits, claims and expenses for the three months ended March 31, 2015 is discussed below.

 

Benefits and Claims

 

The $631,532 increase in benefits and claims for the three months ended March 31, 2015 is primarily due to the following:

 

 

$225,680 increase in interest credited to policyholders is primarily due to an increase of approximately $30.8 million in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits in excess of withdrawals) since March 31, 2014.

 

 

$196,342 increase in death benefits is primarily due to 23 additional final expense claims at an average of approximately $12,400 per claim. The increased final expense mortality was offset by less mortality in the other lines. Final expense mortality is above actuarial estimates when the products were introduced but management and actuarial analysis continues to conclude that its final expense products are profitable.

 

 

$171,339 increase in future policy benefits primarily related to the production of new policies and the existing policies in force aging one additional year.

 

 
38

 

 

Deferral and Amortization of Deferred Acquisition Costs

 

Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies. Certain costs related to the successful acquisition of insurance and annuity policies that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies. These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring life insurance, which vary with, and are primarily related to, the successful production of new and renewal insurance and annuity contracts.

 

For the three months ended March 31, 2015 and 2014, capitalized costs were $971,951 and $528,162, respectively. Amortization of deferred policy acquisition costs for the three months ended March 31, 2015 and 2014 were $394,460 and $281,282, respectively.

 

The $443,789 increase in the acquisition costs deferred primarily relates to increased production of final expense and annuity products. The $113,178 increase in the 2015 amortization of deferred acquisition costs is primarily due to increased final expense mortality and surrenders of life insurance products.

 

Amortization of Value of Insurance Business Acquired

 

The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $99,958 and $105,854 for the three months ended March 31, 2015 and 2014, respectively. The $5,896 decrease in the 2015 amortization of value of insurance business acquired primarily is as expected.

 

Commissions

 

Our commissions for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

(Unaudited)

            Percentage  
   

Three Months Ended March 31,

   

Increase

   

Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Annuity

  $ 262,788     $ 165,343     $ 97,445       58.9 %

Whole life and term first year

    17,849       15,884       1,965       12.4 %

Whole life and term renewal

    31,022       26,657       4,365       16.4 %

Final expense first year

    461,176       207,133       254,043       122.6 %

Final expense renewal

    97,311       95,433       1,878       2.0 %

Total commissions

  $ 870,146     $ 510,450     $ 359,696       70.5 %

 

The $359,696 increase in commissions for the three months ended March 31, 2015 is primarily due to:

 

 

$254,043 increase in final expense first year commissions that correspond to the $205,036 increase in final expense first year premiums.

 

 

$97,445 increase in annuity first year, single and renewal commissions that corresponds to $4,546,010 of increased annuity considerations deposited.

 

 
39

 

 

Other Underwriting, Insurance and Acquisition Expenses

 

The $97,457 increase in other underwriting, insurance and acquisition expenses for the three months ended March 31, 2015 is primarily due to increased acquisition costs associated with the increased final expense and annuity production. 

 

Federal Income Taxes

 

FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or FBLIC. TLIC and FBLIC are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, in 2014 and 2013, TLIC and FBLIC filed combined life insurance company 2013 and 2012 federal tax returns and intend to also file a combined life insurance company 2014 federal tax return for TLIC and FBLIC in 2015. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.

 

For the three months ended March 31, 2015 and 2014, current income tax expense was $74,965 and $50,259, respectively. Deferred federal income tax benefits were $58,656 and $27,915 for the three months ended March 31, 2015 and 2014, respectively.

 

Net Income Per Common Share Basic and Diluted

 

Net income was $363,030 ($0.05 per common share basic and diluted) and $243,154 ($0.03 per common share basic and diluted) for the three months ended March 31, 2015 and 2014, respectively.

 

Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the three months ended March 31, 2015 and 2014 were 7,810,467 and 7,835,376, respectively.

 

Business Segments

 

The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment.

