Company Quick10K Filing
Quick10K
Texas Republic Capital
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
8-K 2018-09-12 Officers
8-K 2018-05-08 Shareholder Vote
ESS Essex Property Trust 18,290
ZYME Zymeworks 509
SNSR World Surveillance Group 86
SLGG Super League Gaming 58
NTZ Natuzzi 50
BOXL Boxlight 34
OXBR Oxbridge RE Holdings 7
EMYB Embassy Bancorp 0
QPAG Qpagos 0
ILCC International Leaders Capital 0
TRCC 2018-12-31
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits
EX-21.1 ex_135395.htm
EX-31.1 ex_135396.htm
EX-31.2 ex_135397.htm
EX-32.1 ex_135398.htm
EX-32.2 ex_135399.htm

Texas Republic Capital Earnings 2018-12-31

TRCC 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 trcc20181231_10k.htm FORM 10-K trcc20181231_10k.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

 


 

FORM 10-K

 


 

(Mark One)

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

 

For the fiscal year ended December 31, 2018

 

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

 

For the transition period From                                to                                  .

 

Commission file number:  000-55621

 

TEXAS REPUBLIC CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Texas

45-5311713

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

13215 Bee Cave Parkway, Ste A120

Austin, Texas 78738

(Address of principal executive offices)

 

(512) 330-0099

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of Each Class

None

 

Securities registered pursuant to section 12(g) of the Exchange Act:

 

Title of Each Class

Common Stock, $.01 Par Value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 every Interactive Data File required to be submitted 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 such files).   Yes ☒   No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition 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 aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

Because of the absence of an established trading market for the common stock, the registrant is unable to calculate the aggregate market value of the voting stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  Common stock $.01 par value as of March 22, 2019: 14,850,097 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2019 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this report.

 

 

 

 

 

Texas Republic Capital Corporation

 

TABLE OF CONTENTS

 

Part I 

 

 

 

 

Item 1.

Business

4

Item 2.

Properties

5

Item 3.

Legal Proceedings

5

Item 4.

Mine Safety Disclosures

5

 

 

 

Part II 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

6

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

7

Item 8.

Financial Statements

12

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

32

Item 9A.

Controls and Procedures

32

Item 9B.

Other Information

33

 

 

 

Part III 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

34

Item 11.

Executive Compensation

34

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

34

Item 13.

Certain Relationships and Related Transactions, and Director Independence

34

Item 14.

Principal Accounting Fees and Services

34

Item 15.

Exhibits

35

 

 

Signatures

36

 

Exhibit 21.1

Exhibit 24.1

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 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

 

 

PART I

 

Item 1. Business

 

Business Development

 

Texas Republic Capital Corporation (the “Company”) is the parent holding company of Texas Republic Life Insurance Company (“TRLIC”) and Texas Republic Life Solutions, Inc. (“TRLS”).  The Company was incorporated in Texas on May 15, 2012, for the primary purpose of forming and capitalizing a life insurance company subsidiary.

 

The Texas Department of Insurance approved TRLIC’s life insurance charter on August 1, 2016.  The Company capitalized TRLIC with $3,000,000 and owns 100% of TRLIC.  TRLIC began insurance operations on April 3, 2017 and is currently selling life and annuity products in the state of Texas.  During 2018, TRCC made capital contributions of $2,000,000 and $750,000 bringing the total capitalization of TRLIC to $5,750,000. TRLS, an insurance agency, was incorporated February 1, 2017.  The Company capitalized TRLS with $50,000 and owns 100% of TRLS.  During 2018, TRCC made a capital contribution of $100,000 bringing the total capitalization of TRLS to $150,000.

 

Company Capitalization

 

From incorporation through April 2, 2017 the Company was involved in the sale of common stock to provide working capital.  During this time the Company completed an organizational offering, three private placement stock offerings and an intrastate public stock offering in the state of Texas.  The Company raised $10,336,500 and incurred $1,215,569 of offering costs through the issuance of 12,865,000 shares from the organizational offering and three private placement offerings. The intrastate public stock offering was registered to raise $25,000,000 by offering 5,000,000 shares of its common stock and ended on April 2, 2017.  This offering raised $10,010,485 and incurred $1,444,127 of offering costs through the sale of 2,002,097 shares of the common stock.  

 

Financial Information about Segments

 

The Financial Accounting Standards Board (“FASB”) guidance requires a “management approach” in the presentation of business segments based on how management internally evaluates the operating performance of business units. The Company has evaluated our operations and has determined there is not definitive segregation between corporate and insurance operations or between life and annuity operations.  Therefore, the Company reports only consolidated operations.

 

Life Insurance and Annuity Operations

 

The Company began selling its life insurance and annuity products on April 3, 2017.  TRLIC is currently selling one life and three annuity products.  The life product is a modified whole life product with an annuity rider.  It is a ten or twenty-year paid-up policy, based on policyholder age, with 50% of the premium deposited into the annuity in years 2-10/20.  The annuity products are 5-year and 10-year fixed annuities.  Based on the product selected there is a 5% or 10% premium bonus immediately credited to the account balance which is vested over five or ten years unless surrendered prior to the end of the vesting period. Additionally, the Company’s TrueFlex product was approved by the Texas Department of Insurance (“TDI”). The TrueFlex product is a voluntary benefit payroll deduction product.

 

Competition and Ratings

 

TRLIC operates in a mature and highly competitive industry. We compete with hundreds of life and health insurance company groups in the United States as well as other financial intermediaries such as banks and securities firms who market insurance products. Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation. Many of these companies have more substantial capital and technological resources, possess greater brand recognition, and maintain higher ratings.  Competitive factors are primarily the breadth and quality of products offered, established positions in niche markets, pricing, relationships with distribution channels, commission structures, the perceived stability of the insurer, quality of underwriting and customer service, scale, and cost efficiency.  Operating results of life insurers are subject to fluctuations, not only from this competitive environment, but also due to economic conditions, interest rate levels and changes and the performance of investments.

 

 

In order to compete successfully, life insurers focus initiatives toward improved technology and distribution, defined end market targets, speed to the market in terms of product development, and customer relationship management as ways of gaining a competitive edge. The Company’s management believes that it can be competitive in the market by servicing niche markets that are underserved by larger insurers.  By developing specialized products, the Company will reach underinsured segments providing cost effective solutions for our client’s needs.  Additionally, the Company can react quickly to changing market conditions and to bring new products to the market to service our client’s needs.

 

Reinsurance

 

TRLIC cedes reinsurance allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth and risk diversification. TRLIC reinsures all amounts of risk on any one life in excess of $50,000 for individual life insurance to Optimum Re Insurance Company (“Optimum Re”).

 

Governmental Regulation

 

TRLIC is subject to regulation and supervision by the Texas Department of Insurance (“TDI”).  The insurance laws of Texas give the TDI broad regulatory authority, including powers to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus and (x) regulate the type and amount of permitted investments.

 

TRLIC can be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of other insurance companies that become insolvent.  These assessments may be deferred or foregone under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes.

 

TRLIC dividends available for distribution are based on provisions of the Texas Insurance Code. Without prior approval from the Commissioner of Insurance of Texas dividends to shareholders are limited to the greater of (a) 10% of TRLIC’s surplus as regards to policyholders as of December 31, next preceding, or (b) the net gain from operations of the insurer company for the twelve-month period ending December 31, next preceding year.

