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EX-32.2 - EXHIBIT 32.2 - First Trinity Financial CORPex32-2.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-31.1 - EXHIBIT 31.1 - First Trinity Financial CORPex31-1.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, 2017

 

[ ]

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

 

For the transition period From                                 to                                   .

 

Commission file number: 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Oklahoma

34-1991436

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma 74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Registrant's telephone number, including area code)

 

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

 

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

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer:  ☐ 

Accelerated filer:  ☐

Non-accelerated filer:  ☐

Smaller reporting company:  

Emerging growth company ☐

 

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

 

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

Yes ☐       No ☑

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of May 8, 2017: 7,802,593 shares

 

 
 

 

  

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2017

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION   Page Number
     

Item 1. Consolidated Financial Statements

   
     

Consolidated Statements of Financial Position as of March 31, 2017 (Unaudited) and December 31, 2016

3

 
     

Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited)

4

 
     

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (Unaudited)

5

 
     

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2017 and 2016 (Unaudited)

6

 
     

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited)

7

 
     

Notes to Consolidated Financial Statements (Unaudited)

8

 
     

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

32

 
     

Item 4. Controls and Procedures

56

 
     
Part II. OTHER INFORMATION    
     

Item 1. Legal Proceedings

56

 
     

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

58

 
     

Item 3. Defaults upon Senior Securities

58

 
     

Item 4. Mine Safety Disclosures

58

 
     

Item 5. Other Information

58  
     

Item 6. Exhibits

58

 
     

Signatures

59

 

 

Exhibit No. 31.1

Exhibit No. 31.2

Exhibit No. 32.1

Exhibit No. 32.2

Exhibit No. 101.INS

Exhibit No. 101.SCH

Exhibit No. 101.CAL

Exhibit No. 101.DEF

Exhibit No. 101.LAB

Exhibit No. 101.PRE

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

(Unaudited)

         
   

March 31, 2017

   

December 31, 2016

 

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $149,863,882 and $128,310,265 as of March 31, 2017 and December 31, 2016, respectively)

  $ 151,925,813     $ 129,311,155  

Available-for-sale equity securities at fair value (cost: $600,529 and $599,400 as of March 31, 2017 and December 31, 2016, respectively)

    657,560       638,407  

Mortgage loans on real estate

    86,878,848       74,371,286  

Investment real estate

    2,365,621       2,506,673  

Policy loans

    1,576,307       1,598,116  

Other long-term investments

    49,515,018       46,788,873  

Total investments

    292,919,167       255,214,510  

Cash and cash equivalents

    25,962,536       34,223,945  

Accrued investment income

    2,542,754       2,176,770  

Recoverable from reinsurers

    1,211,881       1,258,938  

Agents' balances and due premiums

    1,505,643       1,419,250  

Deferred policy acquisition costs

    19,906,373       18,191,990  

Value of insurance business acquired

    5,806,667       5,908,835  

Other assets

    7,977,339       14,858,375  

Total assets

  $ 357,832,360     $ 333,252,613  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 267,911,869     $ 245,346,489  

Future policy benefits

    45,222,673       44,266,227  

Policy claims

    938,779       997,814  

Other policy liabilities

    80,238       69,854  

Total policy liabilities

    314,153,559       290,680,384  

Deferred federal income taxes

    993,422       693,470  

Other liabilities

    5,295,974       5,598,484  

Total liabilities

    320,442,955       296,972,338  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of March 31, 2017 and December 31, 2016 and 7,802,593 outstanding as of March 31, 2017 and December 31, 2016)

    80,502       80,502  

Additional paid-in capital

    28,684,598       28,684,598  

Treasury stock, at cost (247,580 shares as of March 31, 2017 and December 31, 2016)

    (893,947 )     (893,947 )

Accumulated other comprehensive income

    1,666,328       818,676  

Accumulated earnings

    7,851,924       7,590,446  

Total shareholders' equity

    37,389,405       36,280,275  

Total liabilities and shareholders' equity

  $ 357,832,360     $ 333,252,613  

 

See notes to consolidated financial statements (unaudited).