 

The revenues and income (loss) before federal income taxes from our business segments for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

(Unaudited)

    Increase     Percentage  
   

Three Months Ended

   

(Decrease)

   

Change

 
   

2015

   

2014

    2015 to 2014     2015 to 2014  

Revenues:

                               

Life insurance operations

  $ 2,863,686     $ 2,513,377     $ 350,309       13.9 %

Annuity operations

    2,184,075       1,661,238       522,837       31.5 %

Corporate operations

    108,926       116,053       (7,127 )     -6.1 %

Total

  $ 5,156,687     $ 4,290,668     $ 866,019       20.2 %

Income (loss) before income taxes:

                               

Life insurance operations

  $ 102,186     $ (10,567 )   $ 112,753       1067.0 %

Annuity operations

    115,505       224,041       (108,536 )     -48.4 %

Corporate operations

    161,648       52,024       109,624       210.7 %

Total

  $ 379,339     $ 265,498     $ 113,841       42.9 %

 

 
40

 

 

Life Insurance Operations

 

The $350,309 increase in revenues from Life Insurance Operations for the three months ended March 31, 2015 is primarily due to the following:

 

 

$310,331 increase in premiums

 

 

$34,719 increase in net investment income

 

 

$13,504 increase in net realized investment gains

 

 

$8,245 decrease in other income

 

The $112,753 increased profitability from Life Insurance Operations for the three months ended March 31, 2015 is primarily due to the following:

 

 

$310,331 increase in premiums

 

 

$220,687 increase in policy acquisition costs deferred net of amortization

 

 

$153,985 decrease in other underwriting, insurance and acquisition expenses

 

 

$55,875 decrease in amortization of value of insurance business acquired

 

 

$34,719 increase in net investment income

 

 

$13,504 increase in net realized investment gains

 

 

$12,777 decrease in dividend, endowment and supplementary life contract benefits

 

 

$8,245 decrease in other income

 

 

$50,948 increase in surrenders

 

 

$171,339 increase in future policy benefits

 

 

$196,342 increase in death benefits

 

 

$262,251 increase in commissions

 

Annuity Operations

 

The $522,837 increase in revenues from Annuity Operations for the three months ended March 31, 2015 is due to the following:

 

 

$408,904 increase in net investment income

 

 

$113,933 increase in net realized investment gains

 

The $108,536 decreased profitability from Annuity Operations for the three months ended March 31, 2015 is due to the following:

 

 

$368,193 increase in other underwriting, insurance and acquisition expenses

 

 

$225,680 increase in interest credited to policyholders

 

 
41

 

 

 

$97,445 increase in commissions

 

 

$49,979 increase in amortization of value of insurance business acquired

 

 

$109,924 increase in policy acquisition costs deferred net of amortization

 

 

$113,933 increase in net realized investment gains

 

 

$408,904 increase in net investment income

 

Corporate Operations

 

The $7,127 decrease in revenues from Corporate Operations for the three months ended March 31, 2015 is primarily due to $6,871 of decreased net investment income and $256 of decreased other income.

 

The $109,624 increased Corporate Operations profitability for the three months ended March 31, 2015 is primarily due to $116,751 of decreased operating expenses that exceeded $6,871 of decreased net investment income and $256 of decreased other income. The decreased Corporate segment operating expenses relate to decreased expenses incurred by that segment since we are focused on expanding the life insurance and annuity operations of TLIC and FBLIC. The focus of our marketing and executive team is on expanding FBLIC into additional states utilizing final expense and annuity products. There is also significant marketing and executive focus on increasing TLIC production of life insurance and annuity products in TLIC’s current eight licensed states.

 

Consolidated Financial Condition

 

Our invested assets as of March 31, 2015 and December 31, 2014 are summarized as follows:

 

   

(Unaudited)

    December 31,    

Increase (Decrease)

   

Percentage Change

 
   

March 31, 2015

   

2014

    2015 to 2014     2015 to 2014  

Assets

                               

Investments

                               

Available-for-sale fixed maturity securities at fair value (amortized cost: $108,212,909 and $107,412,322, as of March 31, 2015 and December 31, 2014, respectively)

