First Trinity Financial 10Q 2010 Q1 Quarterly report

United States
Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2010


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

For the transition period From to .

Commission file number: 000-52613

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Oklahoma		34-1991436
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7633 East 63rd Place, Suite 230
Tulsa, Oklahoma 74133
(Address of principal executive offices)

(918) 249-2438
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

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


Large accelerated filer:o		Accelerated filer:o		Non-accelerated filer:o		Smaller reporting company:þ

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of May 20, 2010: 5,805,000 shares

FIRST TRINITY FINANCIAL CORPORATION

INDEX TO FORM 10-Q


	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets at March 31, 2010 (Unaudited) and December 31, 2009		3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (Unaudited)		4

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (Unaudited)		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 4T. Controls and Procedures		28

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 3. Defaults upon Senior Securities		29

Item 4. (Removed and Reserved)		29

Item 5. Other Information		29

Item 6. Exhibits		29

Signatures		30

Exhibit No. 31.1
Exhibit No. 31.2
Exhibit No. 32.1
Exhibit No. 32.2

Item 1. Financial Statements

First Trinity Financial Corporation and Subsidiaries

Condensed Consolidated Balance Sheets


	March 31,			December 31,
	2010			2009
	(unaudited)
Assets
Investments
Available-for-sale fixed maturities at fair value (amortized cost: $19,530,252 and $19,772,497 at March 31, 2010 and December 31, 2009, respectively)	$	22,739,988		$	22,510,660
Equity securities (cost: $350,318 March 31, 2010 and December 31, 2009)		514,341			448,484
Mortgage loans on real estate		1,222,173			1,365,953
Investment real estate		3,248,690			3,146,944
Policy loans		331,786			335,022
Other long-term investments		5,234,558			4,975,188

Total investments		33,291,536			32,782,251

Cash and cash equivalents ($325,000 is restricted as to withdrawal at December 31, 2009)		9,319,286			7,080,692
Certificate of deposit (restricted)		102,273			102,273
Accrued investment income		344,419			340,384
Recoverable from reinsurers		905,657			870,294
Accounts receivable		307,748			273,843
Loans from premium financing		2,258,302			2,749,830
Deferred policy acquisition costs		2,201,307			1,918,994
Value of insurance business acquired		2,701,410			2,778,723
Property and equipment		83,840			82,349
Other assets		926,912			837,210

Total assets	$	52,442,690		$	49,816,843


Liabilities and Shareholders’ Equity
Policy liabilities
Policyholders’ account balances	$	25,641,521		$	24,417,483
Future policy benefits		11,898,933			11,349,640
Policy claims		295,087			289,273
Other policyholder funds		340,452			100,731

Total policy liabilities		38,175,993			36,157,127
Deferred federal income taxes		280,214			159,315
Other liabilities		358,731			249,711

Total liabilities		38,814,938			36,566,153


Shareholders’ Equity
Common stock, par value $.01 per share 8,000,000 shares authorized, 5,805,000 issued and outstanding		58,050			58,050
Additional paid-in capital		13,806,503			13,806,503
Accumulated other comprehensive income		3,337,695			2,867,044
Accumulated deficit		(3,574,496	)		(3,480,907	)

Total shareholders’ equity		13,627,752			13,250,690

Total liabilities and shareholders’ equity	$	52,442,690		$	49,816,843

See notes to condensed consolidated financial statements.

First Trinity Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Operations
(Unaudited)


	Three Months Ended
	March 31,
	2010			2009
Revenues
Premiums	$	1,666,554		$	1,543,529
Income from premium financing		101,235			140,531
Net investment income		577,871			575,078
Realized investment gains		49,112			—
Other income		2,826			—

Total revenues		2,397,598			2,259,138


Benefits, Losses and Expenses
Benefits and claims		1,268,816			1,146,417
Acquisition costs deferred		(499,381	)		(300,509	)
Amortization of deferred acquisition costs		216,950			56,217
Amortization of value of insurance business acquired		77,313			67,239
Commissions		442,480			326,207
Other underwriting, insurance and acquisition expense		931,630			847,261

Total benefits, losses and expenses		2,437,808			2,142,832


Income (loss) before income tax expense		(40,210	)		116,306

Provision for federal income taxes
Deferred		53,379			100,526

Net income (loss)	$	(93,589	)	$	15,780


Net income (loss) per common share basic and diluted	$	(0.02	)	$	0.00

See notes to condensed consolidated financial statements.