 

 
3

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

Revenues

               

Premiums

  $ 3,621,690     $ 3,192,542  

Net investment income

    3,669,871       3,360,203  

Net realized investment gains (losses)

    166,506       (19,151 )

Other income

    49,892       7,313  

Total revenues

    7,507,959       6,540,907  

Benefits, Claims and Expenses

               

Benefits and claims

               

Increase in future policy benefits

    959,805       1,358,144  

Death benefits

    1,545,836       952,058  

Surrenders

    283,376       137,726  

Interest credited to policyholders

    2,035,054       1,653,720  

Dividend, endowment and supplementary life contract benefits

    66,973       66,058  

Total benefits and claims

    4,891,044       4,167,706  

Policy acquisition costs deferred

    (2,414,719 )     (1,576,209 )

Amortization of deferred policy acquisition costs

    680,836       696,546  

Amortization of value of insurance business acquired

    102,168       90,132  

Commissions

    2,244,910       1,280,086  

Other underwriting, insurance and acquisition expenses

    1,654,203       1,534,440  

Total expenses

    2,267,398       2,024,995  

Total benefits, claims and expenses

    7,158,442       6,192,701  

Income before total federal income tax expense

    349,517       348,206  

Current federal income tax expense

    -       3,298  

Deferred federal income tax expense

    88,039       49,595  

Total federal income tax expense

    88,039       52,893  

Net income

  $ 261,478     $ 295,313  

Net income per common share basic and diluted

  $ 0.03     $ 0.04  

 

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,

 
   

2017

   

2016

 

Net income

  $ 261,478     $ 295,313  

Other comprehensive income

               

Total net unrealized gains arising during the period

    1,243,084       3,779,522  

Less net realized investment gains (losses)

    164,019       (22,726 )

Net unrealized gains

    1,079,065       3,802,248  

Less adjustment to deferred acquisition costs

    19,500       60,130  

Other comprehensive income before income tax expense

    1,059,565       3,742,118  

Income tax expense

    211,913       748,423  

Total other comprehensive income

    847,652       2,993,695  

Total comprehensive income

  $ 1,109,130     $ 3,289,008  

 

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, 2017 and 2016

(Unaudited)

 

                           

Accumulated

                 
   

Common

   

Additional

           

Other

           

Total

 
   

Stock

   

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Shareholders'

 
   

$.01 Par Value

   

Capital

   

Stock

   

Income (loss)

   

Earnings

   

Equity

 

Balance as of January 1, 2016

  $ 80,502     $ 28,684,598     $ (893,947 )   $ (2,655,817 )   $ 4,999,707     $ 30,215,043  

Comprehensive income:

                                               

Net income

    -       -       -       -       295,313       295,313  

Other comprehensive income

    -       -       -       2,993,695       -       2,993,695  

Balance as of March 31, 2016

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 337,878     $ 5,295,020     $ 33,504,051  
                                                 

Balance as of January 1, 2017

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

Comprehensive income:

                                               

Net income

    -       -       -       -       261,478       261,478  

Other comprehensive income

    -       -       -       847,652       -       847,652  

Balance as of March 31, 2017

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 1,666,328     $ 7,851,924     $ 37,389,405  

 

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,

 
   

2017

   

2016

 

Operating activities

               

Net income

  $ 261,478     $ 295,313  

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

               

Provision for depreciation

    36,531       36,530  

Accretion of discount on investments

    (685,817 )     (375,081 )

Net realized investment losses (gains)

    (166,506 )     19,151  

Amortization of policy acquisition cost

    680,836       696,546  

Policy acquisition cost deferred

    (2,414,719 )     (1,576,209 )

