Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - First Trinity Financial CORPex31-1.htm
EX-32.1 - EXHIBIT 32.1 - First Trinity Financial CORPex32-1.htm
EX-31.2 - EXHIBIT 31.2 - First Trinity Financial CORPex31-2.htm
EX-32.2 - EXHIBIT 32.2 - First Trinity Financial CORPex32-2.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 June 30, 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 August 10, 2015: 7,802,593 shares

 

 
 

 

     

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED JUNE 30, 2015

 

TABLE OF CONTENTS

  

PART I. FINANCIAL INFORMATION

  Page Number
   

Item 1. Consolidated Financial Statements

 
   

Consolidated Statements of Financial Position as of June 30, 2015 (Unaudited) and December 31, 2014

3
   

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)

4
   

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)

5
   

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2015 and 2014 (Unaudited)

6
   

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited)

7
   

Notes to Consolidated Financial Statements (Unaudited)

9
   

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

35
   

Item 4. Controls and Procedures

62
   

Part II. OTHER INFORMATION

 
   

Item 1. Legal Proceedings

62
   

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

63
   

Item 3. Defaults upon Senior Securities

63
   

Item 4. Mine Safety Disclosures

63
   

Item 5. Other Information

63
   

Item 6. Exhibits

63
   

Signatures

64
   

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

 

   

June 30, 2015

   

December 31, 2014

 
Assets  

(Unaudited)

         

Investments

               
Available-for-sale fixed maturity securities at fair value (amortized cost: $120,831,456 and $107,412,322 as of June 30, 2015 and December 31, 2014, respectively)   $ 122,415,027     $ 110,651,429  
Available-for-sale equity securities at fair value (cost: $528,521 and $519,595 as of June 30, 2015 and December 31, 2014, respectively)     643,154       671,357  
Mortgage loans on real estate     49,902,045       38,649,733  
Investment real estate     2,399,302       9,165,090  
Policy loans     1,436,351       1,520,620  
Short-term investments     1,141,710       1,141,199  
Other long-term investments     24,908,063       21,781,925  
Total investments     202,845,652       183,581,353  

Cash and cash equivalents

    8,817,165       10,158,386  

Accrued investment income

    1,994,610       1,682,906  

Recoverable from reinsurers

    1,179,389       1,222,245  

Agents' balances and due premiums

    921,077       562,146  

Deferred policy acquisition costs

    10,671,277       9,287,851  

Value of insurance business acquired

    6,475,057       6,674,414  

Property and equipment, net

    58,300       84,001  

Other assets

    7,605,743       5,747,866  
Total assets   $ 240,568,270     $ 219,001,168  
                 
Liabilities and Shareholders' Equity                

Policy liabilities

               
Policyholders' account balances   $ 163,549,166     $ 140,554,973  
Future policy benefits     37,624,329       35,913,730  
Policy claims     674,283       602,269  
Other policy liabilities     63,303       87,148  
Total policy liabilities     201,911,081       177,158,120  

Notes payable

    -       4,076,473  

Deferred federal income taxes

    1,707,109       2,198,753  

Other liabilities

    4,384,474       2,357,484  
Total liabilities     208,002,664       185,790,830  
Shareholders' equity                
Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 and 8,050,193 issued as of June 30, 2015 and December 31, 2014, respectively and 7,802,593 and 7,812,038 outstanding as of June 30, 2015 and December 31, 2014, respectively)     80,502       80,502  
Additional paid-in capital     28,684,598       28,684,748  
Treasury stock, at cost (247,580 and 238,155 shares as of June 30, 2015 and December 31, 2014, respectively)     (893,947 )     (855,304 )
Accumulated other comprehensive income     1,343,818       2,683,543  
Accumulated earnings     3,350,635       2,616,849  
Total shareholders' equity     32,565,606       33,210,338  
Total liabilities and shareholders' equity   $ 240,568,270     $ 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 June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 
Revenues                                