First Trinity Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Three Months Ended
	March 31,
	2010			2009

Net cash provided by (used in) operating activities	$	737,566		$	(262,589	)

Investing activities
Sales and maturity of fixed maturities		364,670			509,907
Reductions in mortgage loans		144,401			21,918
Purchase of other long term investments		(469,000	)		—
Payments on other long term investments		310,077			233,825
Loans made for premiums financed		(1,418,443	)		(3,232,709	)
Loans repaid for premiums financed		1,848,501			3,000,508
Purchase of real estate		(117,872	)		—
Purchases of property and equipment		(5,932	)		—

Net cash provided by investing activities		656,402			533,449

Financing activities
Policyholder’s account deposits		1,269,005			817,058
Policyholder’s account withdrawals		(424,379	)		(393,517	)


Net cash provided by financing activities		844,626			423,541


Increase in cash		2,238,594			694,401

Cash and cash equivalents, beginning of period		7,080,692			5,669,795

Cash and cash equivalents, end of period	$	9,319,286		$	6,364,196

See notes to condensed consolidated financial statements.

First Trinity Financial Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited)

1. Organization and Significant Accounting Policies

Nature of Operations

First Trinity Financial Corporation, (the “Company”) was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary. The Company raised $1,450,000 from two private placement stock offerings during 2004. On June 22, 2005 the Company’s intrastate public stock offering filed with the Oklahoma Department of Securities for a $12,750,000 intrastate public stock offering, which included a 10% “over-sale” provision (additional sales of $1,275,000), was declared effective. The offering was completed February 23, 2007. The Company raised $14,025,000 from this offering.

On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC’) and First Life America Corporation (“FLAC”) were merged, with FLAC being the surviving company. Immediately following the merger FLAC changed its name to Trinity Life Insurance Company (“TLIC”). After the merger, the Company has two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma. FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums. FLAC was purchased December 23, 2008.

TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states primarily in the Midwest. TLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The products are sold through independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.

The Company’s operations, prior to the acquisition of FLAC involved the sale of a modified premium whole life insurance policy with a flexible premium deferred annuity rider through its subsidiary Old TLIC in the state of Oklahoma. FTCC provides financing for casualty insurance premiums for individuals and companies and is licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC is the sole member of Southern Insurance Services, LLC, (“SIS”) a limited liability company that operates a property and casualty insurance agency.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the year ended December 31, 2010 or for any other interim period or for any other future year.

Certain financial information which is normally included in financial statements prepared in accordance with GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s report on Form 10-K for the fiscal year ended December 31, 2009.

First Trinity Financial Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Principles of Consolidation

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

Reclassifications

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

Use of Estimates

The preparation of financial statements in conformity with 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.

Investments

Fixed maturities 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 deferred taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturities is adjusted for amortization of premium and accretion of discount to maturity. 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.

Equity securities are comprised of common stock and are carried at fair value. The associated unrealized gains and losses, net of applicable deferred taxes, are included in accumulated other comprehensive income. Dividends from these investments are recognized in net investment income when declared.

We evaluate the difference between the cost/amortized cost and estimated fair value of our 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, we then determine the proper treatment for the other-than-temporary impairment. For fixed maturities, 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. For equity securities, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in 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 our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we 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, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the value.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income.

Investment real estate is carried at amortized cost. Depreciation on the office building is calculated over its estimated useful life of 39 years.

Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned.

Other long term investments are comprised of lottery prize receivables and are carried at amortized cost, net of unamortized premium or discounts. Interest income and the amortization of premium or discount are included in net investment income.

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

Certificates of deposit are carried at cost. The Company limits its investment in certificates of deposit to accounts that are federally insured.

Realized gains and losses on sales of investments are recognized in operations on the specific identification basis. Interest and dividends earned on investments are included in net investment income.

Deferred Policy Acquisition Costs

Commissions and other acquisition costs which vary with and are primarily related to the production of new business are deferred and amortized over the life of the related policies. Refer to Revenues and Expenses discussed later regarding amortization methods. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.

Deferred acquisition costs related to annuities are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses on fixed income securities result in adjustments to deferred acquisition costs related to annuities, such adjustments are reflected as a component of the amortization of deferred acquisition costs.

Deferred acquisition costs related to annuities are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains and (losses) from securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income” in the shareholders’ equity section of the balance sheet.

Loans from Premium Financing

Loans from premium financing are carried at their outstanding unpaid principal balances, net of unearned interest, charge-offs and an allowance for loan losses. Interest on loans is earned based on the interest method for computing unearned interest. The rule of 78’s is used to calculate the amount of the interest charge to be forgiven in the event that a loan is repaid prior to the agreed upon number of monthly payments. When serious doubt concerning collectability arises, loans are placed on a nonaccrual basis, generally if no payment is received after one hundred twenty days all accrued and uncollected interest income is reversed against current period operations. Interest income on nonaccrual loans is recognized only when the loan is paid in full. Loan origination fees and costs are charged to expense as incurred.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Allowance for Loan Losses from Premium Financing

The allowance for possible loan losses from financing casualty insurance premiums is a reserve established through a provision for possible loan losses charged to expense which represents, in management’s judgment, the known and inherent credit losses existing in the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio.