  $ 112,520,002     $ 110,651,429     $ 1,868,573       1.7 %

Available-for-sale equity securities at fair value (cost: $525,901 and $519,595 as of March 31, 2015 and December 31, 2014, respectively)

    672,648       671,357       1,291       0.2 %

Mortgage loans on real estate

    45,579,509       38,649,733       6,929,776       17.9 %

Investment real estate

    2,435,674       9,165,090       (6,729,416 )     -73.4 %

Policy loans

    1,461,576       1,520,620       (59,044 )     -3.9 %

Short-term investments

    1,141,837       1,141,199       638       0.1 %

Other long-term investments

    23,048,210       21,781,925       1,266,285       5.8 %

Total investments

  $ 186,859,456     $ 183,581,353     $ 3,278,103       1.8 %

 

The $1,868,573 increase in available-for-sale fixed maturity securities for the three months ended March 31, 2015 is primarily due to purchases of $2,170,526 in excess of sales and maturities of $1,188,229, net realized investment gains of $24,649, increase in unrealized appreciation of $1,067,986 and premium amortization of $206,359. This portfolio is reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies, U. S. government and government agencies, states and political subdivisions and foreign securities.

 

As of March 31, 2015, we held 60 available-for-sale fixed maturity securities with an unrealized loss of $986,403, fair value of $14,733,272 and amortized cost of $15,719,675.

 

 
42

 

 

The $1,291 increase in available-for-sale equity securities for the three months ended March 31, 2015 is primarily due to purchases of $534,687, sales of $526,284, net realized investment losses of $1,900, a $5,015 decrease in unrealized appreciation of available-for-sale equity securities and $197 of premium amortization. This portfolio is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale equity securities portfolio is invested in several companies.

 

As of March 31, 2015, we held one available-for-sale equity security with an unrealized loss of $320, fair value of $49,680 and cost of $50,000.

 

The $6,929,776 increase in mortgage loans for the three months ended March 31, 2015 is primarily due to the purchase of $8,455,196 of mortgage loans, $26,000 capitalization of loan origination fees, $11,051 of realized gains on the early pay off of loans purchased at a discount, discount accretion of $22,051 less principal payments of $1,550,599, charges to the allowance for bad debts of $24,603 and $9,320 of amortization of loan origination fees.

 

The $1,266,285 increase in other long-term investments (comprised of lottery receivables) for the three months ended March 31, 2015 is primarily due to purchases of $2,022,600 and accretion of discount of $414,261 less principal payments of $1,170,576. 

 

The $6,729,416 decrease in investment real estate is primarily due to our March 11, 2015 sale of investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. The Company recorded a gross profit on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119. The remaining $36,372 difference is the depreciation of the Topeka building.

 

Our assets other than invested assets as of March 31, 2015 and December 31, 2014 are summarized as follows:

 

   

(Unaudited)

    December 31,    

Increase (Decrease)

   

Percentage Change

 
   

March 31, 2015

   

2014

    2015 to 2014     2015 to 2014  
                                 

Cash and cash equivalents

  $ 17,621,797     $ 10,158,386     $ 7,463,411       73.5 %

Accrued investment income

    1,756,739       1,682,906       73,833       4.4 %

Recoverable from reinsurers

    1,214,234       1,222,245       (8,011 )     -0.7 %

Agents' balances and due premiums

    705,311       562,146       143,165       25.5 %

Deferred policy acquisition costs

    9,847,853       9,287,851       560,002       6.0 %

Value of insurance business acquired

    6,574,456       6,674,414       (99,958 )     -1.5 %

Property and equipment, net

    71,069       84,001       (12,932 )     -15.4 %

Other assets

    5,176,083       5,747,866       (571,783 )     -9.9 %

Assets other than investment assets

  $ 42,967,542     $ 35,419,815     $ 7,547,727       21.3 %

 

The $143,165 increase in agents’ balances and due premiums is primarily due to a $149,128 increase in agents’ balances. This increase is due to increased production of annuity contracts and final expense policies.

 

Other assets consist primarily of recoverable federal and state income taxes, receivables from mortgage loans and other long-term assets (lottery receivables), guaranty funds, notes receivable, prepaid expenses, other receivables and loans from premium financing.