Premiums

  $ 2,325,124     $ 1,932,055     $ 4,645,438     $ 3,942,038  

Net investment income

    2,504,762       2,261,603       4,912,322       4,232,411  

Net realized investment gains

    82,087       465,151       506,089       761,716  

Loss on other-than-temporary impairment

    (304,256 )     -       (304,256 )     -  

Gain on reinsurance assumption

    550,000       -       550,000       -  

Other income

    11,353       6,763       16,164       20,075  
                                 
Total revenues     5,169,070       4,665,572       10,325,757       8,956,240  
                                 
Benefits, Claims and Expenses                                

Benefits and claims

                               
Increase in future policy benefits     904,650       594,832       1,695,961       1,214,804  
Death benefits     851,418       750,013       1,770,209       1,472,462  
Surrenders     135,487       152,492       277,881       243,938  
Interest credited to policyholders     1,345,410       1,079,517       2,593,300       2,101,727  
Dividend, endowment and supplementary life contract benefits     104,671       71,390       158,104       137,600  
                                 

Total benefits and claims

    3,341,636       2,648,244       6,495,455       5,170,531  
                                 
Policy acquisition costs deferred     (1,251,016 )     (558,309 )     (2,222,967 )     (1,086,471 )
Amortization of deferred policy acquisition costs     463,089       308,272       857,549       589,554  
Amortization of value of insurance business acquired     99,399       96,744       199,357       202,598  
Commissions     1,039,469       529,531       1,909,615       1,039,981  
Other underwriting, insurance and acquisition expenses     1,179,530       1,189,823       2,410,446       2,323,282  

Total expenses

    1,530,471       1,566,061       3,154,000       3,068,944  
                                 
Total benefits, claims and expenses     4,872,107       4,214,305       9,649,455       8,239,475  
                                 
Income before total federal income tax expense (benefit)     296,963       451,267       676,302       716,765  
                                 

Current federal income tax expense

    24,413       28,191       99,378       78,450  

Deferred federal income tax benefit

    (98,056 )     (11,104 )     (156,712 )     (39,019 )
                                 
Total federal income tax expense (benefit)     (73,643 )     17,087       (57,334 )     39,431  
                                 
Net income   $ 370,606     $ 434,180     $ 733,636     $ 677,334  
                                 
Net income per common share basic and diluted   $ 0.05     $ 0.06     $ 0.09     $ 0.09  

 

See notes to consolidated financial statements (unaudited).

 

 

 
4

 

  

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 
Net income   $ 370,606     $ 434,180     $ 733,636     $ 677,334  
                                 
Other comprehensive income (loss)                                
                                 
Total net unrealized gains (losses) arising during the period     (2,997,563 )     2,006,124       (1,911,843 )     3,643,148  
Less net realized investment gains (losses)     (241,927 )     287,827       (219,178 )     566,431  

Net unrealized gains (losses)

    (2,755,636 )     1,718,297       (1,692,665 )     3,076,717  
                                 

Less adjustment to deferred acquisition costs

    (35,497 )     15,055       (18,008 )     24,565  

Other comprehensive income (loss) before income tax expense

    (2,720,139 )     1,703,242       (1,674,657 )     3,052,152  
Income tax expense (benefit)     (544,027 )     340,648       (334,932 )     610,430  

Total other comprehensive income (loss)

    (2,176,112 )     1,362,594       (1,339,725 )     2,441,722  

Total comprehensive income (loss)

  $ (1,805,506 )   $ 1,796,774     $ (606,089 )   $ 3,119,056  

 

 

See notes to consolidated financial statements (unaudited).