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis.

Property and Equipment

The home office building that was acquired in the acquisition of FLAC and carried as property and equipment on the balance sheet in 2008 was leased to third parties in December 2009 and has been reclassified on the balance sheet to investment real estate. Property and equipment are carried at amortized cost. Depreciation on the office building occupied by SIS is calculated over its estimated useful life of 39 years. Office furniture and equipment is recorded at cost or fair value at acquisition less accumulated depreciation using the 200% declining balance method over the estimated useful life of the respective assets of 3 to 7 years.

Reinsurance

The Company cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth. Estimated reinsurance recoverables are reported as assets and are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.

Value of Insurance Business Acquired

As a result of the Company’s purchase of FLAC, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force. The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under Financial Accounting Standards Board (“FASB”) guidance. The value of acquired insurance in force will be amortized over 34 years, which is the expected remaining life of the insurance in force. For the amortization of the value of acquired insurance in force, the Company will periodically review its estimates of gross profits. The most significant assumptions involved in the estimation of gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Other Assets and Other liabilities

Other assets consist primarily of prepaid expenses and federal and state income tax recoverables. Other liabilities consist primarily of accrued expenses and payables.

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 balance sheet date. This liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.75% to 6.75%. Interest crediting rates for premium deposit funds range from 3.5% to 4%.

Future Policy Benefits

The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.

Policy Claims

Policy claim liabilities represent the estimated liabilities for claims reported plus estimated incurred but not yet reported claims developed from trends of historical market data applied to current exposure.

Common Stock

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

Federal Income Taxes

The Company uses the 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. A valuation allowance is established for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits.

Revenues and Expenses

Revenues on traditional life insurance products consist of direct premiums reported as earned when due. Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the premium paying period using the net level premium method. Traditional life insurance products are treated as long duration contracts since they are ordinary whole life insurance products, which generally remain in force for the lifetime of the insured.

Income from premium financing includes cancellation and late fees.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Net Loss per Common Share

Net loss per common share is calculated using the weighted average number of common shares outstanding during the year. The weighted average outstanding common shares for the three months ended March 31, 2010 and 2009 were 5,805,000.

Accumulated Other Comprehensive Income

FASB guidance requires the inclusion of unrealized gains or losses on available-for-sale securities as a component of other comprehensive income. Unrealized gains and losses recognized in accumulated other comprehensive income that are later recognized in net income through a reclassification adjustment are identified on the specific identification method.

Subsequent Events

Management has evaluated all events subsequent to March 31, 2010 through the date that these financial statements have been issued.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06,Improving Disclosures about Fair Value Measurements(“ASU 2010-06”). The new guidance requires entities to separately disclose information relative to transfers in and out of Levels 1 and 2 in the fair value hierarchy. Additionally, ASU 2010-06 requires separate presentation of transfers in, transfers out, purchases, sales, issuances and settlements of Level 3 investments in the tabular reconciliation of Level 3 activity. ASU 2010-06 also clarifies the level of disaggregation for which fair value measurements should be disclosed and requires that information about input and valuation techniques be disclosed for Level 2 and Level 3 assets and liabilities. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted this guidance effective for the first quarter of 2010.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

2. Investments

Investments in available-for sale securities are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2010	Cost		Gains		Losses		Value
Fixed maturity securities
U.S. Government Agency	$	1,921,344	$	8,460	$	3,724	$	1,926,080
Residential mortgage-backed securities		174,625		1,271		161		175,735
Corporate bonds		17,434,283		3,239,861		35,971		20,638,173

Total fixed maturity securities		19,530,252		3,249,592		39,856		22,739,988
Equity securities		350,318		164,023		—		514,341

Total	$	19,880,570	$	3,413,615	$	39,856	$	23,254,329


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2009	Cost		Gains		Losses		Value
Fixed maturity securities
U.S. Government Agency	$	1,921,463	$	7,955	$	51,235	$	1,878,183
Residential mortgage-backed securities		182,835		22,403		—		205,238
Corporate bonds		17,668,199		2,796,431		37,391		20,427,239

Total fixed maturity securities		19,772,497		2,826,789		88,626		22,510,660
Equity securities		350,318		98,166		—		448,484

Total	$	20,122,815	$	2,924,955	$	88,626	$	22,959,144

The following table summarizes, for all securities in an unrealized loss position as of the balance sheet 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.