 

The $571,793 decrease in other assets is primarily due to an $840,330 decrease in receivables from mortgage loans and other long-term assets (lottery receivables) less $252,654 of increased recoverable federal and state income taxes.

 

 
43

 

 

Our liabilities as of March 31, 2015 and December 31, 2014 are summarized as follows:

 

   

(Unaudited)

    December 31,    

Increase (Decrease)

   

Percentage Change

 
   

March 31, 2015

   

2014

    2015 to 2014     2015 to 2014  
                                 

Policy liabilities

                               

Policyholders' account balances

  $ 151,496,179     $ 140,554,973     $ 10,941,206       7.8 %

Future policy benefits

    36,708,320       35,913,730       794,590       2.2 %

Policy claims

    671,407       602,269       69,138       11.5 %

Other policy liabilities

    66,982       87,148       (20,166 )     -23.1 %

Total policy liabilities

    188,942,888       177,158,120       11,784,768       6.7 %

Notes payable

    -       4,076,473       (4,076,473 )     -100.0 %

Deferred federal income taxes

    2,349,193       2,198,753       150,440       6.8 %

Other liabilities

    4,163,805       2,357,484       1,806,321       76.6 %

Total liabilities

  $ 195,455,886     $ 185,790,830     $ 9,665,056       5.2 %

 

The $11,784,768 increase in policy liabilities is primarily due to deposits on annuity and deposit-type contracts exceeding withdrawals by $9,693,316, interest credited to policyholders’ account balances of $1,247,890 and increased future policy benefit reserves of $794,590.

 

On March 11, 2015, the Company sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. The Company recorded a gross profit on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119. In addition, simultaneously with these sales, the Company settled its two notes payable, collateralized by the held for sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473.

 

On March 26, 2014, we issued two notes payable totaling $4,076,473. The first note payable totaling $3,009,265 was collateralized (including assignment of the tenant leases) by three properties, located in Indiana, Oklahoma and Texas, purchased for a total of $4,940,647 in December 2013 and February 2014.

 

In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot building constructed on approximately 8% of this land at a cost of $2,444,203 (including closing costs of $50,516). The building is leased through October 31, 2027 plus four future five year extensions effective on November 1, 2027, November 1, 2032, November 1, 2037 and November 1, 2042. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are as follows: $14,661 in 2014; $14,881 in 2015; $15,104 in 2016; $15,531 in 2017; $15,561 in 2018 and $15,794 in 2019.

 

In December 2013, TLIC also purchased one acre of land in Norman, Oklahoma that included a 9,100 square foot building constructed on approximately 18% of this land at a cost of $1,519,431 (including closing costs of $37,931). The building is leased through August 31, 2028 plus three future five year extensions on September 1, 2028, September 1, 2033 and September 1, 2038. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $8,004 through August 31, 2028.

 

In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land at a cost of $977,013 (including closing costs of $31,063). The building is leased through December 31, 2023 plus four future five year extensions effective on January 1, 2024, January 1, 2029, January 1, 2034 and January 1, 2039. The terms of the lease have the lessee responsible for paying real estate taxes and building insurance. TLIC is responsible for building and ground maintenance. The monthly lease payments are $5,833 through December 31, 2019.

 

 
44

 

 

The second promissory note totaling $1,067,208 was collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864). The building is leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $9,463 through October 31, 2028.

 

When the two promissory notes were originated on March 26, 2014, $106,889 of loan origination fees were capitalized with amortization of the capitalized loan origination fees during the 36 month term of the loan. For the year ended December 31, 2014, $26,722 of the loan origination fees has been amortized and the unamortized loan origination fees as of December 31, 2014 were $80,167. The Company incurred $137,581 of interest expense during 2014 on these two notes payable. In connection with the repayments of the two notes payable on March 11, 2015, the Company expensed the loan origination fees remaining as of March 11, 2015 of $72,744. During the period from January 1, 2015 to March 11, 2015, the Company incurred interest expense of $35,181 on the two notes payable and amortized $7,423 of loan origination fees.