 

There are certain factors specific to the life insurance business which may have an adverse effect on the statutory operating results of TRLIC.  One such factor is that the costs associated with issuing a new policy in force is usually greater than the first year’s policy premium.  Accordingly, in the early years of a new life insurance company, these initial costs and the required provisions for reserves often have an adverse effect on statutory operating results.

 

Employees

 

As of March 22, 2019, the Company has seven full-time employees and one part-time employee in TRCC and TRLIC.

 

Item 2. Properties

 

The Company entered into a lease with a third-party lessor in 2014 for utilization of office space in Austin, Texas.  The lease agreement ended September 30, 2017.  The Company also paid a pro rata share of the operating expenses of the building. 

 

The Company entered into a new 62-month lease agreement with a third-party lessor in 2017 for utilization of office space in Austin, Texas.  The lease agreement ends November 30, 2022.  The lease required a deposit in the amount of $7,109 and abated the first two month’s rent.  The monthly rental payments are $4,864 for the first twelve months after abatement.  The Company also pays a pro rata share of the operating expenses of the building.  Rent expense was $80,967 under the new agreement for the twelve months ended December 31, 2018 and $56,946 under the two agreements for the twelve months ended December 31, 2017.  Total future minimum lease payments and a pro rata share of the buildings operating expenses to be paid under the current non-cancellable lease agreement are $82,487 in 2019, $84,036 in 2020, $85,585 in 2021 and $78,485 in 2022. 

 

Item 3. Legal Proceedings

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

 

(a)

Market Information

 

 

 

Trading of the Company’s common stock is limited, and an established public market does not exist.

 

 

(b)

Holders

 

 

 

As of March 22, 2019, there were 1,575 shareholders of the Company’s outstanding common stock.

 

 

(c)

Dividends

 

 

 

The Company has not paid any cash dividends since inception (May 15, 2012). The Board of Directors of the Company has not adopted a dividend payment policy; however, dividends must necessarily depend upon the Company’s earnings and financial condition, applicable legal restrictions from the Texas Business Organization Code and other factors relevant at the time the Board of Directors considers a dividend policy. Cash available for dividends to shareholders of the Company must initially come from income and capital gains earned on its investment portfolio and dividends paid by the Company’s subsidiaries.

 

 

 

TRLIC dividends available for distribution are based on provisions of the Texas Insurance Code. Without prior approval from the Commissioner of Insurance of Texas dividends to shareholders are limited to the greater of (a) 10% of TRLIC’s surplus as regards to policyholders as of December 31, next preceding, or (b) the net gain from operations of the insurer company for the twelve-month period ending December 31, next preceding year.

 

 

(d)

Securities Authorized for Issuance Under Equity Compensation Plans

 

 

 

There are no equity compensation plans for employees.  The Company’s life subsidiary, TRLIC has an Agent Stock Incentive Plan (“ASIP”).  The plan was approved in August 2018 by the Texas State Securities Board.  The plan awards shares of Texas Republic Capital Corporation common stock to agents based on certain production levels achieved in sales of life and annuity products. Calculation of awards will be determined at December 31, 2018 based on production for the period of August through December 2018.  The ASIP will issue 1,220 shares.

   

(e)

Performance graph not required for smaller reporting company.

 

 

(f)

Related Stockholder Matters

 

 

(i) 

Sale of unregistered equity securities

 

 

 

The Company sold 4,375,000 common shares at $.02 per share to its organizing shareholders in May of 2012 for total proceeds of $87,500.  Subsequently, the Company completed three private placement stock offerings which raised $10,249,000 through the issuance of 8,490,000 shares from the private placement offerings in 2012 and 2013, including a private placement of 2,000,000 shares for $5,000,000 between February and November 2013.  These shares were sold in reliance on the exemption from the registration requirements of the Securities Act of 1933 (the “1933 Act”) contained in Securities and Exchange Commission (“SEC”) Regulation D, Rule 506.  No underwriter was involved in connection with the issuance of our shares, and we paid no finder’s fees in the private placements.

 

 

 

On April 2, 2014, the Company commenced an offering of 5,000,000 shares of common stock at $5.00 per share ($25,000,000 maximum) with a 10% over sale provision, in an intrastate public offering registered with the Texas State Securities Board.  This offering was ended on April 2, 2017 and was sold only to Texas residents pursuant to an exemption from the 1933 Act contained in Section 3(a)(11) of the 1933 Act and Rule 147 promulgated by the SEC.  It was sold by issuer agents registered with the Texas State Securities Board.  The Company raised $10,010,485 and incurred offering costs of $1,444,127 from the sale of 2,002,097 shares in this offering.  Proceeds have been used for working capital and the capitalization of a life insurance company and insurance agency.

 

 

(g)

Purchases of Equity Securities by Issuer

 

 

 

Through December 31, 2017, the Company purchased 3,000 shares of the Company’s common stock for $15,000 held as treasury stock.  Additionally, TRLIC has purchased 14,000 shares of TRCC common stock at a cost of $35,000. The shares were purchased to compensate agents under TRLIC’s Stock Incentive Plan. The shares are held as treasury shares in the consolidated financial statements.

 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Texas Republic Capital Corporation (“we” “us”, “our”, “TRCC” or the “Company”) was incorporated in May 2012 as a financial services holding company.  Between May 2012 and November 2013, we conducted an organizational offering and three private placements of our common stock.  From the organizational offering and private placements, we raised $10,336,500, incurred $1,215,569 of offering costs and issued 12,865,000 shares of our common stock.  During 2012, the funds raised, offering costs incurred and shares subscribed from the private placements were $5,051,300, $180,835 and 10,636,840, respectively.  During 2013, the funds raised, offering costs incurred and shares subscribed from the private placements were $5,285,200, $1,034,734 and 2,228,160, respectively.

 

We began an intrastate public offering of our common stock at a price per share of $5.00 on April 2, 2014 and completed that offering on April 2, 2017.  The Company raised $10,010,485 and incurred $1,444,127 of offering costs through the issuance of 2,002,097 shares of the Company’s common stock less treasury stock of 3,000 shares from the intrastate public stock offering.  During 2014, the funds raised, offering costs incurred and shares subscribed from the offering were $3,143,800, $576,613 and 628,760, respectively.  During 2015, the funds raised, offering costs incurred and shares subscribed from the offering were $1,901,925, $326,734 and 380,385, respectively.  During 2016 the funds raised, offering costs incurred and shares subscribed from the offering were $3,062,510, $330,516 and 612,502, respectively.  During 2017 the funds raised, offering costs incurred and shares subscribed from the offering were $1,902,250, $210,264 and 380,450, respectively. 

 

The Texas Department of Insurance approved TRLIC’s life insurance charter on August 1, 2016.  The Company capitalized TRLIC with $3,000,000 and owns 100% of TRLIC.  TRLIC began insurance operations on April 3, 2017 and is currently selling life and annuity products in the state of Texas.  During 2018 TRCC made capital contributions of $2,000,000 and $750,000 bringing the total capitalization of TRLIC to $5,750,000. Texas Republic Life Solutions (“TRLS”), an insurance agency, was incorporated February 1, 2017.  The Company capitalized TRLS with $50,000 and owns 100% of TRLS.  During 2018 TRCC made a capital contribution of $100,000 bringing the total capitalization of TRLIC to $150,000.

 

We are a financial services holding company and have incurred significant net losses since our inception. As of December 31, 2018, we had an accumulated deficit of $5,445,635. These losses have resulted from costs incurred while raising capital and start-up costs related to our insurance operations. We expect to continue to incur operating losses until we achieve a volume of inforce life insurance policies that provides premiums and investment income which are sufficient to cover our operating costs.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. On a continuing basis, we evaluate our estimates and assumptions.