Amortization of loan origination fees

    14,797       7,251  

Amortization of value of insurance business acquired

    102,168       90,132  

Allowance for mortgage loan losses

    42,054       6,369  

Provision for deferred federal income tax expense

    88,039       49,595  

Interest credited to policyholders

    2,035,054       1,653,720  

Change in assets and liabilities:

               

Accrued investment income

    (365,984 )     (68,967 )

Policy loans

    21,809       (8,261 )

Short-term investments

    -       549,795  

Recoverable from reinsurers

    47,057       (8,587 )

Agents' balances and due premiums

    (86,393 )     (66,883 )

Other assets (excludes depreciation of $159 in 2017 and change in receivable for securities sold of $6,288,274 and ($1,904) in 2017 and 2016, respectively.

    592,603       (1,441,577 )

Future policy benefits

    956,446       1,362,476  

Policy claims

    (59,035 )     90,501  

Other policy liabilities

    10,384       (2,972 )

Other liabilities (exclude change in payable for securities purchased of ($17,569) and $40,907 in 2017 and 2016, respectively.

    (284,941 )     757,093  

Net cash provided by operating activities

    825,861       2,065,935  
                 

Investing activities

               

Purchases of fixed maturity securities available-for-sale

    (26,056,647 )     (2,222,996 )

Maturities of fixed maturity securities available-for-sale

    2,770,000       1,138,000  

Sales of fixed maturity securities available-for-sale

    1,679,231       1,136,413  

Purchases of equity securities available-for-sale

    (1,129 )     (4,552 )

Sales of equity securities available-for-sale

    -       108,800  

Purchases of mortgage loans

    (17,643,638 )     (3,710,052 )

Payments on mortgage loans

    5,125,389       1,572,244  

Purchases of other long-term investments

    (3,648,817 )     (2,024,317 )

Payments on other long-term investments

    1,780,143       1,141,454  

Sale of real estate

    107,167       -  

Net change in receivable and payable for securities sold and purchased

    6,270,705       39,003  

Net cash used in investing activities

    (29,617,596 )     (2,826,003 )
                 

Financing activities

               

Policyholders' account deposits

    25,052,131       5,326,249  

Policyholders' account withdrawals

    (4,521,805 )     (3,912,525 )

Net cash provided by financing activities

    20,530,326       1,413,724  
                 

Increase (decrease) in cash

    (8,261,409 )     653,656  

Cash and cash equivalents, beginning of period

    34,223,945       9,047,586  

Cash and cash equivalents, end of period

  $ 25,962,536     $ 9,701,242  

 

See notes to consolidated financial statements (unaudited).

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

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

 

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

 

The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012.

 

Company Capitalization

 

The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012 and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.

 

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

 

Acquisitions

 

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was $2,695,234 including direct cost associated with the acquisition of $195,234. The acquisition of FLAC was financed with the working capital of FTFC.

 

On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.

 

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

 

 
8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923.

 

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, 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 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, 2016.

 

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.

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to March 31, 2017 through the date that these financial statements have been issued.

 

Recent Accounting Pronouncements

 

Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

 

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

 

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

 

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

 

If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity since there are no uncertainties about the Company’s ability to continue as a going concern.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments.

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss). The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods, the existence of a deferred tax asset related to available-for-sale securities in future periods and the economic conditions at the time of that future adoption.

 

Leases

 

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

 

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

 

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

 

Entities will generally continue to account for leases that commenced before the effective date of this update in accordance with previous U.S. GAAP unless the lease is modified. Lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP. The updated guidance is to be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2018. 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.

 

Investments — Equity Method and Joint Ventures:  Simplifying the Transition to the Equity Method of Accounting

 

In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence.  If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings.  The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. Early adoption is permitted.  The adoption of this guidance did not 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, 2017

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Derivatives and Hedging:  Contingent Put and Call Options in Debt Instruments

 

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument is contingently exercisable, the event that triggers the ability to exercise the option is considered to be clearly and closely related to the debt instrument (i.e., the economic characteristics and risks of the option are related to interest rates or credit risks) and the entity does not have to assess whether the option should be accounted for separately. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Financial Instruments — Credit Losses:  Measurement of Credit Losses on Financial Instruments

 

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

 

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

 

The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.