			Unrealized		Number of
March 31, 2010	Fair Value		Loss		Securities
Fixed maturity securities
Less than 12 months
U.S. Government agency		545,941		3,563		2
Residential MBS		126,490		161		1
Greater than 12 months
U.S. Government agency		104,813		161		1
Corporate bonds		629,684		35,971		4

Total fixed maturity securities	$	1,406,928	$	39,856	$	8


			Unrealized		Number of
December 31, 2009	Fair Value		Loss		Securities
Fixed maturity securities
Less than 12 months
U.S. Government agency	$	1,676,246	$	51,235		6
Corporate bonds		742,087		37,391		5

Total fixed maturity securities	$	2,418,333	$	88,626		11

There were no equity securities in an unrealized loss position at March 31, 2010 and December 31, 2009.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

2. Investments(continued)

As of March 31, 2010, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86% and the equity securities noted above had a fair value to cost ratio of over 100%. As of December 31, 2009, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86% and the equity securities noted above had a fair value to cost ratio of 100%. At March 31, 2010 and December 31, 2009, fixed maturity securities were 84.1% and 87%, respectively, investment grade, as rated by Standard & Poor’s.

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 in light of all 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 income. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the quarters ended March 31, 2010 and 2009.

Net unrealized gains for investments classified as available-for-sale are presented below, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized.


	March 31,			December 31,
	2010			2009
Unrealized appreciation on available-for-sale securities	$	3,373,759		$	2,836,329
Adjustment to deferred acquisition cost		(4,402	)		(4,284	)
Deferred income taxes		(31,662	)		34,999

Net unrealized appreciation on available-for-sale securities	$	3,337,695		$	2,867,044

The amortized cost and fair value of fixed maturity securities at March 31, 2010, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available-for-Sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	504,572	$	578,096
Due in one year through five years		5,605,534		6,601,406
Due after five years through ten years		8,005,634		9,302,685
Due after ten years		5,239,887		6,082,066
Due at multiple maturity dates		174,625		175,735

	$	19,530,252	$	22,739,988

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

2. Investments(continued)

Proceeds from the sale and maturity of investments in available-for-sale securities for the three months ended March 31, 2010 and 2009 were $364,670 and $509,907, respectively. Gross gains of $49,408 and $0 and gross losses of $296 and $0 were realized on the three month periods ended March 31, 2010 and 2009, respectively.

Presented below is investment information, including the accumulated change in net unrealized investment gains or losses for the three months ended March 31, 2010 and 2009. Additionally, the table shows the amount of realized investment gains on fixed maturities and equity securities for the three months ended March 31, 2010 and 2009.


	Three Months Ended March 31,
	2010		2009
Change in unrealized investment gains and (losses)
Available-for-sale securities
Fixed maturities	$	471,573	$	(287,474	)
Equity securities		65,857		(23,922	)

Realized investment gains and losses
Fixed maturities		49,112		—
Equity securities		—		—

Major categories of net investment income are summarized as follows:


	Three Months Ended March 31,
	2010			2009
Fixed maturities	$	506,284		$	402,927
Equity securities		2,144			4,103
Mortgage loans		23,868			25,566
Real estate		86,985			60,587
Short-term and other investments		17,414			84,442

Gross investment income		636,695			577,625
Investment expenses		(58,824	)		(2,547	)

Net investment income	$	577,871		$	575,078

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

Level 1 — Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities include fixed maturities and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

3. Fair Value Measurements(continued)

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

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

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

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009.


March 31, 2010	Level 1		Level 2		Level 3		Total
Fixed maturities, available for sale
U.S. government agency	$	—	$	1,926,080	$	—	$	1,926,080
Corporate		—		20,638,173		—		20,638,173
Residential MBS		—		175,735		—		175,735

Total fixed maturities	$	—	$	22,739,988	$	—	$	22,739,988


Equity securities
Mutual funds	$	81,850	$	—	$	—	$	81,850
Corporate common stock		397,491		—		35,000		432,491

Total equity securities	$	479,341	$	—	$	35,000	$	514,341


December 31, 2009	Level 1		Level 2		Level 3		Total
Fixed maturities, available for sale
U.S. government agency	$	—	$	1,878,183	$	—	$	1,878,183
Corporate		—		20,427,239		—		20,427,239
Residential MBS		—		205,238		—		205,238

Total fixed maturities	$	—	$	22,510,660	$	—	$	22,510,660


Equity securities
Mutual funds	$	80,150	$	—	$	—	$	80,150
Corporate common stock		333,334		—		35,000		368,334

Total equity securities	$	413,484	$	—	$	35,000	$	448,484

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

3. Fair Value Measurements(continued)

At March 31, 2010 and December 31, 2009, Level 3 financial instruments consisted of one private placement common stock that has no active trading. This stock represents an investment in a small development stage insurance holding company. The fair value for this security was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations. Fair values for Level 1 and Level 2 assets are primarily based on quoted prices in the market obtained via pricing services, which use observable inputs in developing such rates.