 

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.

 

Investments

 

Fixed maturity securities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income.  The amortized cost of fixed maturity securities available-for-sale is generally adjusted for amortization of premium and accretion of discount.

 

Interest income, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method.  The amortized cost of fixed maturity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary.

 

 

The Company evaluates the difference between the cost or amortized cost and estimated fair value of its investments to determine whether any decline in value is other-than-temporary in nature.  This determination involves a degree of uncertainty.  If a decline in the fair value of a security is determined to be temporary, the decline is recorded as an unrealized loss in stockholders’ equity.  If a decline in a security’s fair value is considered to be other-than-temporary, the Company then determines the proper treatment for the other-than-temporary impairment.  For fixed maturity securities available-for-sale, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security.

 

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security.  It is not possible to accurately predict when it may be determined that a specific security will become impaired.  Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.

 

Likewise, if a change occurs in the Company’s intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that the Company will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result.  If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortizes the reduced book value back to the security’s expected recovery value over the remaining term of the bond.  The Company continues to review the security for further impairment that would prompt another write-down in the value.

 

Purchases and sales of securities are recorded on a trade-date basis.  Interest earned on investments is recorded on the accrual basis and is included in net investment income.

 

The Company’s mortgage loan portfolio is comprised of residential properties with loan to appraised value ratios below 72%. Mortgage loans are carried at current book value. 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.

 

The Company’s other long-term investments are comprised of lottery prize cash flows holdings held at amortized cost. They are categorized as other long-term investments in the statement of financial position and are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, amounts due from banks and money market instruments.

 

Deferred Policy Acquisition Costs

 

Costs that relate to and vary with the successful production of new business are deferred over life of the policy.  Deferred acquisition costs, (DAC), consist of commissions and policy issuance, underwriting and agency expenses.  DAC expenses are amortized primarily over the premium-paying period of life policies and as profits emerge on the annuity products, using the same assumptions as were used in computing liabilities for future policy benefits.

 

Deferred Sales Inducement Costs

 

Sales inducement costs (SIC) are related to policy bonuses issued on some of the Company’s annuity products.  SIC is deferred at the issuance of the policy and amortized over the shorter of the bonus period or the life of the policy based on the expected future profits of the business.  The amount deferred is based on the difference between the fund value with the bonus and the fund value without the bonus. 

 

Policyholders’ Account Balances

 

The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus applicable bonus and interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.24% to 5.00%.

 

 

Future Policy Benefits

 

Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, mortality and withdrawals based upon the Company’s experience.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves.  Management’s judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.

 

Income Taxes

 

We evaluate our deferred income tax assets, which partially offset our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the financial statements in the period in which such revisions are made.

 

Results of Operations – Years Ended December 31, 2018 and 2017

 

Revenues

 

Our revenues are from the initial sales of insurance products and investment income from investments in fixed maturity available-for-sale securities, mortgages and other assets.  We began selling insurance products in May 2017.  Revenue included $363,515 and $304,163 from sales of life insurance for the twelve months ended December 31, 2018 and 2017, respectively.  The Company also accepted annuity considerations of $1,838,464 and $1,398,041 during 2018 and 2017, respectively.  Annuity considerations will generate revenue on investments but are not classified as revenue for GAAP reporting.

 

Investment income was $348,264 for the year ending December 31, 2018 compared to $96,678 for the year ended December 31, 2017.  During 2018 the Company invested in mortgage loans on real estate, lottery bonds and corporate bonds to increase investment yields to support interest expense on our annuity deposits. The Company also moved all non-operating cash to interest bearing money market accounts. Total revenues were $767,072 for the year ended December 31, 2018, an increase of $365,859 from $401,213 for the year ended December 31, 2017.

 

Expenses

 

Our expenses relate to operating a financial services holding company, a life insurance company and an insurance agency.

 

Expenses were $1,994,508 for the year ended December 31, 2018, an increase of $257,712 from $1,736,796 for the year ended December 31, 2017.

 

Total Benefits and Claims – Increases to policyholder liabilities increased benefits and claims expense $69,487 for the year ended December 31, 2018.  The increase is consistent with the increased insurance sales compared to 2017.

 

Commissions – Commission expense increased $12,052 for the year ended December 31, 2018.  The increase is consistent with the increased insurance sales compared to 2017.

 

Salaries and Wages – Salary expense increased $115,255 for the year ended December 31, 2018. The increase is due to the addition of staff in the third quarter of 2017 and the addition of salaried sales agents in the fourth quarter 2018.  To a lesser degree moderate increases to existing salaries added to the variance.

 

Net Loss

 

The net loss was $1,227,436, or $(0.08) per share, for the year ended December 31, 2018 compared to a net loss of $1,335,583, or $(0.09) per share, for the year ended December 31, 2017. The $108,147 decrease in the net loss was primarily attributable to the increases of $251,586 and $54,921 in net investment income and commission income generated by agency operations, respectively. Somewhat offsetting the increases in revenue are increase in expenses described above. We expect our losses to increase in the future as we incur increased costs to grow the life insurance business.  The weighted average common shares outstanding were 14,861,514 and 14,804,853 for the years ending December 31, 2018 and 2017, respectively.  The total shares outstanding were 14,850,097 and 14,864,097 at December 31, 2018 and 2017, respectively.

 

 

Financial Position – As of December 31, 2018 and 2017

 

Total assets of the Company increased from $15,343,968 as of December 31, 2017 to $15,732,993 as of December 31, 2018, an increase of $389,025 and was attributable to annuity sales in 2018.

 

The Company is investing the annuity deposits in fixed maturity securities, mortgages and other assets (lottery bonds).  The increase in mortgages of $569,135 and lottery bonds of $449,461 are directly related to annuity deposits in Texas Republic Life Insurance Company.  Mortgages of $875,895 were also acquired in the holding company.  The increase of $4,290,468 in fixed maturity securities occurred both in the insurance company and at the holding company level as we try to maximize our investment earnings.

 

Cash decreased $6,066,998 from December 31, 2017 to December 31, 2018 as we are investing to maximize yields to support the insurance operations.  During the twelve months ending December 31, 2018 the outflow of cash relating to investments was $6,397,183 compared to $32,966 during the twelve months ending December 31, 2017.

 

Policyholder liabilities include benefit reserves for both life and annuity policies, claim reserves, deposit funds and advance premiums.  Policyholder liabilities increased $1,812,564 at December 31, 2018 compared to December 31, 2017.  The increase is directly related to the increase of inforce life insurance and the liability for annuity deposits.

 

Total shareholder equity of the Company decreased from $13,540,357 as of December 31, 2017 to $12,028,873 as of December 31, 2018, a decrease of $1,511,484.  The decrease is mainly due to the net loss from operations of $1,227,436 and the purchase of treasury shares of $35,000. Additionally, the increase in unrealized losses on fixed maturity securities due to the interest rate environment added $249,048 to the decrease in equity but should be recaptured as the bonds mature.

 

Liquidity and Capital Resources

 

Since inception, our operations have been financed primarily through an organizational offering, three private placement offerings and an intrastate public stock offering. Through December 31, 2018, we received $20,346,985 from the sale of 14,867,097 shares and incurred offering costs of $2,659,696.  During 2017 and 2016 we paid $5,000 and $10,000 for 1,000 and 2,000 shares of Company’s common stock that is held as treasury stock, respectively.  Additionally, TRLIC has purchased 14,000 shares of TRCC common stock at a cost of $35,000 during 2018. The shares were purchased to compensate agents under TRLIC’s Stock Incentive Plan. The shares are held as treasury shares in the consolidated financial statements. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2012.