 

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

 

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

 

Consolidation – Interests Held through Related Parties that Are Under Common Control

 

In October 2016, the FASB issued further guidance that makes targeted amendments to consolidation accounting. This update changes how a reporting entity that is the primary beneficiary of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The updated guidance is effective for annual and interim periods beginning after December 15, 2016, and is to be applied retrospectively. Early adoption is permitted.  The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

 
12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Business Combinations – Clarifying the Definition of a Business

 

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

 

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

 

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

 

In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Compensation — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

 

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

 

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

 

 
13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(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, 2017 and December 31, 2016 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized Cost

   

Unrealized

   

Unrealized

   

Fair

 
   

or Cost

   

Gains

   

Losses

   

Value

 
   

March 31, 2017 (Unaudited)

 

Fixed maturity securities

                               

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

  $ 3,375,460     $ 88,510     $ 68,402     $ 3,395,568  

States and political subdivisions

    9,602,066       167,836       50,211       9,719,691  

Residential mortgage-backed securities

    33,938       36,689       -       70,627  

Corporate bonds

    116,778,608       2,713,348       1,202,824       118,289,132  

Foreign bonds

    20,073,810       544,739       167,754       20,450,795  

Total fixed maturity securities

    149,863,882       3,551,122       1,489,191       151,925,813  
                                 

Equity securities

                               

Mutual funds

    345,607       805       -       346,412  

Corporate preferred stock

    99,945       2,015       -       101,960  

Corporate common stock

    154,977       54,211       -       209,188  

Total equity securities

    600,529       57,031       -       657,560  

Total fixed maturity and equity securities

  $ 150,464,411     $ 3,608,153     $ 1,489,191     $ 152,583,373  

 

   

December 31, 2016

 

Fixed maturity securities

                               

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

  $ 3,157,889     $ 99,086     $ 71,592     $ 3,185,383  

States and political subdivisions

    9,172,533       144,947       66,584       9,250,896  

Residential mortgage-backed securities

    33,970       36,757       -       70,727  

Corporate bonds

    100,268,424       2,324,712       1,613,095       100,980,041  

Foreign bonds

    15,677,449       394,742       248,083       15,824,108  

Total fixed maturity securities

    128,310,265       3,000,244       1,999,354       129,311,155  
                                 

Equity securities

                               

Mutual funds

    344,783       -       2,869       341,914  

Corporate preferred stock

    99,945       -       3,585       96,360  

Corporate common stock

    154,672       45,461       -       200,133  

Total equity securities

    599,400       45,461       6,454       638,407  

Total fixed maturity and equity securities

  $ 128,909,665     $ 3,045,705     $ 2,005,808     $ 129,949,562  

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(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, 2017 and December 31, 2016 are summarized as follows:

 

           

Unrealized

   

Number of

 
   

Fair Value

   

Loss

   

Securities

 
   

March 31, 2017 (Unaudited)

 

Fixed maturity securities

                       

Less than 12 months

                       

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

  $ 2,086,562     $ 68,402       7  

States and political subdivisions

    2,518,618       50,211       13  

Corporate bonds

    26,306,196       480,601       85  

Foreign bonds

    3,271,284       105,406       12  

Total less than 12 months

    34,182,660       704,620       117  

More than 12 months

                       

Corporate bonds

    7,317,575       722,223       36  

Foreign bonds

    1,021,479       62,348       6  

Total more than 12 months

    8,339,054       784,571       42  

Total fixed maturity securities

  $ 42,521,714     $ 1,489,191       159  

 

   