There were no changes in the fair value of our Level 3 financial instruments for the three months ended March, 2010 and 2009.

There were no transfers of securities between Level 1 and Level 2 during the three months ended March 31, 2010 and 2009.

Fair Value of Financial Instruments

The following disclosure contains the estimated fair values of financial instruments, as of March 31, 2010 and December 31, 2009. 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.


	March 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets
Fixed maturities	$	22,739,988	$	22,739,988	$	22,510,660	$	22,510,660
Equity securities		514,341		514,341		448,484		448,484
Mortgage loans on real estate
Residential		—		—		110,000		110,000
Commercial		1,222,173		1,263,200		1,255,953		1,298,765
Policy loans		331,786		331,786		335,022		335,022
Other long-term investments		5,234,558		5,299,875		4,975,188		5,086,736
Cash and cash equivalents		9,391,286		9,319,286		7,080,692		7,080,692
Loans from premium financing		2,258,302		2,258,302		2,749,830		2,749,830

Liabilities
Policyholders’ account balances	$	25,641,521		24,204,163	$	24,417,483		22,730,469
Policy claims		295,087		295,087		289,273		289,273

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 Maturities and Equity Securities

The fair value of fixed maturities and equity securities are based on the principles previously discussed.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

3. Fair Value Measurements(continued)

Mortgage Loans on Real Estate

The fair values for mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period.

Cash and Cash Equivalents and Policy loans

The carrying value of these financial instruments approximates their fair values.

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 applicable rates.

Loans from Premium Financing

The carrying value of loans from premium financing is net of unearned interest and any estimated loan losses and approximates fair value. Estimated loan losses were $380,296 and $318,826 at March 31, 2010 and December 31, 2009, respectively.

Investment Contracts — Policyholders’ Account Balances

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

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

Policy Claims

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

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

4. Segment Data

The Company operates in three segments as shown in the following table. Given the limited nature of each subsidiary’s operations, the Company has a life insurance segment, consisting of the operations of TLIC, and a premium financing segment, consisting of the operations of FTCC and SIS. Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment.


	For the three months ended March 31,
	2010			2009
Revenues:
Life and annuity insurance operations	$	2,294,318		$	2,114,208
Premium finance operations		103,260			140,531
Corporate operations		20			4,399

Total	$	2,397,598		$	2,259,138


Income (loss) before income taxes:
Life and annuity insurance operations	$	238,861		$	221,542
Premium finance operations		(162,741	)		(25,311	)
Corporate operations		(116,330	)		(79,925	)

Total	$	(40,210	)	$	116,306

5. Allowance for Loss on Premium Finance Contracts

Shown below is a progression of the Company’s allowance for loss related to loans from premium financing:


	March 31,
	2010		2009
Allowance at beginning of period	$	318,826	$	21,305
Additions charged to operations		61,470		18,979

Allowance at end of period	$	380,296	$	40,284

6. Federal Income Taxes

The provision (benefit) for federal income taxes is based on the estimated effective annual tax rate. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

A valuation allowance has been established due to the uncertainty of loss carryforwards and unrealized investment losses.

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2006 through 2009 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.

First Trinity Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

7. Comprehensive Income (Loss)

The components of comprehensive income (loss), net of related federal income taxes, are as follows:


	Three Months Ended March 31,
	2010			2009
Net income (loss)	$	(93,589	)	$	15,780
Total net unrealized gains and losses arising during the period		519,763			(250,330	)
Less: Net realized investment gains		49,112			—

Net unrealized gains and losses		470,651			(250,330	)

Total comprehensive income (loss)	$	377,062		$	(234,550	)

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

8. Revolving Line of Credit

On April 30, 2009, FTCC renewed and modified its loan agreement with the First National Bank of Muskogee, to increase the revolving loan amount to $3,600,000. The loan bears interest on the outstanding principal amount for each interest period at a rate per annum equal to the sum of the J.P. Morgan Chase Prime Rate at all times in effect plus the Prime Rate Margin of .25 of one percent. The rate shall have a floor of no less than 5% at any time. FTFC is a guarantor on the loan. The loan matures May 31, 2010. At March 31, 2010, the outstanding balance on the loan was $1. The maximum amount that has been borrowed is $100,000.