 

The $150,440 increase in deferred federal income taxes during the three months ended March 31, 2015 was due to $209,095 of increased deferred federal income taxes on the unrealized appreciation of available-for-sale fixed maturity and equity securities. This increase was offset by $58,656 of operating deferred tax benefits.

 

Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, estimated guaranty fund assessment liability, unearned investment income and purchase of securities where the trade date and settlement date are in different accounting periods. The $1,806,321 increase in other liabilities is primarily due to a $1,496,118 increase in deposits on pending applications and a $276,418 increase in payables for securities purchased that have not settled.

 

Liquidity and Capital Resources

 

Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through March 31, 2015, we have received $27,119,480 from the sale of our shares.

 

The Company raised $1,450,000 from two private placements 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.

 

Our operations have been profitable and have generated $8,250,167 of net income from operations since we were incorporated in 2004. The Company also issued 702,705 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 $5,270,288 with an offsetting credit of $5,270,288 to common stock and additional paid-in capital.

 

The historic impact of these two stock dividend charges of $5,270,288 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of March 31, 2015 of $2,979,879, as shown in the accumulated earnings caption in the March 31, 2015 consolidated statement of financial position.

 

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.

 

As of March 31, 2015, we had cash and cash equivalents totaling $17,621,797. As of March 31, 2015, cash and cash equivalents of $9,980,833 and $6,506,600, respectively, of the total $17,621,797 were held by TLIC and FBLIC and may not be available for use by FTFC due to the required pre-approval by the OID and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.

 

 
45

 

 

Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $2,167,518 in 2015 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $980,906 in 2015 without prior approval. FBLIC paid a dividend of $1,500,000 to TLIC in December 2014. This dividend was eliminated in consolidation. TLIC has paid no dividends to FTFC.

 

The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures interest and non-interest bearing accounts up to $250,000. Uninsured balances aggregate $12,138,250 as of March 31, 2015. Uninsured balances aggregated $6,494,515 as of December 31, 2014. The increase in uninsured balances is primarily due to $12,577,187 policyholders’ account deposits during the three months ended March 31, 2015 that has not yet been fully invested. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.

 

Our cash flows for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

(Unaudited)

    Increase     Percentage  
   

Three Months Ended March 31,

   

 (Decrease)

   

Change

 
   

2015

   

2014

    2015 to 2014     2015 to 2014  

Net cash provided by operating activities

  $ 3,549,286     $ 1,856,336     $ 1,692,950       91.2 %

Net cash used in investing activities

    (1,664,075 )     (12,588,873 )     10,924,798       -86.8 %

Net cash provided by financing activities

    5,578,200       9,926,970       (4,348,770 )     -43.8 %

Increase (decrease) in cash

    7,463,411       (805,567 )     8,268,978       -1026.5 %

Cash and cash equivalents, beginning of period

    10,158,386       10,608,438       (450,052 )     -4.2 %

Cash and cash equivalents, end of period

  $ 17,621,797     $ 9,802,871     $ 7,818,926       79.8 %

 

The $1,692,950 increase in cash provided by operating activities during the three months ended March 31, 2015 is primarily due to increased collections of net investment income and premiums that exceeded increased payments of benefits and claims and other underwriting, insurance and acquisition expenses.

 

The $10,924,798 decrease in cash used for investing activities during the three months ended March 31, 2015 was primarily related to $7,083,246 of proceeds for the 2015 sale of investment real estate, $5,905,468 of decreased 2015 purchases of fixed maturity securities, $2,817,857 of decreased purchases of investment real estate and $840,763 of increased 2015 payments of mortgage loans that exceeded $3,701,474 of increased 2015 purchases of mortgage loans and $2,242,101 of decreased 2015 sales and maturities of fixed maturity securities.

 

The $4,348,770 decrease in cash provided by financing activities for the three months ended March 31, 2015 resulted from $8,152,946 less funds available in 2015 due to both the settlement of and the non issuance of note payable proceeds of $4,076,473 that exceeded $3,762,819 of increased 2015 policyholder account deposits in excess of withdrawals and $41,357 of 2015 decreased purchases of treasury shares.