December 31, 2016

 

Fixed maturity securities

                       

Less than 12 months

                       

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

  $ 1,878,308     $ 71,592       6  

States and political subdivisions

    2,532,653       66,584       14  

Corporate bonds

    23,721,217       696,066       92  

Foreign bonds

    5,087,133       155,833       16  

Total less than 12 months

    33,219,311       990,075       128  

More than 12 months

                       

Corporate bonds

    8,004,923       917,029       36  

Foreign bonds

    1,024,548       92,250       6  

Total more than 12 months

    9,029,471       1,009,279       42  

Total fixed maturity securities

    42,248,782       1,999,354       170  

Equity securities

                       

Less than 12 months

                       

Corporate preferred stock

    96,360       3,585       2  

Total less than 12 months

    96,360       3,585       2  

More than 12 months

                       

Mutual funds

    89,113       2,869       1  

Total more than 12 months

    89,113       2,869       1  

Total equity securities

    185,473       6,454       3  

Total fixed maturity and equity securities

  $ 42,434,255     $ 2,005,808       173  

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

2. Investments (continued)

 

As of March 31, 2017, the Company held 159 available-for-sale fixed maturity securities with an unrealized loss of $1,489,191, fair value of $42,521,714 and amortized cost of $44,010,905. These unrealized losses were primarily due to market interest rate movements in the bond market as of March 31, 2017. The ratio of the fair value to the amortized cost of these 159 securities is 97%.

 

As of December 31, 2016, the Company held 170 available-for-sale fixed maturity securities with an unrealized loss of $1,999,354, fair value of $42,248,782 and amortized cost of $44,248,136. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2016. The ratio of the fair value to the amortized cost of these 170 securities is 95%.

 

As of March 31, 2017, the Company had no available-for-sale equity securities with unrealized losses.

 

As of December 31, 2016, the Company had three available-for-sale equity securities with an unrealized loss of $6,454, fair value of $185,473 and cost of $191,927. The ratio of fair value to cost of these securities is 97%. 

 

Fixed maturity securities were 93% and 92% investment grade as rated by Standard & Poor’s as of March 31, 2017 and December 31, 2016, respectively.

 

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

 

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

 

There were no impairments during the three months ended March 31, 2017 and 2016.

 

The Company recorded one other-than-temporary impairment during fourth quarter 2016.  During fourth quarter 2016, the Company impaired its bonds in an energy corporation with a total par value of $650,000 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 $207,450 for the year ended December 31, 2016. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities during 2016.

 

Management believes that the Company will fully recover its cost basis in the securities held as of March 31, 2017, 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

March 31, 2017

(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, 2017 and December 31, 2016, are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2017

   

December 31, 2016

 

Unrealized appreciation on available-for-sale securities

  $ 2,118,962     $ 1,039,897  

Adjustment to deferred acquisition costs

    (36,053 )     (16,553 )

Deferred income taxes

    (416,581 )     (204,668 )

Net unrealized appreciation on available-for-sale securities

  $ 1,666,328     $ 818,676  

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $49,515,018 and $46,788,873 as of March 31, 2017 and December 31, 2016, 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, 2017, by contractual maturity, are summarized as follows:

 

   

March 31, 2017 (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

  $ 8,564,969     $ 8,646,613     $ 6,978,927     $ 7,081,822  

Due after one year through five years

    31,765,292       32,499,328       19,501,912       21,055,897  

Due after five years through ten years

    42,243,357       43,132,728       13,854,164       16,558,746  

Due after ten years

    67,256,326       67,576,517       9,180,015       14,151,045  

Due at multiple maturity dates

    33,938       70,627       -       -  
                                 
    $ 149,863,882     $ 151,925,813     $ 49,515,018     $ 58,847,510  

 

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

March 31, 2017

(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 months ended March 31, 2017 and 2016 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2017

   

2016

   

2017

   

2016

   

2017

   