9. Contingent Liabilities

Guaranty fund assessments may be taken as a credit against premium taxes over a five-year period. These assessments, brought about by the insolvency of life and health insurers, are levied at the discretion of the various state guaranty fund associations to cover association obligations. It is management’s opinion that the effect of any future assessments would not be material to the financial position or results of operations of the Company because of the use of premium tax offsets.

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

Overview

First Trinity Financial Corporation (“we” “us”, “our”, or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets and a premium finance company, financing casualty insurance premiums.

As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents.

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

We provide financing for casualty insurance premiums through independent property and casualty insurance agents. We are licensed in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.

Recent Acquisitions

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In the fourth quarter of 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation (“FLAC”), included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000.

The Company’s profitability in the life insurance segment is a function of its ability to accurately price the policies that it writes, adequately value life insurance business acquired and administer life insurance company acquisitions at an expense level that validates the acquisition cost. Profitability in the premium financing segment is dependent on the Company’s ability to compete in that sector, maintain low administrative costs and minimize losses.

Critical Accounting Policies and Estimates

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

Investments

Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income.

Investment real estate is carried at amortized cost. Depreciation on the office building is calculated over its estimated useful life of 39 years.

Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned.

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

Certificates of deposit are carried at cost. The Company limits its investment in certificates of deposit to accounts that are federally insured.

Deferred Policy Acquisition Costs

Loans from Premium Financing

Allowance for Loan Losses from Premium Financing

Value of Insurance Business Acquired

Policyholders’ Account Balances

Future Policy Benefits

Federal Income Taxes

Recent Accounting Pronouncements

Business Segments

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

•

Life and annuity insurance operations, consisting of the operations of TLIC;

•

Premium finance operations, consisting of the operations of FTCC; and

•

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

Please see Note 4 to the Condensed Consolidated Financial Statements for additional information regarding segment data.

Results of Operations

The primary sources of revenue for the Company are life insurance premium income, income from premium financing and investment income. Premium payments are classified as first-year, renewal and single. Renewal premiums are any premium payments made after the first year the policy is in force.

On August 6, 2009, the Company was made aware of potentially fraudulent loans and financial transactions made by an independent agency that did business with the Company’s wholly owned subsidiary, FTCC. The fraudulent loans and financial transactions totaled $1,293,450. The independent agency and its owner have assigned assets having an estimated fair value of $622,377 to cover loan losses.

Additionally, the independent agency endorsed and deposited $326,479 of checks issued by FTCC in the agency’s bank account that were payable to other third parties for insurance premiums. FTCC recovered these funds from the banks due to improper endorsement.

FTCC and the Company continue to investigate the facts and circumstances relating to any fraudulent loans and financial transactions and will continue to seek restitution for any losses.

Revenues

Insurance revenues are primarily generated from premium revenues and investment income. In addition, realized gains and losses on investment holdings can significantly impact revenues from year to year.

Total consolidated revenues increased 6% to $2,397,598 for the three months ended March 31, 2010, an increase of $138,460 from $2,259,138 for the three months ended March 31, 2009. The increase is primarily attributable to the increase in premium income and realized gains.

Life and Annuity Insurance Operations

Revenues from life and annuity insurance operations increased 9% to $2,294,318 for the three months ended March 31, 2010, an increase of $180,110 from $2,114,208 for the three months ended March 31, 2009. Our pre-tax income, for the three months ended March 31, 2010, increased $17,319 compared to the three months ended March 31, 2009. The increase is primarily attributable to the increase in premium income and realized gains.

Premium Finance Operations

Revenues from premium financing operations decreased 27% to $103,260 for the three months ended March 31, 2010, a decrease of $37,271 from $140,531 for the three months ended March 31, 2009. The pre-tax loss, for the three months ended March 31, 2010, increased to a loss of $(162,742) compared to a pre-tax loss of $(25,311) for the three months ended March 31, 2009. The loss is primarily attributable to an increase in allowance for loan losses and other loan losses.

Corporate Operations

Revenues from corporate operations decreased $4,379. This decrease is primarily due to a decrease in investment income. Net loss increased 46% to $(116,330) for the three months ended March 31, 2010 from a net loss of $(79,925) for the three months ended March 31, 2009. The increase in the loss is primarily attributable to an increase in general operating expenses.

Net Investment Income

Net investment income increased 0.5% to $577,871 for the three ended March 31, 2010, an increase of $2,793 from $575,078 for the three months ended March 31, 2009. The increase is primarily due to the increase in investment income from the acquisition of FLAC.