 

We had cash and cash equivalents totaling $6,511,652 and $12,578,650 as of December 31, 2018 and 2017, respectively.  The Company maintains cash and cash equivalents at multiple institutions.  The Federal Deposit Insurance Corporation insures interest and non-interest-bearing accounts up to $250,000.  Uninsured balances aggregate $534,014 and $4,993,908 as of December 31, 2018 and December 31, 2017 respectively.  Other funds are invested in mutual funds that invest in U.S. government securities.  We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss.  The Company has not experienced any losses in such accounts.

 

Capital provided from the public offering will provide a considerable amount of operating funds for current and future operations.  The operations of TRLIC should provide ample cash flows from premium income and investment income to meet operating requirements.  Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows.

 

We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital expenditures for at least 12 months. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. TRLIC and TRLS may require additional capital as they continue to grow.  As discussed above, the Company capitalized TRLIC with $3,000,000 cash during the third quarter of 2016. During 2018 the Company added additional capital of $2.75 million to TRLIC. The Company capitalized TRLS with $50,000 in the second quarter of 2017.  The Company contributed an additional $100,000 to TRLS in 2018.

 

Off-Balance Sheet Arrangements

 

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

 

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

These factors include among others:

 

  

 

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

  

 

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

  

 

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

  

 

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

  

 

investment losses and defaults;

  

 

competition in our product lines;

  

 

attraction and retention of qualified employees and agents;

 

 

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

  

 

the availability, affordability and adequacy of reinsurance protection;

  

 

the effects of emerging claim and coverage issues;

  

 

the cyclical nature of the insurance business;

   

 

interest rate fluctuations;

  

 

changes in our experiences related to deferred policy acquisition costs;

  

 

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

  

 

rating agencies’ actions;

  

 

domestic or international military actions;

  

 

the effects of extensive government regulation of the insurance industry;

  

 

changes in tax and securities law;

  

 

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

  

 

regulatory or legislative changes or developments;

  

 

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

  

 

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

  

 

risks of employee error or misconduct;

  

 

the assimilation of life insurance businesses we acquire and the sound management of these businesses; and

  

 

the availability of capital to expand our business.

 

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

 

 

Item 8.   Financial Statements

 

 

TEXAS REPUBLIC CAPITAL CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

Consolidated Financial Statements

Page Number

 

 

 

 

Report of Independent Registered Public Accounting Firm

13

 

 

Consolidated Statements of Financial Position

14

 

 

Consolidated Statements of Operations

15

 

 

Consolidated Statements of Comprehensive Loss

16

 

 

Consolidated Statements of Changes in Shareholders’ Equity

17

 

 

Consolidated Statements of Cash Flows

18

 

 

Notes to Consolidated Financial Statements

19

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and

Shareholders of Texas Republic Capital Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of financial position of Texas Republic Capital Corporation and Subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements).  In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

/s/ Kerber, Eck & Braeckel LLP

 

We have served as the Company’s auditor since 2012.

 

Springfield, Illinois

March 22, 2019

 

 

Texas Republic Capital Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

December 31, 2018

   

December 31, 2017

 

Assets

               

Available-for-sale fixed maturity securities at fair value

(Amortized cost: $6,828,467 and $2,288,321 as of

December 31, 2018 and 2017, respectively)

  $ 6,665,056     $ 2,374,588  

Mortgage loans

    1,445,030       -  

Other long-term investments

    449,461       -  

Total investments

    8,559,547       2,374,588  

Cash and cash equivalents

    6,511,652       12,578,650  

Accrued investment income

    76,668       22,709  

Due premium

    5,050       -  

Deferred policy acquisition costs

    326,210       193,585  

Deferred sales inducement costs

    164,316       79,866  

Advances and notes receivable

    14,360       24,850  

Security deposit

    7,109       7,109  

Prepaid and other assets

    33,871       29,381  

Furniture and equipment, net

    34,210       33,230  

    Total assets

  $ 15,732,993     $ 15,343,968  
                 

Liabilities and Shareholders’ Equity

               

Policy liabilities

               

Policyholders’ account balances

  $ 3,165,519     $ 1,487,763  

Future policy benefits

    338,407       175,023  

Policy claims and other benefits

    28,306       2,504  
Liability for deposit-type contracts     19,540       -  

Other policyholder liabilities

    9,283       83,201  

Total policy liabilities

    3,561,055       1,748,491  

Accounts payable

    143,065       55,120  

Total liabilities

    3,704,120       1,803,611  
                 

Shareholders’ equity

               

Common stock, par value $.01 per share, 25,000,000 shares authorized,

14,867,097 issued as of December 31, 2018 and 2017, 14,850,097 and 14,864,097

outstanding as of December 31, 2018 and 2017, respectively

    148,671       148,671  

Additional paid-in capital

    17,538,618       17,538,618  

Treasury stock, at cost (17,000 and 3,000 shares as of December 31, 2018 and 2017, respectively)

    (50,000

)

    (15,000

)

Accumulated other comprehensive income (loss)

    (162,781

)

    86,267  

Accumulated deficit

    (5,445,635

)

    (4,218,199

)

Total shareholders’ equity

    12,028,873       13,540,357  

Total liabilities and shareholders’ equity

  $ 15,732,993     $ 15,343,968  

 

See notes to consolidated financial statements.

 

 

Texas Republic Capital Corporation and Subsidiaries

Consolidated Statements of Operations

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Revenues

               

Premiums and other considerations

  $ 363,515     $ 304,163  

Net investment income

    348,264       96,678  

Commission income

    55,293       372  

Total revenues

    767,072       401,213  

Benefits, claims and expenses

               

Increase in future policy benefits

    162,828       174,665  

Death and other benefits

    25,802       2,504  

Interest credited to policyholders

    67,882       9,856  

Total benefits and claims

    256,512       187,025  

Policy acquisition costs deferred

    (197,369

)

    (193,585

)

Policy acquisition costs amortized

    65,373       -  

Commissions

    236,270       224,218  

Salaries and wages

    784,688       669,433  

Employee benefits

    73,203       80,482  

Taxes, licenses and fees

    56,432       50,509  

Office rent

    80,967       56,946  

Director fees

    48,250       51,250  

Third-party administration fees

    188,413       194,605  

Service and transfer agent fees

    47,156       32,515  

Travel, meals and entertainment

    31,885       98,006  

Professional fees

    153,953       159,337  

Furniture, equipment and software

    31,978       21,792  

Office and other expenses

    136,797       104,263  

Total benefits, claims and expenses

    1,994,508       1,736,796  

Net loss

  $ (1,227,436

)

  $ (1,335,583

)

                 

Net loss per common share outstanding and subscribed

  $ (0.08

)

  $ (0.09

)

 

See notes to consolidated financial statements.

 

 

 

Texas Republic Capital Corporation and Subsidiaries

Consolidated Statements of Comprehensive Loss

 

   

Years Ended December 31,

 
   

2018

   

2017

 
                 

Net loss

  $ (1,227,436

)

  $ (1,335,583

)

Other comprehensive income (loss)

               

Total net unrealized gains (losses) arising during the period

    (249,678

)

    32,566  

Adjustment to deferred acquisition costs

    630       -  

Total other comprehensive income (loss)

    (249,048

)

    32,566  

Total comprehensive loss

  $ (1,476,484

)

  $ (1,303,017

)

 

See notes to consolidated financial statements.