2016

   

2017

   

2016

 

Proceeds

  $ 4,449,231     $ 2,274,413     $ -     $ 108,800     $ 5,125,389     $ 1,572,244     $ 107,167     $ -  

Gross realized gains

    171,105       7,094       -       -       -       3,575       2,487       -  

Gross realized losses

    (7,086 )     (28,352 )     -       (1,468 )     -       -       -       -  

 

The accumulated change in unrealized investment gains (losses) for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2017 and 2016 and the amount of net realized investment gains (losses) 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, 2017 and 2016 are summarized as follows:

  
 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

2. Investments (continued)

 

Major categories of net investment income for the three months ended March 31, 2017 and 2016 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2017

   

2016

 

Fixed maturity securities

  $ 1,490,370     $ 1,567,218  

Equity securities

    5,072       7,182  

Other long-term investments

    857,470       547,822  

Mortgage loans

    1,667,394       1,353,071  

Policy loans

    27,564       26,098  

Real estate

    93,711       91,968  

Short-term and other investments

    110,286       72,270  

Gross investment income

    4,251,867       3,665,629  

Investment expenses

    (581,996 )     (305,426 )

Net investment income

  $ 3,669,871     $ 3,360,203  

 

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, 2017 and December 31, 2016, these required deposits, included in investment assets, had amortized costs that totaled $4,107,553 and $4,099,405, respectively. As of March 31, 2017 and December 31, 2016, these required deposits had fair values that totaled $4,132,879 and $4,125,116, respectively.

 

The Company’s mortgage loans by property type as of March 31, 2017 and December 31, 2016 are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2017

   

December 31, 2016

 

Commercial mortgage loans

               

Retail stores

  $ 1,055,651     $ 1,075,324  

Office buildings

    177,494       179,484  

Total commercial mortgage loans

    1,233,145       1,254,808  

Residential mortgage loans

    85,645,703       73,116,478  

Total mortgage loans

  $ 86,878,848     $ 74,371,286  

 

 
19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

2. Investments (continued)

 

The Company’s investment real estate as of March 31, 2017 and December 31, 2016 is summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2017

   

December 31, 2016

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for investment

    745,155       745,155  

Total land

    958,315       958,315  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (1,086,067 )     (1,049,695 )

Buildings net of accumulated depreciation

    1,181,490       1,217,862  

Residential real estate - held for sale

    225,816       330,496  

Total residential real estate

    225,816       330,496  

Investment real estate, net of accumulated depreciation

  $ 2,365,621     $ 2,506,673  

 

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-fourth of this land. This building and land on one of the four lots is held for the production of income. The other three lots of land owned in Topeka, Kansas are held for investment. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. During fourth quarter 2016 management impaired the undeveloped land by $4,892 from its carrying value to its net realizable value expected at the time of ultimate resale.

 

During 2016 the Company foreclosed on seven residential mortgage loans of real estate totaling $394,427 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value. On November 30, 2016, the Company sold one investment real estate property with an aggregate carrying value of $63,931. The Company recorded a gross realized investment loss on sale of $20,662 based on an aggregate sales price of $43,269.

 

During 2017, the Company sold investment real estate property with an aggregate carrying value of $104,680. The Company recorded a gross realized investment gain on sale of $2,487 based on an aggregate sales price of $107,167.

 

 

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.