Net Realized Investment Gains

Net realized investment gains were $49,112 for the three months ended March 31, 2010. There were no realized investment gains or losses for the three months ended March 31, 2009.

Benefits, Losses and Expenses

Benefits and claims increased $122,399 to $1,268,816 for the three months ended March 31, 2010 from $1,146,417 at March 31, 2009. The increase is primarily attributable to an increase in reserves due to the aging of the business.

Certain costs related to the acquisition of life insurance policies are capitalized and amortized over the premium-paying period of the policies. These costs, which are referred to as deferred policy acquisition costs, include commissions and other costs of acquiring life insurance, which vary with, and are primarily related to, the production of new insurance contracts. The capitalized cost will be amortized over the life of the associated policies. For the three months ended March 31, 2010 and 2009, capitalized cost was $499,381 and $300,509, respectively. Amortization of deferred policy acquisition costs for the three months ended March 31, 2010 and 2009 was $216,950 and $56,217, respectively.

The cost of acquiring insurance business is amortized over the remaining life of the business. Amortization of value of insurance business acquired was $77,313 and $67,239 for the three months ended March 31, 2010 and 2009, respectively.

Commissions were $442,480 for the three months ended March 31, 2010, an increase of $116,273, compared to the three months ended March 31, 2009. The increase is due to an increase in new policies written.

Other underwriting, insurance and acquisition expenses were $931,630 for the three months ended March 31, 2010, an increase of $84,369, compared to the three months ended March 31, 2009. The increase is primarily due an increase in loan losses and other operating expenses in the premium finance operations.

Federal income taxes are calculated based on the earnings of TLIC. Certain items included in income reported for financial statements are not included in taxable income for the current period, resulting in deferred income taxes. For the three months ended March 31, 2010 and 2009, deferred income taxes were $53,379 and taxes currently payable were $0 and deferred income taxes were $100,526 and taxes currently payable were $0, respectively.

For the three months ended March 31 2010, there was a net loss of $(93,589) compared to a net gain of $15,780 for the three months ended March 31, 2009 and loss per share increased $.02 per share to a $.02 loss per share, while equity per share increased approximately 3% to $2.35 compared to $2.28 per share at December 31, 2009. The increase in the net loss was primarily attributable to an increase in losses related to loans from premium financed.

Consolidated Financial Condition

At March 31, 2010, the Company’s available-for-sale fixed maturities had a fair value of $22,739,988 and amortized cost of $19,530,252 compared to a fair value of $22,510,660 and an amortized cost of $19,772,497 at December, 31, 2009. This portfolio is reported at fair value with unrealized gains and losses, net of applicable deferred taxes, reflected as a separate component in shareholders’ equity within “Accumulated Other Comprehensive Income”. The fixed maturities portfolio is invested in a variety of companies and U. S. Government sponsored agency securities.

At March 31, 2010, the Company’s available-for-sale equity securities had a fair value of $514,341 compared to a fair value of $448,484 at December 31, 2009. This portfolio is reported at fair value with unrealized gains and losses, net of applicable deferred taxes, reflected within accumulated other comprehensive income. The equity securities portfolio is invested in a variety of companies.

At March 31, 2010 and December 31, 2009, the Company held loans from premium financing of $2,258,302 and $2,749,830, respectively. The loan balances at March 31, 2010 and 2009, respectively, are net of unearned interest of $62,520 and $72,144, respectively and allowance for loan losses at March 31, 2010 and December 31, 2009 of $380,296 and $318,826, respectively.

Shown below is a progression of the Company’s loans from premium financing for the three months ended March 31, 2010 and the year ended December 31, 2009.


	March 31,			December 31,
	2010			2009
Balance, beginning of year	$	3,140,800		$	4,848,845
Loans financed		1,346,819			9,313,585
Unearned interest added to loans		71,624			493,647
Capitalized fees and interest reversed		(51,091	)		(53,176	)
Payment of loans and unearned interest		(1,807,034	)		(11,462,101	)


Ending loan balance including unearned interest		2,701,118			3,140,800
Unearned interest included in ending loan balances		(62,520	)		(72,144	)

Loan balance net of unearned interest		2,638,598			3,068,656
Less:
Allowance for loan loss		(380,296	)		(318,826	)

Loan balance net of unearned interest and allowance for loan losses at the end of the year	$	2,258,302		$	2,749,830

Total investments were $33,291,536 and $32,782,251 at March 31, 2010 and December 31, 2009, respectively.

Deferred policy acquisition costs were $2,201,307 and $1,918,994 at March 31, 2010 and December 31, 2009, respectively. Policy acquisition expenses related to new insurance sales were capitalized in the amount of $499,381 and $300,509 for the three months ended March 31, 2010 and 2009, respectively. Amortization for the three months ended March 31, 2010 and 2009 was $216,950 and $56,217, respectively.