 

 
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Our shareholders’ equity as of March 31, 2015 and December 31, 2014 is summarized as follows:

 

   

(Unaudited)

    December 31,    

Increase (Decrease)

   

Percentage Change

 
   

March 31, 2015

   

 2014

    2015 to 2014     2015 to 2014  
                                 

Common stock, par value $.01 per share, 20,000,000 shares authorized, and 8,050,193 issued as of March 31, 2015 and December 31, 2014 and 7,802,613 and 7,812,038 outstanding as of March 31, 2015 and December 31, 2014, respectively

  $ 80,502     $ 80,502     $ -       0.0 %

Additional paid-in capital

    28,684,748       28,684,748       -       0.0 %

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

    (893,947 )     (855,304 )     (38,643 )     4.5 %

Accumulated other comprehensive income

    3,519,930       2,683,543       836,387       31.2 %

Accumulated earnings

    2,979,879       2,616,849       363,030       13.9 %

Total shareholders' equity

  $ 34,371,112     $ 33,210,338     $ 1,160,774       3.5 %

 

The increase in shareholders’ equity of $1,160,774 for the three months ended March 31, 2015 is due to $836,387 of other comprehensive income, $363,030 of net income less $38,643 for purchases of 9,425 shares of treasury stock from the former chairman of FTFC.

 

Equity per common share outstanding increased 3.8% to $4.41 as of March 31, 2015 compared to $4.25 per share as of December 31, 2014, based upon 7,802,613 common shares outstanding as of March 31, 2015 and 7,812,038 common shares outstanding as of December 31, 2014.

 

The liquidity requirements of our life insurance companies are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2015 or 2014. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.

 

We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products. Our investment portfolio had unrealized appreciation on available-for-sale securities of $4,453,840 and $3,390,869 as of March 31, 2015 and December 31, 2014, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. The $1,085,720 increase in unrealized gains arising for the three months ended March 31, 2015 has been offset by the first quarter 2015 net realized investment gains of $22,749 originating from the sale and call activity for available-for-sale fixed maturity and equity securities.

 

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.

 

One of our significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes. From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC’s and FBLIC’s annuity business is impacted by changes in interest rates. Life insurance company policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations.

 

 
47

 

 

We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies. We maintain conservative durations in our fixed maturity portfolio. As of March 31, 2015, cash, short-term investments and the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 13.5% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.

 

In addition to the measures described above, TLIC and FBLIC must comply with the NAIC promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC and FBLIC met during 2014, the SVL also requires the Company to perform annual cash flow testing for TLIC and FBLIC. This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.

 

Our marketing plan could be modified to emphasize certain product types and reduce others. New business levels could be varied in order to find the optimum level. We believe that our current liquidity, current bond portfolio maturity distribution and cash position give us substantial resources to administer our existing business and fund growth generated by direct sales.

 

The operations of TLIC and FBLIC may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments. Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows or existing assets and reserves.

 

We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and FBLIC that are limited by law to the greater of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) public and private offerings of our common stock and (4) corporate borrowings, if necessary.

 

We are not aware of any commitments or unusual events that could materially affect our capital resources. We are not aware of any current recommendations by any regulatory authority which, if implemented, would have a material adverse effect on our liquidity, capital resources or operations.

 

We believe that our existing cash and cash equivalents as of March 31, 2015 will be sufficient to fund our anticipated operating expenses.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us.

 

There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements.