 

 
20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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

 

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

 

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

 

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

 

 
21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(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, 2017 and December 31, 2016 is summarized as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

March 31, 2017 (Unaudited)

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 3,395,568     $ -     $ 3,395,568  

States and political subdivisions

    -       9,719,691       -       9,719,691  

Residential mortgage-backed securities

    -       70,627       -       70,627  

Corporate bonds

    -       118,289,132       -       118,289,132  

Foreign bonds

    -       20,450,795       -       20,450,795  

Total fixed maturity securities

  $ -     $ 151,925,813     $ -     $ 151,925,813  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ -     $ 346,412     $ -     $ 346,412  

Corporate preferred stock

    101,960       -       -       101,960  

Corporate common stock

    147,688       -       61,500       209,188  

Total equity securities

  $ 249,648     $ 346,412     $ 61,500     $ 657,560  

 

   

December 31, 2016

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 3,185,383     $ -     $ 3,185,383  

States and political subdivisions

    -       9,250,896       -       9,250,896  

Residential mortgage-backed securities

    -       70,727       -       70,727  

Corporate bonds

    -       100,980,041       -       100,980,041  

Foreign bonds

    -       15,824,108       -       15,824,108  

Total fixed maturity securities

  $ -     $ 129,311,155     $ -     $ 129,311,155  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ -     $ 341,914     $ -     $ 341,914  

Corporate preferred stock

    96,360       -       -       96,360  

Corporate common stock

    138,633       -       61,500       200,133  

Total equity securities

  $ 234,993     $ 341,914     $ 61,500     $ 638,407  

 

As of March 31, 2017 and December 31, 2016, 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 these small insurance holding companies commence operations.

 

 
22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited) 

 

3. Fair Value Measurements (continued)

 

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

 

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

 

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.

 

 
23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(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, 2017 and December 31, 2016, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

 

Financial Instruments Disclosed, But Not Carried, at Fair Value:

 

   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 
   

March 31, 2017 (Unaudited)

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,233,145     $ 1,245,615     $ -     $ -     $ 1,245,615  

Residential

    85,645,703       86,519,153       -       -       86,519,153  

Policy loans

    1,576,307       1,576,307       -       -       1,576,307  

Other long-term investments

    49,515,018       58,847,510       -       -       58,847,510  

Cash and cash equivalents

    25,962,536       25,962,536       25,962,536       -       -  

Accrued investment income

    2,542,754       2,542,754       -       -       2,542,754  

Total financial assets

  $ 166,475,463     $ 150,458,439     $ 25,962,536     $ -     $ 124,495,903  

Financial liabilities

                                       

Policyholders' account balances

  $ 267,911,869     $ 226,181,661     $ -     $ -     $ 226,181,661  

Policy claims

    938,779       938,779       -       -       938,779  

Total financial liabilities

  $ 268,850,648     $ 185,368,033     $ -     $ -     $ 185,368,033  

 

   

December 31, 2016

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,254,808     $ 1,268,140     $ -     $ -     $ 1,268,140  

Residential

    73,116,478       70,383,661       -       -       70,383,661  

Policy loans

    1,598,116       1,598,116       -       -       1,598,116  

Other long-term investments

    46,788,873       55,890,429       -       -       55,890,429  

Cash and cash equivalents

    34,223,945       34,223,945       34,223,945       -       -  

Accrued investment income

    2,176,770       2,176,770       -       -       2,176,770  

Total financial assets

  $ 159,158,990     $ 165,541,061     $ 34,223,945     $ -     $ 131,317,116  

Financial liabilities

                                       

Policyholders' account balances

  $ 245,346,489     $ 206,541,702     $ -     $ -     $ 206,541,702  

Policy claims

    997,814       997,814       -       -       997,814  

Total financial liabilities

  $ 246,344,303     $ 207,539,516     $ -     $ -     $ 207,539,516  

 

 
24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(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, Accrued Investment Income and Policy Loans

 

The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents 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.

 

 
25

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(Unaudited)

 

4. 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, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 are summarized as follows:

  

   

Three Months Ended March 31, (Unaudited)

 
   

2017

   

2016

 

Revenues:

               

Life insurance operations

  $ 4,184,653     $ 3,745,244  

Annuity operations

    3,188,969       2,637,424  

Corporate operations

    134,337       158,239  

Total

  $ 7,507,959     $ 6,540,907  
                 

Income before income taxes:

               

Life insurance operations

  $ 117,848