Total policy liabilities as of March 31, 2010 and December 31, 2009 were $38,175,993 and $36,157,127, respectively. Approximately 98% of the 2010 total consists of policyholders’ account balances and future policy benefit reserves.

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through March 31, 2010, we received $15,475,000 from the sale of our shares. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2004.

At March 31, 2010, we had cash and cash equivalents totaling $9,319,286. The majority of our excess funds have been invested in money market mutual funds. At March 31, 2010, cash and cash equivalents of $8,049,315 of the total $9,319,286 are held by TLIC and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department of certain dividend or intercompany transactions to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser 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 to pay a dividend in 2010 without prior approval. There were no dividends paid or a return of capital to the parent company in 2009.

Our cash balances at our primary depositories were significantly in excess of Federal Deposit Insurance Corporation coverage at March 31, 2010 and December 31, 2009. Management monitors the solvency of all financial institutions in which we have funds to minimize the exposure for loss. Management does not believe we are at significant risk for such a loss.

During the three months ended March 31, 2010, the Company provided $737,566 of cash in operations compared to $262,589 of cash used in operations in the three months ended March 31, 2009. The increase in cash provided by operations can be attributed primarily to the increase in other policyholder liabilities. Cash provided by investing activities for the three months ended March 31, 2010 and 2009 was $656,402 and $533,449, respectively. Net cash provided by financing activities for the three months ended March 31, 2010 and 2009 was $844,626 and $423,541, respectively. The increase resulted from a net increase in policy deposits.

Shareholders’ equity at March 31, 2010 was $13,627,752 compared to $13,250,690 at December 31, 2009. The increase is due to an increase in fair value of fixed maturity and equity security investments.

The liquidity requirements of our life insurance company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2010 or 2009. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.

The Company is subject to various market risks. The quality of our investment portfolio and the current level of shareholder’s equity continue to provide a sound financial base as we strive to expand our marketing to offer competive products. Our investment portfolio recovered from the disruptions in the capital markets and had net unrealized gains of $3,337,695 at March 31, 2010.

The Company has used the majority of its capital provided from the public offering to expand the premium finance business and to acquire a life insurance company. The operations of TLIC may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments. Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows.

On March 12, 2009, we entered into a senior revolving loan with a bank to loan up to $3,000,000 to provide working capital and funds for expansion. The loan was renewed on April 30, 2009 and modified to increase the revolving loan amount to $3,600,000. The loan agreement terminates May 31, 2010. On July 21, 2009, FTCC borrowed $100,000 under the loan agreement and repaid $99,999 on November 4, 2009, leaving a balance of $1. There have been no negotiations relating to renewing the senior revolving loan that matures May 31, 2010.

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

We believe that our existing cash and cash equivalents at March 31, 2010 will be sufficient to fund our anticipated operating expenses. Loans outstanding from premium financing declined during 2009 and the three months ended on March 31, 2010 The growth of the premium finance subsidiary is uncertain and will require additional capital if it grows. Funds will not be available to continue the expansion of the Company’s subsidiaries without borrowing funds or raising additional capital. 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.

Forward Looking Information

We caution readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Statements using verbs such as “expect”, “anticipate”, “believe” or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent our beliefs concerning future levels of sales and redemptions of our products, investment spreads and yields or the earnings and profitability of our activities.

Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable factors and developments. Some of these may be national in scope, such as general economic conditions, changes in tax laws and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments, industry consolidation and the effects of competition in the insurance business from other insurance companies and other financial institutions operating in our market area and elsewhere. Others may relate to the Company specifically, such as credit, volatility and other risks associated with our investment portfolio. We caution that such factors are not exclusive. We disclaim any obligation to update forward-looking information.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes to Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

There are no material legal proceedings pending against the Company or its subsidiaries or of which any of their property is the subject. There are no proceedings in which any director, officer, affiliate or shareholder of the Company, or any of their associates, is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5. Other Information

None

Item 6. Exhibits


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

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

	32.1			Section 1350 Certification of Principal Executive Officer

	32.2			Section 1350 Certification of Principal Financial Officer

SIGNATURES

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


	FIRST TRINITY FINANCIAL CORPORATION an Oklahoma corporation
May 26, 2010	By:	/s/ Gregg Zahn
		Gregg Zahn, President and Chief Executive Officer

May 26, 2010	By:	/s/ William Lay
		William Lay, Treasurer and Chief Financial Officer

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Readability	H.S. freshman Bad

First Trinity Financial (FTFC) 10-Q2010 Q1 Quarterly report

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