 

 

Texas Republic Capital Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2018 and 2017

 

   

Common Stock

$.01 Par

Value

   

Additional

Paid-in

Capital

   

Treasury

Stock

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Accumulated

Deficit

   

Total

Shareholders’

Equity

 

Balance as of January 1, 2017

  $ 144,866     $ 15,850,437     $ (10,000

)

  $ 53,701     $ (2,882,616

)

  $ 13,156,388  

Subscriptions of common stock:

                                               

$5.00 per share

    3,805     $ 1,898,445     $ -     $ -     $ -     $ 1,902,250  

Purchase of common stock

    -       -       (5,000

)

    -       -       (5,000

)

Offering costs

    -       (210,264

)

    -       -       -       (210,264

)

Other comprehensive income

    -       -       -       32,566       -       32,566  

Net loss

    -       -       -       -       (1,335,583

)

    (1,335,583

)

Balance as of December 31, 2017

  $ 148,671     $ 17,538,618     $ (15,000

)

  $ 86,267     $ (4,218,199

)

  $ 13,540,357  
                                                 

Purchase of common stock

    -       -       (35,000

)

    -       -       (35,000

)

Other comprehensive loss

    -       -       -       (249,048

)

    -       (249,048

)

Net loss

    -       -       -       -       (1,227,436

)

    (1,227,436

)

Balance as of December 31, 2018

  $ 148,671     $ 17,538,618     $ (50,000

)

  $ (162,781

)

  $ (5,445,635

)

  $ 12,028,873  

 

See notes to consolidated financial statements.

 

 

Texas Republic Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows

 

   

Years Ended December 31,

 
   

2018

   

2017

 
                 

Operating activities

               

Net loss

  $ (1,227,436

)

  $ (1,335,583

)

Adjustments to reconcile net loss to net cash used in

operating activities:

               

Accretion of discount on investments

    (23,468

)

    (1,942

)

Provision for depreciation

    12,066       4,240  

Policy acquisition costs deferred

    (197,369

)

    (193,585

)

Policy acquisition costs amortized

    65,373       -  

Mortgage loan origination fees deferred

    (27,154

)

    -  

Amortization of mortgage loan origination fees

    122       -  

Interest credited to policyholders

    67,882       9,856  

Change in assets and liabilities:

               

Accrued investment income

    (53,959

)

    -  

Due premium

    (5,050

)

    -  

Advances and notes receivable

    10,490       10,925  

Security deposit

    -       (3,117

)

Prepaid and other assets

    (4,490

)

    (29,381

)

Future policy benefits

    163,384       175,023  

Policy claims

    25,802       2,504  

Other policy liabilities

    (73,918

)

    83,201  

Accounts payable

    87,945       23,776  

Net cash used in operating activities

    (1,179,780

)

    (1,254,083

)

                 

Investing activities

               

Purchases of furniture and equipment

    (13,046

)

    (32,966

)

Purchase of fixed maturity securities

    (4,540,023

)

    -  

Purchase of mortgage loans

    (1,428,137

)

    -  

Payments on mortgage loans

    10,206       -  

Purchase of other long-term investments

    (426,183

)

    -  

Net cash used in investing activities

    (6,397,183

)

    (32,966

)

                 

Financing activities

               

Proceeds from public stock offering

    -       1,902,250  

Offering costs

    -       (210,264

)

Purchase of treasury stock

    (35,000

)

    (5,000

)

Policyholder deposits

    1,838,464       1,398,041  

Policyholder withdrawals

    (312,549

)

    -  

Deposit-type contracts - deposits

    24,175       -  

Deposit-type contracts - withdrawals

    (5,125

)

    -  

Net cash provided by financing activities

    1,509,965       3,085,027  
                 

Decrease in cash and cash equivalents

    (6,066,998

)

    1,797,978  

Cash and cash equivalents, beginning of period

    12,578,650       10,780,672  

Cash and cash equivalents, end of period

  $ 6,511,652     $ 12,578,650  

 

See notes to consolidated financial statements.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

1.          Organization and Significant Accounting Policies

 

Nature of Operations

 

Texas Republic Capital Corporation (the “Company”) is the parent holding company of Texas Republic Life Insurance Company (“TRLIC”) and Texas Republic Life Solutions, Inc. (“TRLS”).  The Company was incorporated in Texas on May 15, 2012, for the primary purpose of forming and capitalizing a life insurance company subsidiary.

 

The Texas Department of Insurance approved TRLIC’s life insurance charter on August 1, 2016.  The Company capitalized TRLIC with $3,000,000 and owns 100% of TRLIC.  TRLIC began insurance operations on April 3, 2017 and is currently selling life and annuity products in the state of Texas.  During 2018 the Company made capital contributions of $2,000,000 and $750,000 bringing the total capitalization of TRLIC to $5,750,000. TRLS, an insurance agency, was incorporated February 1, 2017.  The Company capitalized TRLS with $50,000 and owns 100% of TRLS. During 2018 the Company made a capital contribution of $100,000 bringing the total capitalization of TRLS to $150,000.

 

From incorporation through April 2, 2017, the Company was involved in the sale of common stock to provide working capital.  During this time the Company completed an organizational offering, three private placement stock offerings and an intrastate public stock offering in the state of Texas.  The Company raised $10,336,500 and incurred $1,215,569 of offering costs through the issuance of 12,865,000 shares from the organizational offering and three private placement offerings. The intrastate public stock offering was registered to raise $25,000,000 by offering 5,000,000 shares of its common stock and was ended on April 2, 2017.  This offering raised $10,010,485 and incurred $1,444,127 of offering costs through the sale of 2,002,097 shares of the common stock. 

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

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.

 

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.

 

Reclassifications

 

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

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

1.          Organization and Significant Accounting Policies (continued)

 

Investments

 

Fixed maturity securities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income.  The amortized cost of fixed maturity securities available-for-sale is generally adjusted for amortization of premium and accretion of discount.

 

Interest income, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method.  The amortized cost of fixed maturity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary.

 

The Company evaluates the difference between the cost or amortized cost and estimated fair value of its investments to determine whether any decline in value is other-than-temporary in nature.  This determination involves a degree of uncertainty.  If a decline in the fair value of a security is determined to be temporary, the decline is recorded as an unrealized loss in stockholders’ equity.  If a decline in a security’s fair value is considered to be other-than-temporary, the Company then determines the proper treatment for the other-than-temporary impairment.  For fixed maturity securities, available-for-sale, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security.

 

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security.  It is not possible to accurately predict when it may be determined that a specific security will become impaired.  Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.

 

Likewise, if a change occurs in the Company’s intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that the Company will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result.  If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortizes the reduced book value back to the security’s expected recovery value over the remaining term of the bond.  The Company continues to review the security for further impairment that would prompt another write-down in the value.

 

Purchases and sales of securities are recorded on a trade-date basis.  Interest earned on investments is recorded on the accrual basis and is included in net investment income.

 

The Company’s mortgage loan portfolio is comprised of residential properties with loan to appraised value ratios below 72%. Mortgage loans are carried at current book value. 

 

The Company’s other long-term investments are comprised of lottery prize cash flows holdings held at amortized cost. They are categorized as other long-term investments in the statement of financial position and are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, amounts due from banks and money market instruments.