  

 

 
5

 

   

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Six Months Ended June 30, 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     -       -       -       -       677,334       677,334  
Other comprehensive income     -       -       -       2,441,722       -       2,441,722  
Balance as of June 30, 2014   $ 80,502     $ 28,684,748     $ (773,731 )   $ 4,319,879     $ 1,368,672     $ 33,680,070  
                                                 
Balance as of January 1, 2015   $ 80,502     $ 28,684,748     $ (855,304 )   $ 2,683,543     $ 2,616,849     $ 33,210,338  

Repurchase of common stock

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

Stock dividend adjustment

    -       (150 )     -       -       150       -  

Comprehensive income (loss):

                                               
Net income     -       -       -       -       733,636       733,636  
Other comprehensive loss     -       -       -       (1,339,725 )     -       (1,339,725 )
Balance as of June 30, 2015   $ 80,502     $ 28,684,598     $ (893,947 )   $ 1,343,818     $ 3,350,635     $ 32,565,606  

 

 

See notes to consolidated financial statements (unaudited).

 

 

 
6

 

  

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2015

   

2014

 
Operating activities                
Net income   $ 733,636     $ 677,334  
Adjustments to reconcile net income to net cash provided by operating activities:                

Provision for depreciation

    98,445       101,821  

Accretion of discount on investments

    (477,735 )     (459,252 )

Net realized investment gains

    (506,089 )     (761,716 )

Loss on other-than-temporary impairment

    304,256       -  

Gain on reinsurance assumption

    (550,000 )     -  

Amortization of policy acquisition cost

    857,549       589,554  

Policy acquisition cost deferred

    (2,222,967 )     (1,086,471 )

Mortgage loan origination fees deferred

    (50,000 )     (49,500 )

Amortization of loan origination fees

    33,194       47,937  

Amortization of value of insurance business acquired

    199,357       202,598  

Provision for deferred federal income tax benefit

    (156,712 )     (39,019 )

Interest credited to policyholders

    2,593,300       2,101,727  

Change in assets and liabilities:

               
Accrued investment income     (311,704 )     (122,056 )
Policy loans     84,269       (29,351 )
Short-term investments     (511 )     (1,392,649 )
Allowance for mortgage and premium finance loan losses     37,992       36,904  
Recoverable from reinsurers     42,856       19,752  
Agents' balances and due premiums     (358,931 )     13,465  
Other assets (excludes $61 and $9,500 of premium finance loans for 2015 and 2014, respectively)     (1,307,938 )     (782,354 )
Future policy benefits     1,710,599       1,232,196  
Policy claims     72,014       18,613  
Other policy liabilities     (23,845 )     4,245  
Other liabilities     2,026,990       493,953  
Net cash provided by operating activities     2,828,025       817,731  
                 
Investing activities                

Purchases of fixed maturity securities

    (16,654,068 )     (15,551,685 )

Maturities of fixed maturity securities

    1,405,000       3,309,000  

Sales of fixed maturity securities

    1,183,161       5,271,058  

Purchases of equity securities

    (544,835 )     (105,542 )

Sales of equity securities

    533,813       101,080  

Purchases of mortgage loans

    (15,299,124 )     (12,342,197 )

Payments on mortgage loans

    4,124,035       3,010,790  

Purchases of other long-term investments

    (4,368,725 )     (1,837,619 )

Payments on other long-term investments

    2,082,413       1,947,162  

Loans repaid for premiums financed

    61       19,000  

Purchases of real estate

    -       (2,817,857 )

Sale of real estate

    7,083,246       36,000  
Net cash used in investing activities     (20,455,023 )     (18,960,810 )
                 
Financing activities                

Policyholders' account deposits

    25,903,955       15,658,605  

Policyholders' account withdrawals

    (5,503,062 )     (3,239,258 )

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     16,285,777       16,415,820  
                 
Decrease in cash     (1,341,221 )     (1,727,259 )
Cash and cash equivalents, beginning of period     10,158,386       10,608,438  
Cash and cash equivalents, end of period   $ 8,817,165     $ 8,881,179  

 

See notes to consolidated financial statements (unaudited).