 

 
48

 

 

These factors include among others:

 

  

 

general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets;

  

 

differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes;

  

 

the effect of increased claims activity from natural or man-made catastrophes, pandemic disease, or other events resulting in catastrophic loss of life;

  

 

adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses such as FTCC;

  

 

inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset;

  

 

investment losses and defaults;

  

 

competition in our product lines;

  

 

attraction and retention of qualified employees and agents;

 

 

ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks;

  

 

the availability, affordability and adequacy of reinsurance protection;

  

 

the effects of emerging claim and coverage issues;

  

 

the cyclical nature of the insurance business;

   

 

interest rate fluctuations;

  

 

changes in our experiences related to deferred policy acquisition costs;

  

 

the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us;

  

 

rating agencies’ actions;

  

 

domestic or international military actions;

  

 

the effects of extensive government regulation of the insurance industry;

  

 

changes in tax and securities law;

  

 

changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;

  

 

regulatory or legislative changes or developments;

  

 

the effects of unanticipated events on our disaster recovery and business continuity planning;

  

 

failures or limitations of our computer, data security and administration systems;

  

 

risks of employee error or misconduct;

  

 

the introduction of alternative healthcare solutions; 

    the assimilation of life insurance businesses we acquire and the sound management of these businesses; and
    the availability of capital to expand our business.

 

It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. In addition, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable developments.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 as amended (“Exchange Act”) as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is made known to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

 
49

 

 

Changes to Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, filed an action in the District Court of Tulsa County, Oklahoma in 2013, Case No. CJ-2013-03385, against former Company Board of Directors member, Wayne Pettigrew and Mr. Pettigrew’s company, Group & Pension Planners, Inc. (the “Defendants”).  The petition filed in the case alleges that Mr. Pettigrew, during and after the time he was a member of the Company’s Board of Directors, made defamatory statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company.  The defendants are alleged to have made defamatory statements to certain shareholders of the Company, to the press and to the Oklahoma Insurance Department and the Oklahoma Department of Securities.  Mr. Pettigrew has denied the allegations.

 

The Board of Directors, represented by independent counsel, concluded that there was no action to be taken against Mr. Zahn and that the allegations by Mr. Pettigrew were without substance.  The Company has been informed by the Oklahoma Insurance Department that it would take no action and was also informed that the Oklahoma Department of Securities, after its investigation of the allegations, concluded that no proceedings were needed with respect to the alleged matters.

 

It is the Company’s intention to vigorously prosecute this action against the Defendants for damages and for the correction of the defamatory statements.  In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.

 

Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for the Decreasing Term to 95 policies. On November 22, 2013, three individuals who owned Decreasing Term to 95 policies filed a Petition in the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to FBLIC’s decision to not provide a dividend under the Decreasing Term to 95 policies.

 

The Petition asserts claims for breach of contract and anticipatory breach of contract and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. In addition to these claims, the Petition asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act (“MMPA”).

It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.

 

The Petition also seeks to certify a class of individuals with similar claims but no class has been certified by the Court. FBLIC denies the allegations in the Petition and will continue to defend against them. It is the Company’s intention to vigorously defend the request for class certification, as well as to defend vigorously against the individual allegations. FBLIC filed a motion for partial summary judgment seeking summary judgment on the claims for violation of MMPA. This motion for partial summary judgment asked the court to declare that the MMPA does not apply to insurance companies such as FBLIC and enter judgment for FBLIC on the petition. A hearing for the motion of summary judgment was held on February 25, 2015 and it was subsequently denied by the court on March 2, 2015. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action.

 

 
50

 

 

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

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

   
31.2   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
   
32.1    Section 1350 Certification of Principal Executive Officer
   
32.2       Section 1350 Certification of Principal Financial Officer
   
101.INS**  XBRL Instance
   
101.SCH**     XBRL Taxonomy Extension Schema
   
101.CAL**   XBRL Taxonomy Extension Calculation
   
101.DEF**    XBRL Taxonomy Extension Definition
   
101.LAB** XBRL Taxonomy Extension Labels
   
101.PRE** XBRL Taxonomy Extension Presentation
   
**XBRL Information is furnished and not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 
51

 

 

SIGNATURES

 

In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

FIRST TRINITY FINANCIAL CORPORATION  

 

  an Oklahoma corporation  

 

 

 

 

 

 

 

 

May 14, 2015    By: /s/ Gregg E. Zahn  

 

 

Gregg E. Zahn, President and Chief Executive Officer

 

       
       
May 14, 2015 By: /s/ Jeffrey J. Wood  
    Jeffrey J. Wood, Chief Financial Officer  

   

 

 

 

               

 

 

 

52