 

Deferred Policy Acquisition Costs

 

Costs that relate to and vary with the successful production of new business are deferred over the life of the policy.  Deferred acquisition costs (“DAC”) consist of commissions and policy issuance, underwriting and agency expenses.  DAC expenses are amortized primarily over the premium-paying period of life policies and as profit emerge on annuity products.  Amortization uses the same assumptions as were used in computing liabilities for future policy benefits.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

1.          Organization and Significant Accounting Policies (continued)

 

Deferred Sales Inducement Costs

 

Sales inducement costs (“SIC”) are related to policy bonuses issued on some of the Company’s annuity products.  SIC is deferred at the issuance of the policy and amortized over the shorter of the bonus period or the life of the policy based on the expected future profits of the business.  The amount deferred is based on the difference between the fund value with the bonus and the fund value without the bonus. There was $164,316 and $79,866 of SIC deferred at December 31, 2018 and December 31, 2017, respectively.  For the twelve months ended December 31, 2018 there was $104,603 of SIC deferred and $20,153 of SIC amortized. There was $79,866 of SIC deferred during the twelve months ended December 31, 2017. There was no SIC amortized in 2017.

 

Advances and Notes Receivable

 

Advances and notes receivable are recorded at unpaid principal balances.  Management evaluates the collectability of advances and notes receivable on the specific identification basis. Uncollectible amounts are reported in the results of operations in the year the determination is made.

 

Furniture and Equipment

 

Furniture and equipment are carried at cost less accumulated depreciation or amortization. Office furniture, equipment and EDP equipment is recorded at cost or fair value at acquisition less accumulated depreciation or amortization using the straight-line method over the estimated useful life of the respective assets of three to seven years.

 

Policyholders’ Account Balances

 

The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus applicable bonus and interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.24% to 5.00%.

 

Future Policy Benefits

 

Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, mortality and withdrawals based upon the Company’s experience.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves.  Management’s judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.

 

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, are recorded at cost.

 

Federal Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes.  Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined using tax bases.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

1.          Organization and Significant Accounting Policies (continued)

 

Offering Costs

 

Certain costs directly related to the sale of the Company’s securities are capitalized against the proceeds from the sales. These costs include legal fees, recruiting and training expenses, commissions, printing, mailing, and other expenses related to the offering.

 

Net Loss Per Common Share Outstanding and Subscribed

 

Net loss per common share is calculated using the weighted average number of common shares outstanding and subscribed during the year. Shares sold during the period are considered to be outstanding for one half of the month in which they were sold. The weighted average common shares outstanding were 14,861,514 and 14,804,853 for the years ending December 31, 2018 and 2017, respectively. 

 

Related Party Transactions

 

During 2015, the Company entered into an administrative service agreement with First Trinity Financial Corporation (“FTFC”) for accounting and other services incidental to the operations of the Company and paid FTFC $11,963 for the year ended December 31, 2017 related to this agreement.  The Company also paid FTFC $8,320 for the year ended December 31, 2017 for additional services performed outside of the administrative service agreement.  The administrative service agreement with FTFC was terminated effective April 30, 2017. The Chairman of the Company is also the Chairman, President and Chief Executive Officer of FTFC. 

 

During 2018 the Company entered into an agreement with FTFC where FTFC will use its resources to source mortgages on real estate and lottery bonds.  FTFC will present to the Company investments based on criteria the Company has established.  The Company has the option to purchase the presented investment assets directly from the seller or to decline the purchase based on the Company’s analysis of the investment.  All mortgages and lottery bonds that were purchased by the Company in 2018 were obtained through this agreement.

 

Subsequent Events

 

Management has evaluated subsequent events for recognition and disclosure in the financial statements through the date the financial statements were available to be issued.

 

Recent Accounting Pronouncements

 

 In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12). This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts.  ASU 2018-12 revises certain aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts.  The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-duration contracts.  The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ ("MRB") and requiring all contract features meeting the definition of an MRB to be measured at fair value, simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant basis over the expected term of the related contracts rather than based on gross profits and enhancing disclosure requirements.  While this ASU is effective on January 1, 2021, the transition date (the remeasurement date) is January 1, 2019.  Early adoption of this ASU is permitted.  The Company is in process of evaluating the impact this guidance will have on our consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”).  ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including, but not limited to: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance principle.  ASU 2016-15 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Adoption of this guidance did not have any material impact on the Company’s financial condition or results of operations.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

1.          Organization and Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements

 

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”).  ASU 2017-08 revises the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The Company is evaluating the securities the Company owns which were purchased at a premium.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – “Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”).  ASU 2016-01 provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the guidance: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. (3) Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. (4) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. (5) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. (6) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. (7) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. (8) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  The adoption of this guidance did not have a significant impact on the Company’s financial statements.

 

 In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”).  ASU 2016-02 requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year, with early adoption permitted. ASU 2016-02 requires the application of a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. While the Company is currently evaluating ASU 2016-02, the Company does not expect a material impact on the Company’s financial condition or results of operations from the adoption of this guidance.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”).  ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, mortgage loans, lottery prize receivables, trade receivables, and reinsurance recoverable. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets and that they be presented on the financial statements net of the valuation allowance.  This methodology is referred to as the current expected credit loss model. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on the Company’s financial condition and results of operations.  However, currently the Company does not expect a material impact on the Company’s financial condition or results of operations from the adoption of this guidance.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

1.          Organization and Significant Accounting Policies (continued)

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other” (“ASU 2017-04”).  ASU 2017-04 will amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  As the Company currently has no goodwill on its balance sheet, ASU 2017-04 is not expected to have an impact on the Company’s financial condition or results of operations.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”).  ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income from the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is evaluating the effects of the enactment of the Tax Cuts and Jobs Act and ASU 2018-02, but does not expect a material impact on the Company’s financial condition or results of operations from the adoption of this guidance.

 

2.           Investments

 

Fixed Maturity Securities Available-For-Sale

 

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

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2018

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

Corporate bonds

  $ 6,828,467     $ 25,916     $ 189,327     $ 6,665,056  

Total fixed maturity securities

  $ 6,828,467     $ 25,916     $ 189,327     $ 6,665,056  

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2017

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

Corporate bonds

  $ 2,288,321     $ 93,942     $ 7,675     $ 2,374,588  

Total fixed maturity securities

  $ 2,288,321     $ 93,942     $ 7,675     $ 2,374,588  

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

2.           Investments (continued)

 

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

 

           

Unrealized

   

Number of

 

December 31, 2018

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

 Corporate bonds

  $ 4,321,663     $ 170,332       36  
                         

Greater than 12 months

                       

 Corporate bonds

    82,500       18,995       1  

Total fixed maturity securities

  $ 4,404,163     $ 189,327       37  

 

           

Unrealized

   

Number of

 

December 31, 2017

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Greater than 12 months

                       

 Corporate bonds

  $ 94,250     $ 7,675       1  

Total fixed maturity securities

  $ 94,250     $ 7,675       1  

 

As of December 31, 2018, 33 of the 37 fixed maturity securities in a loss position had a fair value to amortized cost ratio equal to or greater than 90%.  The four fixed securities that were below 90% were at 80% or higher. The 36 securities in a less than 12-month loss position had an average fair value to amortized cost ratio of 96%. The single issue in a loss position greater than 12-months had a fair value to amortized cost ratio of 81% and 92% as of December 31, 2018 and December 31, 2017, respectively.  Two fixed maturity securities with a par value of $250,000 are below investment grade as rated by Standard and Poor’s as of December 31, 2018 and December 31, 2017.