 

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Supplemental Disclosures

(Unaudited)

  

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company recorded an asset of $550,000 associated with this reinsurance assumption during second quarter 2015 which was equivalent to the estimated gain on the reinsurance assumption transaction. During third quarter 2015, the Company will complete the evaluation of assets and liabilities associated with the reinsurance assumption. Once this analysis is complete, any adjustments will be recorded as a gain (loss) on reinsurance assumption.

 

In conjunction with this 2015 reinsurance assumption transaction, the non-cash impact on operating activities is summarized as follows:

  

   

(Unaudited)

 
   

Six Months Ended

 
   

June 30, 2015

 
         

Reinsurance assumption asset

  $ 550,000  
         

Gain on reinsurance assumption

  $ 550,000  

 

 

 
8

 

  

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

   

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

First Trinity Financial Corporation (the “Company” or "FTFC") is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) and First Trinity Capital Corporation (“FTCC”). The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.

 

The Company owns 100% of TLIC. TLIC owns 100% of FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals. TLIC’s and FBLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Virginia and West Virginia.

 

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

 

Company Capitalization

 

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

 

The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital. As a result, the Company's accumulated earnings as of June 30, 2015, as shown in the consolidated statement of financial position, was negatively impacted in 2011 ($2,428,328) and 2012 ($2,841,810) and all periods thereafter by the $5,270,138 charge of the stock dividends.

 

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

 

Acquisition of Other Companies 

 

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

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 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 and six months ended June 30, 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, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

      

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to June 30, 2015 through the date that these financial statements have been issued.

 

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.

 

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.

 

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

 

 
11

 

    

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

    

1. Organization and Significant Accounting Policies (continued)

 

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.

 

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.

 

 
12

 

  

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

  

1. Organization and Significant Accounting Policies (continued)

 

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.

 

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.

 

 
13

 

   

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

2. Investments

 

Fixed Maturity and Equity Securities Available-For-Sale

 

Investments in fixed maturity and equity securities available-for-sale as of June 30, 2015 and December 31, 2014 are summarized as follows:

  

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

June 30, 2015 (Unaudited)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

Fixed maturity securities

                               
U.S. government and U.S. government agencies   $ 2,670,662     $ 159,937     $ 100,703     $ 2,729,896  
States and political subdivisions     3,754,088       9,118       90,933       3,672,273  
Residential mortgage-backed securities     64,277       43,213       -       107,490  
Corporate bonds     99,261,901       2,842,887       1,281,903       100,822,885  
Foreign bonds     15,080,528       384,686       382,731       15,082,483  

Total fixed maturity securities

    120,831,456       3,439,841       1,856,270       122,415,027  

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 

Equity securities

 

Cost

   

Gains

   

Losses

   

Value

 
Mutual funds     81,325       -       5,081       76,244  
Corporate preferred stock     258,137       3,308       2,105       259,340  
Corporate common stock     189,059       120,226       1,715       307,570  

Total equity securities

    528,521       123,534       8,901       643,154  
                                 

Total fixed maturity and equity securities

  $ 121,359,977     $ 3,563,375     $ 1,865,171     $ 123,058,181  

 

           

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  

 

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 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 June 30, 2015 and December 31, 2014 are summarized as follows:

  

           

Unrealized

   

Number of

 

June 30, 2015 (Unaudited)

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       
Less than 12 months                        
U.S. government and U.S. government agencies   $ 291,720     $ 8,280       1  
States and political subdivisions     3,008,732       90,933       15  
Corporate bonds     29,964,140       871,737       105  
Foreign bonds     6,141,590       382,731       26  
Total less than 12 months     39,406,182       1,353,681       147  
More than 12 months                        
U.S. government and U.S. government agencies     1,037,577       92,423       2  
Corporate bonds     2,808,975       410,166       18  
Total more than 12 months     3,846,552       502,589       20  