 

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.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

2.           Investments (continued)

 

Based on management’s review, the Company experienced no other-than-temporary impairments during the years ended December 31, 2018 and 2017.

 

Management believes that the Company will fully recover its cost basis in the securities held as of December 31, 2018, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.  The 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.

 

Net unrealized gains included in other comprehensive income (loss) for investments classified as available-for-sale are summarized as follows:

 

   

December 31,

2018

   

December 31,

2017

 

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

  $ (163,411

)

  $ 86,267  

Adjustment to deferred acquisition costs

    630       -  

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

  $ (162,781

)

  $ 86,267  

 

The amortized cost and fair value of fixed maturity available-for-sale securities as of December 31, 2018, by contractual maturity, are summarized as follows:

 

   

Amortized Cost

   

Fair Value

 

Due after one year through five years

  $ 2,865,294     $ 2,853,846  

Due after five years through ten years

    2,821,548       2,774,294  

Due after ten years

    1,141,625       1,036,916  

Total fixed maturity securities

  $ 6,828,467     $ 6,665,056  

 

The amortized cost and fair value of other long-term investments as of December 31, 2018, by contractual maturity, are summarized as follows: 

 

   

Amortized Cost

   

Fair Value

 

Due in one year or less

  $ 49,826     $ 49,914  

Due after one year through five years

    197,073       222,618  

Due after five years through ten years

    202,562       267,012  

Total other long-term investments

  $ 449,461     $ 539,544  

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Mortgage Loan on Real Estate

 

The Company utilizes the ratio of the carrying value of individual mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s mortgage loans on real estate by credit quality using this ratio as of December 31, 2018 are summarized as follows (there was no investment in mortgage loans at December 31, 2017):

 

Loan-To-Value-Ratio

 

December 31, 2018

   

December 31, 2017

 

70% to 80%

  $ 75,947     $ -  

60% to 70%

    573,506       -  

50% to 60%

    677,169       -  

40% to 50%

    118,408       -  

Total

  $ 1,445,030     $ -  

 

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

2.           Investments (continued)

 

Major categories of net investment income for the years ended December 31, 2018 and 2017 are summarized as follows:

 

   

For the Years Ended December 31,

 
   

2018

   

2017

 
                 

Fixed maturity securities

  $ 205,466     $ 91,828  

Other long-term assets

    23,279       -  

Mortgage loans

    25,400       -  

Short-term and other investments

    113,672       4,850  

Gross investment income

    367,817       96,678  

Investment expenses

    19,553       -  

Net investment income

  $ 348,264     $ 96,678  

 

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 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 has no Level 1 assets that would include securities 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.  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 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 the levels of the fair value hierarchy are reported as transfers in and out of the specific level category as of the beginning of the period in which the reclassifications occur.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

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 December 31, 2018 and 2017 are summarized as follows:

 

December 31, 2018

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

Corporate bonds

  $ -     $ 6,665,056     $ -     $ 6,665,056  

Total fixed maturity securities

  $ -     $ 6,665,056     $ -     $ 6,665,056  

 

December 31, 2017

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

Corporate bonds

  $ -     $ 2,374,588     $ -     $ 2,374,588  

Total fixed maturity securities

  $ -     $ 2,374,588     $ -     $ 2,374,588  

 

Fair values for Level 2 assets for the Company’s fixed maturity securities available-for-sale are primarily based on prices supplied by a third-party investment service.  The third-party investment service provides quoted prices 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 corporate bonds.

 

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

 

Fair Value of Financial Instruments

 

The carrying amount and fair value of the Company’s financial assets disclosed, but not carried, at fair value as of December 31, 2018 and 2017 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

 

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

 

   

December 31, 2018

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Financial assets

                                       

Cash and cash equivalents

  $ 6,511,652     $ 6,511,652     $ 6,511,652     $ -     $ -  

Mortgages on real estate

    1,445,030       1,457,196       -       -       1,457,196  

Other long-term investments

    449,461       539,544       -       -       539,544  

Accrued investment income

    76,668       76,668       -       -       76,668  

Advances and notes receivable

    14,360       14,360       -       -       14,360  

Total financial assets

  $ 8,497,171       8,599,420     $ 6,511,652     $ -     $ 2,087,768  
                                         

Financial liabilities

                                       

Policyholders’ account balances

  $ 3,165,519     $ 2,375,631     $ -     $ -     $ 2,375,631  

Policy claims

    28,306       28,306       -       -       28,306  

Total financial liabilities

  $ 3,193,825     $ 2,403,937     $ -     $ -     $ 2,403,937  

 

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

3.           Fair Value Measurements (continued)

 

   

December 31, 2017

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Financial assets

                                       

Cash and cash equivalents

  $ 12,578,650     $ 12,578,650     $ 12,578,650     $ -     $ -  

Accrued investment income

    22,709       22,709       -       -       22,709  

Advances and notes receivable

    24,850       24,850       -       -       24,850  

Total financial assets

  $ 12,626,209     $ 12,626,209     $ 12,578,650     $ -     $ 47,559  
                                         

Financial liabilities

                                       

Policyholders’ account balances

  $ 1,487,763     $ 1,155,525     $ -     $ -     $ 1,155,525  

Policy claims

    2,504       2,504       -       -       2,504  

Total financial liabilities

  $ 1,490,267     $ 1,158,029     $ -     $ -     $ 1,158,029  

 

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

 

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

 

Cash and Cash Equivalents, Accrued Investment Income and Advances and Notes Receivable

 

The carrying value of these financial instruments approximates their fair values due to the expected short-term nature until the cash settlement of these items.  Cash and cash equivalents are included in Level 1 of the fair value hierarchy due to their highly liquid nature.  Accrued investment income and advances and notes receivable are included in Level 3 of the fair value hierarchy due to little or no availability of market activity for these types of assets.

 

Mortgages on Real Estate

 

The Company’s mortgage loan portfolio is comprised of residential properties with loan to appraised value ratios below 72%. 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.

 

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 FTSE Pension Liability Index in effect at the end of each period.

 

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.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

4.          Property and Equipment

 

Property and equipment as of December 31, 2018 and 2017 is summarized as follows:

 

   

December 31, 2018

   

December 31, 2017

 

Total property and equipment

  $ 55,339     $ 42,293  

Less - accumulated depreciation

    (21,129

)

    (9,063

)

Property and equipment net of accumulated depreciation

  $ 34,210     $ 33,230  

 

5.          Income Taxes

 

The Company files a consolidated return with its subsidiary TRLS.  The Company’s other subsidiary TRLIC files a separate federal return for life insurance companies.  TRLIC is taxed as a life insurance company under the provisions of the Internal Revenue Code.  Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years.  Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.

 

The Company has net operating loss carryforwards of approximately $3.6 million expiring in 2032 through 2037. The company also has $349,200 of loss carryforwards from 2018 that will not expire.  A valuation allowance of $826,559 has been established for net operating losses arising from 2012 through 2018 since the Company has not demonstrated the ability to generate taxable income.  As of December 31, 2018, TRLIC has $1,376,919 in operating loss carryforwards that have originated since 2016.  In accordance with the Tax Cuts and Jobs Act of 2017, $588,407 of the operating loss carryforwards were generated prior to 1/1/18 and will expire in 2031 and 2032.  Additionally, TRLIC has loss carryforwards of $788,512 from 2018 which will not expire.   TRLIC’s operating loss carryforwards has a valuation allowance of $289,153 against it at December 31, 2018, as TRLIC has not yet demonstrated the ability to generate taxable income.  The utilization of those losses is restricted by the tax laws and some or all the losses may not be available for use.

 

The Company and its subsidiaries have no known uncertain tax benefits within its provision for income taxes.  In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts.  The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions.  The 2015 through 2018 U.S. federal tax years are subject to income tax examination by tax authorities.  The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements. 

 

6.          Concentrations of Credit Risk

 

The Company maintains cash and cash equivalents at multiple institutions.  The Federal Deposit Insurance Corporation insures non-interest-bearing accounts up to $250,000.  Uninsured balances aggregate $534,014 as of December 31, 2018.  The Company monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss.  The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

7.         Stock Incentive Plan

 

The Company’s Agent Stock Incentive Plan (“ASIP”) was approved in August 2018 by the Texas State Securities Board.  The plan awards shares of Texas Republic Capital Corporation common stock to agents based on certain production levels achieved in sales of life and annuity products.  Calculation of awards at December 31, 2018 are based on production for the period of August through December 2018.  The ASIP will issue 1,270 shares.

 

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

 

8.          Lease Commitment

 

The Company entered into a lease with a third-party lessor in 2014 for utilization of office space in Austin, Texas.  The lease agreement ended September 30, 2017.  The Company also paid a pro rata share of the operating expenses of the building. 

 

The Company entered into a new 62-month lease agreement with a third-party lessor in 2017 for utilization of office space in Austin, Texas.  The lease agreement ends November 30, 2022.  The lease required a deposit in the amount of $7,109 and abated the first two month’s rent.  The monthly rental payments are $4,864 for the first twelve months after abatement.  The Company also pays a pro rata share of the operating expenses of the building.  Rent expense was $80,967 under the new agreement for the twelve months ended December 31, 2018 and $56,946 under the two agreements for the twelve months ended December 31, 2017.  Total future minimum lease payments and a pro rata share of the buildings operating expenses to be paid under the current non-cancellable lease agreement are $82,487 in 2019, $84,036 in 2020, $85,585 in 2021 and $78,485 in 2022. 

 

9.           Shareholders’ Equity and Statutory Accounting Practices

 

TRLIC is domiciled in Texas and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the TDI. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners, state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.  Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.

 

The statutory net loss for TRLIC was $897,619 and $563,881 for the years ended December 31, 2018 and 2017, respectively. The statutory capital and surplus of TRLIC was $4,201,803 and $2,352,437 as of December 31, 2018 and 2017, respectively.

 

TRLIC is subject to Texas laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the TDI.  The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.  Cash dividends may only be paid out of surplus derived from realized net profits.  Based on these limitations, there is no capacity for TRLIC to pay a dividend to TRCC.

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Controls and Procedures.  (This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section).

 

Evaluation of Disclosure Controls and Procedures

 

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

 

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operating, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Management’s Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As of the end of the period covered by this annual report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Certifying Officers, of the effectiveness of the design and operation of the Company’s internal controls over financial reporting as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  The standard measures adopted by management in making its evaluation are the measures in the Internal-Control Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon such evaluation, management has determined that internal control over financial reporting was effective as of December 31, 2018.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Limitations on the Effectiveness of Controls

 

The Company’s management, including the Certifying Officers, does not expect that the disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

 

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

 

The design of any system of controls is also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 

Changes to Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the year ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. Other Information

 

None

 

 

Part III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2019 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

 

Item 11. Executive Compensation

 

The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2019 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2019 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2019 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

 

Item 14. Principal Accounting Fees and Services

 

The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2019 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

 

 

 

Item 15. Exhibits

 

Exhibit

 

 

Number

 Description of Exhibit

 

 

 

 

3.1

Certificate of Formation

 

 

 

 

3.2

Bylaws

 

 

 

 

10.1

Lease Agreement – October 1, 2014 – September 30, 2017

 

 

 

 

10.2

Mortgage Loan Consulting Agreement between the Company and First Trinity Financial Corporation

 

 

 

 

10.3

Mortgage Loan Purchase Agreement between the Company and First Trinity Financial Corporation

 

 

 

 

10.4

Mortgage Loan Repurchase Guarantee Agreement between the Company and First Trinity Financial Corporation

 

 

 

 

10.5

Administrative Services Agreement between the Company and First Trinity Financial Corporation

 

 

 

 

21.1*

Subsidiaries of Registrant

 

 

 

 

24.1*

Powers of Attorney (included in the signature pages hereto and incorporated herein by reference).

 

 

 

 

31.1*

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

 

 

 

 

31.2*

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

 

 

 

 

32.1*

Section 1350 Certification of Principal Executive Officer.

 

 

 

 

32.2*

Section 1350 Certification of Principal Financial Officer.

 

 

 

 

101.INS**

XBRL Instance

 

 

 

 

101.SCH**

XBRL Taxonomy Extension Schema

 

 

 

 

101.CAL**

XBRL Taxonomy Extension Calculation

 

 

 

 

101.DEF**

XBRL Taxonomy Extension Definition

 

 

 

 

101.LAB**

XBRL Taxonomy Extension Labels

 

 

 

 

101.PRE**

XBRL Taxonomy Extension Presentation

 

 

*      Filed herewith

 

**      XBRL Information is furnished and not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

TEXAS REPUBLIC CAPITAL CORPORATION

 

 

 

 

 

Date March 22, 2019

By:

/s/ Timothy R. Miller

 

 

 

Timothy R. Miller

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

TEXAS REPUBLIC CAPITAL CORPORATION

 

 

 

 

 

Date March 22, 2019

By:

/s/ Thomas F. Kopetic

 

 

 

Thomas F. Kopetic

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By

/s/ Timothy R. Miller

 

Date

March 22, 2019

 

Timothy R. Miller

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

By

/s/ William S. Lay

 

Date

March 22, 2019

 

William S. Lay

 

 

 

 

Secretary and Treasurer

 

 

 

 

 

 

 

 

By

/s/ Charles R. Bailey

 

Date

March 22, 2019

 

Charles R. Bailey, Director

 

 

 

 

 

 

 

 

By

/s/ Steven D. Braley

 

Date

March 22, 2019

 

Steven D. Braley, Director

 

 

 

 

 

 

 

 

By

/s/ David L. Cleavinger

 

Date

March 22, 2019

 

David L. Cleavinger, Director

 

 

 

 

 

 

 

 

By

/s/ Kenneth R. Davis

 

Date

March 22, 2019

 

Kenneth R. Davis, Director

 

 

 

 

 

 

 

 

By

/s/ J. Pete Laney

 

Date

March 22, 2019

 

J. Pete Laney, Director

 

 

 

 

 

 

 

 

By

/s/ Adrian G. McDonald Jr.

 

Date

March 22, 2019

 

Adrian G. McDonald Jr., Director

 

 

 

 

 

 

 

 

By

/s/ Alvie J. Mitchell Jr.

 

Date

March 22, 2019

 

Alvie J. Mitchell Jr., Director

 

 

 

 

 

 

 

 

By

/s/ James E. Sandberg Jr.

 

Date

March 22, 2019

 

James E. Sandberg Jr., Director

 

 

 

 

 

 

 

 

By

/s/ Vernon R. Woelke

 

Date

March 22, 2019

 

Vernon R. Woelke, Director

 

 

 

 

 

 

 

 

By

/s/ Gregg E. Zahn

 

Date

March 22, 2019

 

Gregg E. Zahn. Director

 

 

 

 

37