Total fixed maturity securities

    43,252,734       1,856,270       167  

Equity securities

                       
Less than 12 months                        
Mutual funds     76,244       5,081       1  
Corporate preferred stock     97,840       2,105       2  
Corporate common stock     47,034       1,715       1  

Total equity securities

    221,118       8,901       4  

Total fixed maturity and equity securities

  $ 43,473,852     $ 1,865,171       171  

 

           

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  

 

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

2. Investments (continued)

 

As of June 30, 2015, the Company held 167 available-for-sale fixed maturity securities with an unrealized loss of $1,856,270, fair value of $43,252,734 and amortized cost of $45,109,004. These unrealized losses were primarily due to market interest rate movements in the bond market as of June 30, 2015. The ratio of the fair value to the amortized cost of these 167 securities is 96%.

 

The Company has recorded one other-than-temporary impairment during 2015.  During the second quarter of 2015, the Company impaired its bonds in a mining corporation with a total par value of $600,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $304,256 for the three and six months ended June 30, 2015. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. The Company has experienced no additional other-than-temporary impairments during 2015.

 

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 June 30, 2015, the Company has four available-for-sale equity securities with an unrealized loss of $8,901, fair value of $221,118 and cost of $230,019. The ratio of fair value to cost of these securities is 96%.

 

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 June 30, 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 one other-than-temporary impairment during the three and six months ended June 30, 2015. There were no impairments during the three and six months ended June 30, 2014 nor during the year ended December 31, 2014. Management believes that the Company will fully recover its cost basis in the securities held as of June 30, 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. 

 

 
16

 

   

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 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 June 30, 2015 and December 31, 2014, are summarized as follows:

  

   

(Unaudited)

         
   

June 30, 2015

   

December 31, 2014

 
Unrealized appreciation on available-for-sale securities   $ 1,698,204     $ 3,390,869  

Adjustment to deferred acquisition costs

    (18,432 )     (36,440 )

Deferred income taxes

    (335,954 )     (670,886 )
Net unrealized appreciation on available-for-sale securities   $ 1,343,818     $ 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 $24,908,063 and $21,781,925 as of June 30, 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 June 30, 2015, by contractual maturity, are summarized as follows:

  

   

June 30, 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

  $ 4,478,270     $ 4,561,555     $ 3,758,713     $ 3,799,344  

Due in one year through five years

    34,619,118       36,252,266       10,168,906       10,974,518  

Due after five years through ten years

    54,038,399       54,528,772       7,137,414       8,587,183  

Due after ten years

    27,631,392       26,964,944       3,843,030       5,201,473  

Due at multiple maturity dates

    64,277       107,490       -       -  
    $ 120,831,456     $ 122,415,027     $ 24,908,063     $ 28,562,518  

 

 

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.

  

 

 
17

 

  

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

  

2. Investments (continued)

 

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate and investment real estate for the three and six months ended June 30, 2015 and 2014 are summarized as follows:

  

   

Three Months Ended June 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 

Proceeds

  $ 1,399,932     $ 5,149,728     $ 7,529     $ 101,080     $ 2,573,436     $ 2,300,954     $ -     $ 36,000  

Gross realized gains

    62,791       266,493       -       21,400       19,758       177,324       -       -  

Gross realized losses

    (462 )     (66 )     -       -       -       -       -       -  
Loss on other-than- temporary impairment     (304,256 )     -       -       -       -       -       -       -  

 

 

   

Six Months Ended June 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 

Proceeds

  $ 2,588,161     $ 8,580,058     $ 533,813     $ 101,080     $ 4,124,035     $ 3,010,790     $ 7,083,246     $ 36,000  

Gross realized gains

    88,632       546,063       996       21,400       30,809       195,285       390,202       -  

Gross realized losses

    (1,654 )     (1,032 )     (2,896 )     -       -       -       -       -  
Loss on other-than- temporary impairment     (304,256 )     -       -       -       -       -       -       -  

  

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three and six months ended June 30, 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 and six months ended June 30, 2015 and 2014 are summarized as follows:

  

   

Three Months Ended June 30, (Unaudited)

   

Six Months Ended June 30, (Unaudited)

 
   

2015

   

2014

   

2015

   

2014

 
Change in unrealized investment gains:                                

Available-for-sale securities:

                               
Fixed maturity securities   $ (2,723,522 )   $ 1,710,928     $ (1,655,536 )   $ 3,073,930  
Equity securities     (32,114 )     7,369       (37,129 )     2,787  
                                 
Net realized investment gains (losses):                                

Available-for-sale securities:

                               
Fixed maturity securities     (241,927 )     266,427       (217,278 )     545,031  
Equity securities     -       21,400       (1,900 )     21,400  

Mortgage loans on real estate

    19,758       177,324       30,809       195,285  

Investment real estate

    -       -       390,202       -  

 

 

 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

2. Investments (continued)

 

Major categories of net investment income for the three and six months ended June 30, 2015 and 2014 are summarized as follows:

  

   

Three Months Ended June 30, (Unaudited)

   

Six Months Ended June 30, (Unaudited)

 
   

2015

   

2014

   

2015

   

2014

 

Fixed maturity securities

  $ 1,245,734     $ 1,128,167     $ 2,419,515     $ 2,248,063  

Equity securities

    8,725       10,747       20,254       21,404  

Other long-term investments

    424,587       418,379       838,829       833,790  

Mortgage loans

    980,728       581,733       1,936,872       1,035,705  

Policy loans

    25,165       25,435       50,306       50,378  

Real estate

    71,822       204,799       259,410       377,994  

Short-term and other investments

    65,434       35,781       113,626       72,078  
Gross investment income     2,822,195       2,405,041       5,638,812       4,639,412  

Investment expenses

    (317,433 )     (143,438 )     (726,490 )     (407,001 )
Net investment income   $ 2,504,762     $ 2,261,603     $ 4,912,322     $ 4,232,411  

 

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 June 30, 2015 and December 31, 2014, these required deposits, included in investment assets, had amortized costs that totaled $3,972,666 and $3,954,696, respectively. As of June 30, 2015 and December 31, 2014, these required deposits had fair values that totaled $4,024,276 and $4,057,740, respectively.

 

The Company’s mortgage loans by property type as of June 30, 2015 and December 31, 2014 are summarized as follows:

  

   

(Unaudited)

                 
   

June 30, 2015

   

December 31, 2014

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Commercial mortgage loans

                               
                                 
Retail stores   $ 1,313,679       2.63 %   $ 1,635,412       4.23 %
Office buildings     318,925       0.64 %     327,181       0.85 %
                                 

Total commercial mortgage loans

    1,632,604       3.27 %     1,962,593       5.08 %
                                 

Residential mortgage loans

    48,269,441       96.73 %     36,687,140       94.92 %
                                 

Total mortgage loans

  $ 49,902,045       100.00 %   $ 38,649,733       100.00 %

     

 

 
19

 

  

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

  

2. Investments (continued)

 

The Company’s investment real estate as of June 30, 2015 and December 31, 2014 is summarized as follows:

   

(Unaudited)

         
   

June 30, 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

    (831,462 )     (758,718 )
Buildings net of accumulated depreciation     1,436,095       1,508,839  

Building - held for sale

    -       5,408,613  
Total buildings     1,436,095       6,917,452  

Investment real estate, net of accumulated depreciation

  $ 2,399,302     $ 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 acres of land is held for the production of income. The remaining five acres of land are held for sale. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. This land is held for sale. 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 and, as discussed below, were sold on March 11, 2015.

 

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. This building and land were also held for sale and, as discussed below, were sold on March 11, 2015.

 

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.

 

 
20

 

  

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

  

3. Fair Value Measurements (continued)

 

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.

    

 

 
21

 

  

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 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 June 30, 2015 and December 31, 2014 is summarized as follows: