First Trinity Financial 10Q 2013 Q1 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ]

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

For the quarterly period ended March 31, 2013

[ ]	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. Yes þ No o

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

Yes þ No o

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

Large accelerated filer: ¨

Accelerated filer: ¨

Non-accelerated filer: ¨

Smaller reporting company: þ

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

Yes o No þ

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 13, 2013: 7,776,164 shares

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2013

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		Page Number

Item 1. Consolidated Financial Statements

Consolidated Statements of Financial Position as of March 31, 2013 (Unaudited) and December 31, 2012		3

Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		4

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		5

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		6

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		7

Notes to Consolidated Financial Statements (Unaudited)		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 4. Controls and Procedures		39

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40

Item 3. Defaults upon Senior Securities		40

Item 4. Mine Safety Disclosures		40

Item 5. Other Information		40

Item 6. Exhibits		40

Signatures		41

Exhibit No. 31.1
Exhibit No. 31.2
Exhibit No. 32.1
Exhibit No. 32.2
Exhibit No 101.INS
Exhibit No. 101.SCH
Exhibit No. 101.CAL
Exhibit No. 101.DEF
Exhibit No. 101.LAB
Exhibit No. 101.PRE

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

	March 31, 2013			December 31, 2012
Assets	(Unaudited)
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $96,248,154 and $91,543,308 as of March 31, 2013 and December 31, 2012, respectively)	$	103,544,487		$	98,659,797
Available-for-sale equity securities at fair value (cost: $697,980 and $695,846 as of March 31, 2013 and December 31, 2012, respectively)		857,929			843,497
Mortgage loans on real estate		12,722,725			10,435,776
Investment real estate		2,818,478			2,858,765
Policy loans		1,498,415			1,488,035
Other long-term investments		22,715,572			19,560,794
Total investments		144,157,606			133,846,664
Cash and cash equivalents		5,801,546			10,947,474
Accrued investment income		1,451,311			1,417,218
Recoverable from reinsurers		1,279,829			1,188,371
Agents' balances and due premiums		373,389			358,729
Loans from premium financing, net		135,643			261,072
Deferred policy acquisition costs		7,412,298			7,028,820
Value of insurance business acquired		7,414,052			7,508,895
Property and equipment, net		153,305			124,558
Other assets		2,953,840			2,768,516
Total assets	$	171,132,819		$	165,450,317
Liabilities and Shareholders' Equity
Policy liabilities
Policyholders' account balances	$	99,855,190		$	95,043,370
Future policy benefits		31,667,959			31,065,560
Policy claims		612,023			717,521
Other policy liabilities		96,864			139,722
Total policy liabilities		132,232,036			126,966,173
Deferred federal income taxes		3,261,461			3,301,524
Other liabilities		1,425,089			1,460,508
Total liabilities		136,918,586			131,728,205
Shareholders' equity
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 issued as of March 31, 2013 and December 31, 2012 and 7,776,164 and 7,789,060 outstanding as of March 31, 2013 and December 31, 2012, respectively, and 75,820 and 63,070 subscribed as of March 31, 2013 and December 31, 2012, respectively		80,502			80,374
Additional paid-in capital		28,710,485			28,707,648
Treasury stock, at cost (198,209 and 185,313 shares as of March 31, 2013 and December 31, 2012, respectively)		(693,732	)		(648,595	)
Accumulated other comprehensive income		5,933,971			5,780,670
Accumulated earnings (deficit)		183,007			(197,985	)
Total shareholders' equity		34,214,233			33,722,112
Total liabilities and shareholders' equity	$	171,132,819		$	165,450,317

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31,
	2013			2012
Revenues
Premiums	$	1,927,550		$	2,056,139
Income from premium financing		1,094			47,012
Net investment income		1,651,623			1,472,495
Net realized investment gains		149,269			68,540
Other income		1,925			7,824
Total revenues		3,731,461			3,652,010
Benefits, Claims and Expenses
Benefits and claims
Increase in future policy benefits		590,691			608,641
Death benefits		493,866			659,706
Surrenders		129,036			129,447
Interest credited to policyholders		903,040			786,632
Dividend, endowment and supplementary life contract benefits		52,830			97,203
Total benefits and claims		2,169,463			2,281,629
Policy acquisition costs deferred		(641,535	)		(947,411	)
Amortization of deferred policy acquisition costs		257,538			242,957
Amortization of value of insurance business acquired		94,844			107,655
Commissions		518,642			795,913
Other underwriting, insurance and acquisition expenses		982,381			844,810
Total expenses		1,211,870			1,043,924
Total benefits, claims and expenses		3,381,333			3,325,553
Income before total federal income tax expense (benefit)		350,128			326,457
Current federal income tax expense		47,524			54,280
Deferred federal income tax benefit		(78,388	)		(45,075	)
Total federal income tax expense (benefit)		(30,864	)		9,205
Net income	$	380,992		$	317,252
Net income per common share basic and diluted	$	0.05		$	0.04

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended March 31,
	2013		2012
Net income	$	380,992	$	317,252
Other comprehensive income
Total net unrealized gains arising during the period		341,411		677,033
Less net realized investment gains		149,269		68,540
Net unrealized gains		192,142		608,493
Less adjustment to deferred acquisition costs		516		6,975
Other comprehensive income before income tax expense		191,626		601,518
Income tax expense		38,325		136,880
Total other comprehensive income		153,301		464,638
Total comprehensive income	$	534,293	$	781,890

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 2013 and 2012

(Unaudited)

	Common Stock $.01 Par Value		Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income		Accumulated Earnings (Deficit)			Total Shareholders' Equity
Balance as of January 1, 2012	$	73,649	$	24,086,146	$	-		$	2,696,224	$	1,542,094		$	28,398,113
Stock dividend		3,780		2,831,220		-			-		(2,835,000	)		-
Subscriptions of common stock		1,971		1,254,516		-			-		-			1,256,487
Comprehensive income:
Net income		-		-		-			-		317,252			317,252
Other comprehensive income		-		-		-			464,638		-			464,638
Balance as of March 31, 2012	$	79,400	$	28,171,882	$	-		$	3,160,862	$	(975,654	)	$	30,436,490

Balance as of January 1, 2013	$	80,374	$	28,707,648	$	(648,595	)	$	5,780,670	$	(197,985	)	$	33,722,112
Subscriptions of common stock		128		2,837		-			-		-			2,965
Repurchase of common stock		-		-		(45,137	)		-		-			(45,137	)
Comprehensive income:
Net income		-		-		-			-		380,992			380,992
Other comprehensive income		-		-		-			153,301		-			153,301
Balance as of March 31, 2013	$	80,502	$	28,710,485	$	(693,732	)	$	5,933,971	$	183,007		$	34,214,233

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2013			2012
Operating activities
Net income	$	380,992		$	317,252
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation		51,974			52,056
Accretion of discount on investments		(209,431	)		(233,047	)
Net realized investment gains		(149,269	)		(68,540	)
Gain on sale of fixed asset		-			(2,934	)
Amortization of policy acquisition cost		257,538			242,957
Policy acquisition cost deferred		(641,535	)		(947,411	)
Mortgage loan origination fees deferred		(48,031	)		-
Amortization of loan origination fees		11,438			-
Amortization of value of insurance business acquired		94,844			107,655
Provision for deferred federal income tax benefit		(78,388	)		(45,075	)
Interest credited to policyholders		903,040			788,130
Change in assets and liabilities:
Accrued investment income		(34,093	)		(153,740	)
Policy loans		(10,380	)		(7,462	)
Allowance for mortgage and premium finance loan losses		46,371			(7,484	)
Recoverable from reinsurers		(91,458	)		(31,956	)
Agents' balances and due premiums		(14,660	)		1,290
Other assets		(185,324	)		(169,705	)
Future policy benefits		602,399			611,384
Policy claims		(105,498	)		(42,004	)
Other policy liabilities		(42,858	)		34,618
Other liabilities		(35,419	)		(132,289	)
Net cash provided by operating activities		702,252			313,695

Investing activities
Purchases of fixed maturity securities		(6,649,734	)		(11,490,292	)
Maturities of fixed maturity securities		825,000			859,481
Sales of fixed maturity securities		962,518			1,351,559
Purchases of equity securities		(2,134	)		(500,565	)
Purchases of mortgage loans		(2,866,116	)		(1,715,776	)
Payments on mortgage loans		689,827			22,225
Purchases of other long-term investments		(3,697,065	)		(4,353,500	)
Payments on other long-term investments		937,922			689,277
Loans made for premiums financed		-			(361,741	)
Loans repaid for premiums financed		125,429			564,271
Sales of furniture and equipment		-			5,000
Purchases of furniture and equipment		(40,435	)		-
Net cash used in investing activities		(9,714,788	)		(14,930,061	)

Financing activities
Policyholders' account deposits		5,573,147			8,065,887
Policyholders' account withdrawals		(1,664,367	)		(1,202,822	)
Purchases of treasury stock		(45,137	)		-
Proceeds from public and private stock offerings		2,965			1,256,487
Net cash provided by financing activities		3,866,608			8,119,552

Decrease in cash		(5,145,928	)		(6,496,814	)
Cash and cash equivalents, beginning of period		10,947,474			27,705,711
Cash and cash equivalents, end of period	$	5,801,546		$	21,208,897

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(Unaudited)

Supplemental Disclosures

In 2012, the Company issued approximately 378,000 shares in connection with a 5% share dividend payable to the holders of shares of the Company as of March 10, 2012. In conjunction with the 2012 stock dividend, the non-cash impact on investing and financing activities is summarized as follows:

	Three Months Ended March 31, 2012
Fair value of shares issued in connection with the stock dividend (378,000 share issued in 2012)	$	2,835,000
Reduction in accumulated earnings (deficit) due to the stock dividend		(2,835,000	)
Increase in common stock, par value $.01 due to the stock dividend		3,780
Increase in additional paid-in-capital due to the stock dividend		2,831,220
Change in shareholders' equity due to the stock dividend	$	-

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

1. Organization and Significant Accounting Policies

Nature of Operations

First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company, Family Benefit Life Insurance Company, First Trinity Capital Corporation and Southern Insurance Services, LLC. 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 $12,750,000, 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 June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities. The offering was completed April 30, 2012. The Company raised $11,000,010 from this offering.

On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement was for 600,000 shares of the Company’s common stock for $8.50 per share. If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses. This offering was suspended on March 8, 2013 and resulted in gross proceeds of $644,470 from the subscription of 75,820 shares of its common stock and incurred $338,333 in offering costs.

The Company purchased First Life America Corporation (“FLAC”) on December 23, 2008. On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC”) and FLAC, were merged, with FLAC being the surviving company. Immediately following the merger, FLAC changed its name to Trinity Life Insurance Company (“TLIC”). After the merger, the Company had two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma.

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.

TLIC purchased Family Benefit Life Insurance Company (“Family Benefit Life”) on December 28, 2011. Family Benefit Life is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in seven states. Family Benefit Life’s current product portfolio consists of whole life, term, accidental death and dismemberment, annuity, endowment and group life insurance products. The products are sold through independent agents in the states of Arizona, Colorado, Kansas, Missouri, Nebraska, New Mexico and Oklahoma. Family Benefit Life has recently been licensed in Arkansas, Illinois, Indiana, Kentucky, North Dakota, Pennsylvania, South Dakota, Texas and West Virginia.

FTCC was incorporated in 2006, and began operations in January 2007. 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. The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC has continued to process payments and service all existing premium financing contracts after June 30, 2012 and will through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

The Company also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2010, that operated as a property and casualty insurance agency but currently has no operations.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the year ended December 31, 2013 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2012.

Principles of Consolidation

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

Reclassifications

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

Use of Estimates

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

Common Stock

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

On January 11, 2012, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they held. The dividend was payable to the holders of shares of the Corporation as of March 10, 2012. Fractional shares were rounded to the nearest whole number of shares. The Company issued approximately 378,000 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,835,000 with an offsetting credit of $2,835,000 to common stock and additional paid-in capital. This stock dividend was a non-cash investing and financing activity.

Subsequent Events

Management has evaluated all events subsequent to March 31, 2013 through the date that these financial statements have been issued.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Recent Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.

The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the updated guidance effective March 31, 2013, and such adoption did not have any effect on the Company’s results of operations, financial position or liquidity.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.

The updated guidance was effective for the quarter ended March 31, 2013, but early adoption was permitted. The Company adopted the updated guidance effective December 31, 2012, and such adoption did not have any effect on the Company’s results of operations, financial position or liquidity.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

2. Investments

Fixed Maturity and Equity Securities Available-For-Sale

Investments in fixed maturity and equity securities available-for-sale as of March 31, 2013 and December 31, 2012 are summarized as follows:

March 31, 2013 (unaudited)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities
U.S. government	$	2,585,745	$	261,436	$	28,646	$	2,818,535
States and political subdivisions		263,470		2,401		3,588		262,283
Residential mortgage-backed securities		98,624		73,921		-		172,545
Corporate bonds		89,038,802		6,768,320		89,131		95,717,991
Foreign bonds		4,261,513		342,443		30,823		4,573,133
Total fixed maturity securities		96,248,154		7,448,521		152,188		103,544,487

Equity securities	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mutual funds		164,581		39,368		-		203,949
Corporate preferred stock		347,905		24,955		-		372,860
Corporate common stock		185,494		95,626		-		281,120
Total equity securities		697,980		159,949		-		857,929
Total fixed maturity and equity securities	$	96,946,134	$	7,608,470	$	152,188	$	104,402,416

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities
U.S. government	$	2,577,074	$	256,628	$	5,769	$	2,827,933
States and political subdivisions		264,854		1,970		4,539		262,285
Residential mortgage-backed securities		107,229		67,890		-		175,119
Corporate bonds		84,325,622		6,578,982		83,812		90,820,792
Foreign bonds		4,268,529		344,630		39,491		4,573,668
Total fixed maturity securities		91,543,308		7,250,100		133,611		98,659,797

Equity securities	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mutual funds		162,447		40,795		-		203,242
Corporate preferred stock		347,905		24,415		-		372,320
Corporate common stock		185,494		82,441		-		267,935
Total equity securities		695,846		147,651		-		843,497
Total fixed maturity and equity securities	$	92,239,154	$	7,397,751	$	133,611	$	99,503,294

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

2. Investments (continued)

All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of March 31, 2013 and December 31, 2012 are summarized as follows:

March 31, 2013 (unaudited)	Fair Value		Unrealized Loss		Number of Securities
Fixed maturity securities
Less than 12 months
U.S. government	$	1,401,354	$	28,646		3
States and political subdivisions		104,915		3,588		1
Corporate bonds		5,493,222		78,515		33
Total less than 12 months		6,999,491		110,749		37
More than 12 months
Corporate bonds		252,752		10,616		2
Foreign bonds		574,878		30,823		4
Total more than 12 months		827,630		41,439		6
Total fixed maturity securities	$	7,827,121	$	152,188		43

December 31, 2012	Fair Value		Unrealized Loss		Number of Securities
Fixed maturity securities
Less than 12 months
U.S. government	$	594,232	$	5,769		1
States and political subdivisions		104,243		4,539		1
Corporate bonds		5,772,021		83,812		28
Foreign bonds		916,406		39,491		5
Total fixed maturity securities	$	7,386,902	$	133,611		35

As of March 31, 2013, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 92%. As of December 31, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 93%. Fixed maturity securities were 95% investment grade as rated by Standard & Poor’s as of March 31, 2013 and December 31, 2012, respectively. There were no equity securities in an unrealized loss position as of March 31, 2013 and December 31, 2012.

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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

2. Investments (continued)

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

Based on management’s review, the Company experienced no other-than-temporary impairments during the three months ended March 31, 2013 and the year ended December 31, 2012. Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2013, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of March 31, 2013 and December 31, 2012, are summarized as follows:

	(Unaudited) March 31, 2013			December 31, 2012
Unrealized appreciation on available-for-sale securities	$	7,456,282		$	7,264,140
Adjustment to deferred acquisition costs		(38,815	)		(38,299	)
Deferred income taxes		(1,483,496	)		(1,445,171	)
Net unrealized appreciation on available-for-sale securities	$	5,933,971		$	5,780,670

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of March 31, 2013, by contractual maturity, are summarized as follows:

	March 31, 2013 (Unaudited)
	Fixed Maturity Available-For-Sale Securities				Other Long-Term Investments
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	3,901,769	$	3,963,390	$	3,775,155	$	3,795,743
Due in one year through five years		33,815,777		36,764,752		9,840,758		10,709,876
Due after five years through ten years		46,604,234		50,213,242		6,314,428		7,934,425
Due after ten years		11,827,750		12,430,558		2,785,231		4,265,989
Due at multiple maturity dates		98,624		172,545		-		-
	$	96,248,154	$	103,544,487	$	22,715,572	$	26,706,033

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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

2. Investments (continued)

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale and mortgage loans on real estate for the three months ended March 31, 2013 and 2012 are summarized as follows:

	Three Months Ended March 31, (Unaudited)
	Fixed Maturity Securities					Mortgage Loans on Real Estate
	2013			2012		2013		2012
Proceeds	$	1,787,518		$	2,211,040	$	689,009	$	-
Gross realized gains		51,013			68,540		102,515		-
Gross realized losses		(4,259	)		-		-		-

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2013 and 2012 and the amount of realized investment gains on fixed maturity securities available-for-sale and mortgage loans on real estate for the three months ended March 31, 2013 and 2012 are summarized as follows:

	Three Months Ended March 31, (Unaudited)
	2013		2012
Change in unrealized investment gains:
Available-for-sale securities:
Fixed maturity securities	$	179,844	$	524,234
Equity securities		12,298		84,259
Net realized investment gains (losses):
Available-for-sale securities:
Fixed maturity securities		46,754		68,540
Mortgage loans on real estate		102,515		-

Major categories of net investment income for the three months ended March 31, 2013 and 2012 are summarized as follows:

	Three Months Ended March 31, (Unaudited)
	2013			2012
Fixed maturity securities	$	1,098,833		$	1,223,324
Equity securities		7,315			12,561
Other long-term investments		395,635			197,753
Mortgage loans		210,022			38,321
Policy loans		24,104			24,993
Real estate		90,710			93,475
Short-term and other investments		10,428			9,045
Gross investment income		1,837,047			1,599,472
Investment expenses		(185,424	)		(126,977	)
Net investment income	$	1,651,623		$	1,472,495

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

2. Investments (continued)

Included in invested assets are securities and other assets having amortized cost values of $3,405,881 and $3,981,060 and fair values of $3,610,301 and $4,219,334 as of March 31, 2013 and December 31, 2012, respectively, which have been placed on deposit with various state insurance departments.

3. Fair Value Measurements

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

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

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

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

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

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

3. Fair Value Measurements (continued)

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 is summarized as follows:

March 31, 2013 (Unaudited)	Level 1		Level 2		Level 3		Total
Fixed maturity securities, available-for-sale
U.S. government	$	-	$	2,818,535	$	-	$	2,818,535
States and political subdivisions		-		262,283		-		262,283
Residential mortgage-backed securities		-		172,545		-		172,545
Corporate bonds		-		95,717,991		-		95,717,991
Foreign bonds		-		4,573,133		-		4,573,133

Total fixed maturity securities	$	-	$	103,544,487	$	-	$	103,544,487

Equity securities, available-for-sale
Mutual funds	$	-	$	203,949	$	-	$	203,949
Corporate preferred stock		-		372,860		-		372,860
Corporate common stock		228,620		-		52,500		281,120

Total equity securities	$	228,620	$	576,809	$	52,500	$	857,929

December 31, 2012	Level 1		Level 2		Level 3		Total
Fixed maturity securities, available-for-sale
U.S. government	$	-	$	2,827,933	$	-	$	2,827,933
States and political subdivisions		-		262,285		-		262,285
Residential mortgage-backed securities		-		175,119		-		175,119
Corporate bonds		-		90,820,792		-		90,820,792
Foreign bonds		-		4,573,668		-		4,573,668

Total fixed maturity securities	$	-	$	98,659,797	$	-	$	98,659,797

Equity securities, available-for-sale
Mutual funds	$	-	$	203,242	$	-	$	203,242
Corporate preferred stock		-		372,320		-		372,320
Corporate common stock		215,435		-		52,500		267,935

Total equity securities	$	215,435	$	575,562	$	52,500	$	843,497

As of March 31, 2013, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. During 2012, one private placement common stock was sold and another was purchased. These private placement stocks represent investments in small development stage insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

3. Fair Value Measurements (continued)

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

The Company’s equity securities are included in Level 1 and Level 2 and the private placement common stocks included in Level 3. Level 1 for those equity securities classified as such is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and are based upon unadjusted prices. Level 2 for those equity securities classified as such is appropriate since they are not actively traded as of March 31, 2013.

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

3. Fair Value Measurements (continued)

Fair Value of Financial Instruments

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of March 31, 2013 and December 31, 2012, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

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

	March 31, 2013 (Unaudited)
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Mortgage loans on real estate
Commercial	$	2,216,846	$	2,285,224	$	-	$	-	$	2,285,224
Residential		10,505,879		10,550,414		-		-		10,550,414
Policy loans		1,498,415		1,498,415		-		-		1,498,415
Other long-term investments		22,715,572		26,706,033		-		-		26,706,033
Cash and cash equivalents		5,801,546		5,801,546		5,801,546		-		-
Accrued investment income		1,451,311		1,451,311		-		-		1,451,311
Loans from premium financing		135,643		135,643		-		-		135,643
Total financial assets	$	44,325,212	$	48,428,586	$	5,801,546	$	-	$	42,627,040
Financial liabilities
Policyholders' account balances	$	99,855,190	$	95,207,220	$	-	$	-	$	95,207,220
Policy claims		612,023		612,023		-		-		612,023
Total financial liabilities	$	100,467,213	$	95,819,243	$	-	$	-	$	95,819,243

	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Mortgage loans on real estate
Commercial	$	2,267,560	$	2,330,004	$	-	$	-	$	2,330,004
Residential		8,168,216		8,177,697		-		-		8,177,697
Policy loans		1,488,035		1,488,035		-		-		1,488,035
Other long-term investments		19,560,794		23,168,994		-		-		23,168,994
Cash and cash equivalents		10,947,474		10,947,474		10,947,474		-		-
Accrued investment income		1,417,218		1,417,218		-		-		1,417,218
Loans from premium financing		261,072		261,072		-		-		261,072
Total financial assets	$	44,110,369	$	47,790,494	$	10,947,474	$	-	$	36,843,020
Financial liabilities
Policyholders' account balances	$	95,043,370	$	91,013,971	$	-	$	-	$	91,013,971
Policy claims		717,521		717,521		-		-		717,521
Total financial liabilities	$	95,760,891	$	91,731,492	$	-	$	-	$	91,731,492

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

3. Fair Value Measurements (continued)

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

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

Fixed Maturity and Equity Securities

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

Mortgage Loans on Real Estate

The fair values for mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period, as determined by recent new loan activity.

Cash and Cash Equivalents, Accrued Investment Income and Policy Loans

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

Other Long-Term Investments

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

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. Unearned interest was $1,389 as of both March 31, 2013 and December 31, 2012. Estimated loan losses were $228,999 as of both March 31, 2013 and December 31, 2012.

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 Consolidated Financial Statements

March 31, 2013

(Unaudited)

4. Segment Data

The Company has a life insurance segment, consisting of the operations of TLIC and Family Benefit Life, 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. These segments as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 are summarized as follows:

	Three Months Ended March 31, (Unaudited)
	2013			2012
Revenues:
Life and annuity insurance operations	$	3,686,274		$	3,583,603
Premium finance operations		1,094			47,056
Corporate operations		44,093			21,351
Total	$	3,731,461		$	3,652,010
Income (loss) before income taxes:
Life and annuity insurance operations	$	562,854		$	499,383
Premium finance operations		(108,807	)		(12,755	)
Corporate operations		(103,919	)		(160,171	)
Total	$	350,128		$	326,457
Depreciation and amortization expense:
Life and annuity insurance operations	$	410,146		$	397,478
Premium finance operations		927			927
Corporate operations		4,721			4,263
Total	$	415,794		$	402,668

	(Unaudited) March 31, 2013		December 31, 2012
Assets:
Life and annuity insurance operations	$	164,172,691	$	158,151,031
Premium finance operations		670,104		979,390
Corporate operations		6,290,024		6,319,896
Total	$	171,132,819	$	165,450,317

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

5. Allowance for Loss on Premium Finance Contracts

The progression of the Company’s allowance for loss related to loans from premium financing for the three months ended March 31, 2013 and 2012 is summarized as follows:

	Three Months Ended March 31, (Unaudited)
	2013		2012
Allowance at beginning of period	$	228,999	$	229,004
Additions credited to operations		-		(7,484	)
Allowance at end of period	$	228,999	$	221,520

6. Federal Income Taxes

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

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2009 through 2012 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.

7. 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.

8. Other Comprehensive Income and Accumulated Other Comprehensive Income

The changes in the components of the Company’s accumulated other comprehensive income for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited)
	Unrealized Appreciation on Available-For-Sale Securities		Adjustment to Deferred Acquisition Costs			Accumulated Other Comprehensive Income
Balance as of January 1, 2012	$	2,718,885	$	(22,661	)	$	2,696,224
Other comprehensive income		470,026		(5,388	)		464,638
Balance as of March 31, 2012	$	3,188,911	$	(28,049	)	$	3,160,862

Balance as of January 1, 2013	$	5,811,309	$	(30,639	)	$	5,780,670
Other comprehensive income before reclassifications, net of tax		273,129		(413	)		272,716
Less amounts reclassified from accumulated other comprehensive income, net of tax		119,415		-			119,415
Other comprehensive income		153,714		(413	)		153,301
Balance as of March 31, 2013	$	5,965,023	$	(31,052	)	$	5,933,971

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

The pretax components of the Company’s other comprehensive income and the related income tax expense for each component for the three months ended March 31, 2013 and 2012 are summarized as follows:

	Three Months Ended March 31, 2013 (Unaudited)
	Pretax			Income Tax Expense (Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	341,411		$	68,282		$	273,129
Reclassification adjustment for gains included in income		(149,269	)		(29,854	)		(119,415	)
Net unrealized gains on investments		192,142			38,428			153,714
Adjustment to deferred acquisition costs		(516	)		(103	)		(413	)
Total other comprehensive income	$	191,626		$	38,325		$	153,301

	Three Months Ended March 31, 2012 (Unaudited)
	Pretax			Income Tax Expense (Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	677,033		$	154,064		$	522,969
Reclassification adjustment for gains included in income		(68,540	)		(15,597	)		(52,943	)
Net unrealized gains on investments		608,493			138,467			470,026
Adjustment to deferred acquisition costs		(6,975	)		(1,587	)		(5,388	)
Total other comprehensive income	$	601,518		$	136,880		$	464,638

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

The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statement of operations for the three months ended March 31, 2013 are summarized as follows:

Reclassification Adjustments	Three Months Ended March 31, 2013 (Unaudited)
Unrealized gains on available-for-sale securities:
Realized gains on sales of securities (a)	$	149,269
Income tax expenses (b)		29,854
Total reclassification adjustments		119,415

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

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

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 TLIC 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. With the acquisition of Family Benefit Life in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. Family Benefit Life has recently been licensed in Arkansas, Illinois, Indiana, Kentucky, North Dakota, Pennsylvania, South Dakota, Texas and West Virginia. Sales activity will soon begin in these new states.

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. The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continued to process payments and service all existing premium financing contracts after June 30, 2012 and will through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.

Acquisitions

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000. In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of Family Benefit Life Insurance Company, included in the life insurance segment, for $13,855,129.

Our profitability in the life insurance segment is a function of our ability to accurately price the policies that we write, 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. However, as introduced above, the Company has discontinued its premium financing operations and will completely exit that segment of the business on approximately July 1, 2013.

Critical Accounting Policies and Estimates

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

For a description of the Company’s critical accounting policies and estimates, please refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The Company considers its most critical accounting estimates to be those applied to investments in fixed maturities and equity securities, deferred policy acquisition costs, loans from premium financing, value of insurance business acquired, future policy benefits and federal income taxes. Except as discussed below, there have been no material changes to the Company’s critical accounting policies and estimates since December 31, 2012.

Recent Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

Testing Indefinite-Lived Intangible Assets for Impairment

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 and Family Benefit Life;

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

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

Please see below and Note 4 to the Consolidated Financial Statements for the three months ended March 31, 2013 and 2012 and as of March 31, 2013 and December 31, 2012 for additional information regarding segment information.

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

FINANCIAL HIGHLIGHTS

Consolidated Condensed Results of Operations for the Three Months Ended March 31, 2013 and 2012

	(Unaudited)
	Three Months Ended March 31,					Increase (Decrease)			Percentage Change
	2013			2012		2013 less 2012			2013 to 2012
Premiums	$	1,927,550		$	2,056,139	$	(128,589	)		-6.3	%
Net investment income		1,651,623			1,472,495		179,128			12.2	%
Net realized investment gains		149,269			68,540		80,729			117.8	%
Other revenues		3,019			54,836		(51,817	)		-94.5	%
Total revenues		3,731,461			3,652,010		79,451			2.2	%
Benefits and claims		2,169,463			2,281,629		(112,166	)		-4.9	%
Expenses		1,211,870			1,043,924		167,946			16.1	%
Total benefits, claims and expenses		3,381,333			3,325,553		55,780			1.7	%
Income before federal income tax expense (benefit)		350,128			326,457		23,671			7.3	%
Federal income tax expense (benefit)		(30,864	)		9,205		(40,069	)		-435.3	%
Net income	$	380,992		$	317,252	$	63,740			20.1	%
Net income per common share basic and diluted	$	0.05		$	0.04	$	0.01

Consolidated Condensed Financial Position as of March 31, 2013 and December 31, 2012

	(Unaudited)				Increase (Decrease)			Percentage Change
	March 31, 2013		December 31, 2012		2013 to 2012			2013 to 2012


Investment assets	$	144,157,606	$	133,846,664	$	10,310,942			7.7	%
Other assets		26,975,213		31,603,653		(4,628,440	)		-14.6	%
Total assets	$	171,132,819	$	165,450,317	$	5,682,502			3.4	%

Policy liabilities	$	132,232,036	$	126,966,173	$	5,265,863			4.1	%
Deferred federal income taxes		3,261,461		3,301,524		(40,063	)		-1.2	%
Other liabilities		1,425,089		1,460,508		(35,419	)		-2.4	%
Total liabilities		136,918,586		131,728,205		5,190,381			3.9	%
Shareholders' equity		34,214,233		33,722,112		492,121			1.5	%
Total liabilities and shareholders' equity	$	171,132,819	$	165,450,317	$	5,682,502			3.4	%

Shareholders' equity per common share	$	4.36	$	4.29	$	0.07

Results of Operations – Three Months Ended March 31, 2013 and 2012

Revenues

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

Our revenues for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited)
	Three Months Ended March 31,				Increase (Decrease)			Percentage Change
	2013		2012		2013 less 2012			2013 to 2012
Premiums	$	1,927,550	$	2,056,139	$	(128,589	)		-6.3	%
Income from premium financing		1,094		47,012		(45,918	)		-97.7	%
Net investment income		1,651,623		1,472,495		179,128			12.2	%
Net realized investment gains		149,269		68,540		80,729			117.8	%
Other income		1,925		7,824		(5,899	)		-75.4	%
Total revenues	$	3,731,461	$	3,652,010	$	79,451			2.2	%

The increase in total revenues of $79,451 for the three months ended March 31, 2013 is discussed below.

Premiums

Our premiums for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited)
	Three Months Ended March 31,				Increase (Decrease)			Percentage Change
	2013		2012		2013 less 2012			2013 to 2012
Whole life and term first year	$	23,201	$	32,223	$	(9,022	)		-28.0	%
Whole life and term renewal		721,612		970,154		(248,542	)		-25.6	%
Final expense first year		252,882		273,545		(20,663	)		-7.6	%
Final expense renewal		929,855		780,217		149,638			19.2	%
Total premiums	$	1,927,550	$	2,056,139	$	(128,589	)		-6.3	%

The $128,589 decrease in premiums for the three months ended March 31, 2013 is primarily due to a $248,542 decrease in whole life and term renewal premiums that exceeded a $149,638 increase in final expense renewal premiums.

Income from Premium Financing

The income from premium financing has steadily decreased during the past two years. There was a decrease of $45,918 for the three months ended March 31, 2013.

As introduced above, the Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continued to process payments and service all existing premium financing contracts after June 30, 2012 and will through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.

Net Investment Income

The major components of our net investment income for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited)
	Three Months Ended March 31,						Increase (Decrease)			Percentage Change
	2013			2012			2013 less 2012			2013 to 2012
Fixed maturity securities	$	1,098,833		$	1,223,324		$	(124,491	)		-10.2	%
Equity securities		7,315			12,561			(5,246	)		-41.8	%
Other long-term investments		395,635			197,753			197,882			100.1	%
Mortgage loans		210,022			38,321			171,701			448.1	%
Policy loans		24,104			24,993			(889	)		-3.6	%
Real estate		90,710			93,475			(2,765	)		-3.0	%
Short-term and other investments		10,428			9,045			1,383			15.3	%
Gross investment income		1,837,047			1,599,472			237,575			14.9	%
Investment expenses		(185,424	)		(126,977	)		58,447			-46.0	%
Net investment income	$	1,651,623		$	1,472,495		$	179,128			12.2	%

The $237,575 increase in gross investment income for the three months ended March 31, 2013 is due to the 2013 investment of excess cash primarily in fixed maturity securities, other long-term investments (lottery receivables) and mortgage loans.

The $58,447 increase in investment expenses for the three months ended March 31, 2013 is primarily due to the establishment of a $46,371 bad debt allowance on mortgage loans on real estate for commercial and residential mortgage loans where funds or real estate are not otherwise escrowed and held by a third party for the benefit of the Company. As of March 31, 2013, $59,913 of cash and $205,259 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in mortgage loans on real estate with one loan originator.

Net Realized Investment Gains

There was an $80,729 increase in net realized investment gains for the three months ended March 31, 2013.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $46,754 for the three months ended March 31, 2013 resulted from proceeds of $1,787,518 for these securities that had carrying values of $1,740,764 at the 2013 disposal dates.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $68,540 for the three months ended March 31, 2012 resulted from proceeds of $2,211,040 for these securities that had carrying values of $2,142,500 at the 2012 disposal dates.

The net realized investment gains from mortgage loans on real estate of $102,515 for the three months ended March 31, 2013, resulted from the early pay off of three mortgage loans that the Company had acquired at a discount price.

We have recorded no other-than-temporary impairments in 2013 and 2012.

Other Income

The $5,899 decrease in other income for the three months ended March 31, 2013 is primarily due to decreased service fees.

Total Benefits, Claims and Expenses

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

Our benefits, claims and expenses for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited)
	Three Months Ended March 31,						Increase (Decrease)			Percentage Change
	2013			2012			2013 less 2012			2013 to 2012
Benefits and claims
Increase in future policy benefits	$	590,691		$	608,641		$	(17,950	)		-2.9	%
Death benefits		493,866			659,706			(165,840	)		-25.1	%
Surrenders		129,036			129,447			(411	)		-0.3	%
Interest credited to policyholders		903,040			786,632			116,408			14.8	%
Dividend, endowment and supplementary life contract benefits		52,830			97,203			(44,373	)		-45.6	%
Total benefits and claims		2,169,463			2,281,629			(112,166	)		-4.9	%
Expenses
Policy acquisition costs deferred		(641,535	)		(947,411	)		305,876			-32.3	%
Amortization of deferred policy acquisition costs		257,538			242,957			14,581			6.0	%
Amortization of value of insurance business acquired		94,844			107,655			(12,811	)		-11.9	%
Commissions		518,642			795,913			(277,271	)		-34.8	%
Other underwriting, insurance and acquisition expenses		982,381			844,810			137,571			16.3	%
Total expenses		1,211,870			1,043,924			167,946			16.1	%
Total benefits, claims and expenses	$	3,381,333		$	3,325,553		$	55,780			1.7	%

The increase of $55,780 in total benefits, claims and expenses for the three months ended March 31, 2013 is discussed below.

Benefits and Claims

The $112,166 decrease in benefits and claims for the three months ended March 31, 2013 is primarily due to the following:

$165,840 decrease in death benefits is primarily due to favorable mortality experience in 2013.

$44,373 decrease in dividends, endowments and supplementary life contract benefits due to management’s decision to decrease non guaranteed dividends on Family Benefit Life products due to decreased investment yields and decreased divisible surplus.

$116,408 increase in interest credited to policyholders primarily due to an increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits in excess of withdrawals).

Deferral and Amortization of Deferred Acquisition Costs

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

For the three months ended March 31, 2013 and 2012, capitalized costs were $641,535 and $947,411, respectively. Amortization of deferred policy acquisition costs for the three months ended March 31, 2013 and 2012 were $257,538 and $242,957, respectively.

The $305,876 decrease in the acquisition costs deferred primarily relates to decreased production of final expense policies and annuity contracts in 2013. The $14,581 increase in the 2013 amortization of deferred acquisition costs is as expected.

Amortization of Value of Insurance Business Acquired

The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $94,844 and $107,655 for the three months ended March 31, 2013 and 2012, respectively. The $12,811 decrease in the 2013 amortization of value of insurance business acquired primarily is as expected.

Commissions

Our commissions for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited)
	Three Months Ended March 31,				Increase (Decrease)			Percentage Change
	2013		2012		2013 less 2012			2013 to 2012
Annuity	$	91,536	$	331,727	$	(240,191	)		-72.4	%
Whole life and term first year		16,995		25,077		(8,082	)		-32.2	%
Whole life and term renewal		25,724		37,091		(11,367	)		-30.6	%
Final expense first year		296,827		329,944		(33,117	)		-10.0	%
Final expense renewal		87,560		72,074		15,486			21.5	%
Total commissions	$	518,642	$	795,913	$	(277,271	)		-34.8	%

The $277,271 decrease in commissions for the three months ended March 31, 2013 is primarily due to:

$240,191 decrease in annuity first year, single and renewal commissions that corresponds to $2,492,740 of decreased annuity considerations deposited and a 2013 decrease in the annuity commission rate.

$33,117 decrease in final expense first year commissions that correspond to the $20,663 decrease in final expense first year premiums.

Other Underwriting, Insurance and Acquisition Expenses

The $137,571 increase in other underwriting, insurance and acquisition expenses for the three months ended March 31, 2013 is primarily attributed to a $125,000 reduction in the bonuses accrued at December 31, 2011 that reduced salaries and wages during the three months ended March 31, 2012.

Federal Income Taxes

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

For the three months ended March 31, 2013 and 2012, current income tax expense was $47,524 and $54,280, respectively. Deferred federal income tax benefit was $78,388 and $45,075 for the three months ended March 31, 2013 and 2012, respectively.

Net Income Per Common Share Basic and Diluted

Net income was $380,992 ($0.05 per common share basic and diluted) and $317,252 ($0.04 per common share basic and diluted) for the three months ended March 31, 2013 and 2012, respectively.

Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the three months ended March 31, 2013 and 2012 were 7,852,106 and 7,843,665 respectively.

Business Segments

The revenues and income (loss) before federal income taxes from our business segments for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited)
	Three Months Ended						Increase (Decrease)			Percentage Change
	2013			2012			2013 to 2012			2013 to 2012
Revenues:
Life and annuity insurance operations	$	3,686,274		$	3,583,603		$	102,671			2.9	%
Premium finance operations		1,094			47,056			(45,962	)		-97.7	%
Corporate operations		44,093			21,351			22,742			106.5	%
Total	$	3,731,461		$	3,652,010		$	79,451			2.2	%
Income (loss) before income taxes:
Life and annuity insurance operations	$	562,854		$	499,383		$	63,471			12.7	%
Premium finance operations		(108,807	)		(12,755	)		(96,052	)		753.1	%
Corporate operations		(103,919	)		(160,171	)		56,252			-35.1	%
Total	$	350,128		$	326,457		$	23,671			7.3	%

Life and Annuity Insurance Operations

The $102,671 increase in revenues from Life and Annuity Insurance Operations for the three months ended March 31, 2013 is primarily due to the following:

$153,498 increase in net investment income

$80,729 increase in net realized investment gains

$128,589 decrease in premiums

The $63,471 increased profitability from Life and Annuity Insurance Operations for the three months ended March 31, 2013 is primarily due to the following:

$277,271 decrease in commissions

$153,498 increase in net investment income

$112,166 decrease in benefits and claims

$80,729 increase in net realized investment gains

$12,811 decrease in amortization of value of insurance business acquired

$320,457 decrease in policy acquisition costs deferred net of amortization

$128,589 decrease in premiums

$117,241 increase in other underwriting, insurance and acquisition expenses

Premium Finance Operations

The $45,962 decrease in revenues from Premium Finance Operations for the three months ended March 31, 2013 is due to decreased fee income as we discontinued offering premium finance contracts on July 1, 2012.

The $96,052 decreased profitability from Premium Finance Operations for the three months ended March 31, 2013 is primarily due to $45,962 of decreased fee income and $52,897 of increased legal fees.

Corporate Operations

The $22,742 increase in revenues from Corporate Operations for the three months ended March 31, 2013 is primarily due to increased net investment income.

The $56,252 increased Corporate Operations profitability for the three months ended March 31, 2013 is primarily due to the $22,742 increase in net investment income and $29,760 of decreased operating expenses.

Consolidated Financial Condition

Our invested assets as of March 31, 2013 and December 31, 2012 are summarized as follows:

	(Unaudited) March 31, 2013		December 31, 2012		Increase (Decrease) 2013 to 2012			Percentage Change 2013 to 2012
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $96,248,154 and $91,543,308 as of March 31, 2013 and December 31, 2012, respectively)	$	103,544,487	$	98,659,797	$	4,884,690			5.0	%
Available-for-sale equity securities at fair value (cost: $697,980 and $695,846 as of March 31, 2013 and December 31, 2012, respectively)		857,929		843,497		14,432			1.7	%
Mortgage loans on real estate		12,722,725		10,435,776		2,286,949			21.9	%
Investment real estate		2,818,478		2,858,765		(40,287	)		-1.4	%
Policy loans		1,498,415		1,488,035		10,380			0.7	%
Other long-term investments		22,715,572		19,560,794		3,154,778			16.1	%
Total investments	$	144,157,606	$	133,846,664	$	10,310,942			7.7	%

The $4,884,690 increase in available-for-sale fixed maturity securities for the three months ended March 31, 2013 is primarily due to purchases of $6,649,734 in excess of sales and maturities of $1,787,518, net realized investment gains of $46,754, $179,844 increase in unrealized appreciation and premium amortization of $204,124. This portfolio is reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies and U. S. government and foreign securities.

As of March 31, 2013, we held 43 available-for-sale fixed maturity securities with an unrealized loss of $152,188, fair value of $7,827,121 and amortized cost of $7,979,309.

The $14,432 increase in available-for-sale equity securities for the three months ended March 31, 2013 is primarily due to purchases of $2,134 and a $12,298 increase in unrealized appreciation of available-for-sale equity securities. This portfolio is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale equity securities portfolio is invested in a variety of companies.

As of both March 31, 2013 and December 31, 2012 there were no available-for-sale equity securities in an unrealized loss position.

The $2,286,949 increase in mortgage loans for the three months ended March 31, 2013 is primarily due to the origination of $2,866,116 of mortgage loans, $48,031 capitalization of loan origination fees, $102,515 of realized gains on the early pay off of loans purchased at a discount, discount accretion of $17,923 less principal payments of $689,827, allowance for bad debts of $46,371 and $11,438 of amortization of loan origination fees.

The $3,154,778 increase in other long-term investments (comprised of lottery receivables) for the three months ended March 31, 2013 is primarily due to the purchases of $3,697,065, $395,635 of accretion of discount less principal payments of $937,922.

Our assets other than invested assets as of March 31, 2013 and December 31, 2012 are summarized as follows:

	(Unaudited) March 31, 2013		December 31, 2012		Increase (Decrease) 2013 to 2012			Percentage Change 2013 to 2012

Cash and cash equivalents	$	5,801,546	$	10,947,474	$	(5,145,928	)		-47.0	%
Accrued investment income		1,451,311		1,417,218		34,093			2.4	%
Recoverable from reinsurers		1,279,829		1,188,371		91,458			7.7	%
Agents' balances and due premiums		373,389		358,729		14,660			4.1	%
Loans from premium financing, net		135,643		261,072		(125,429	)		-48.0	%
Deferred policy acquisition costs		7,412,298		7,028,820		383,478			5.5	%
Value of insurance business acquired		7,414,052		7,508,895		(94,843	)		-1.3	%
Property and equipment, net		153,305		124,558		28,747			23.1	%
Other assets		2,953,840		2,768,516		185,324			6.7	%
Assets other than investment assets	$	26,975,213	$	31,603,653	$	(4,628,440	)		-14.6	%

The $5,145,928 decrease in cash is primarily due to the company investing these funds in fixed maturity securities, mortgage loans and other long-term investments (i.e., lottery receivables).

The $125,429 decrease in loans from premium financing is related to normal loan collections and our May 16, 2012 decision to discontinue offering premium finance contracts effective July 1, 2012.

Other assets consist primarily of prepaid expenses, recoverable federal and state income taxes, guaranty funds, notes receivable, customer account balances receivable and receivables for securities sold with trade dates and settlement dates in different accounting periods. The $185,324 increase in other assets is primarily due to $207,766 of increased recoverable federal and state income taxes.

The progression of the Company’s loans from premium financing for the three months ended March 31, 2013 and year ended December 31, 2012 is summarized as follows:


	(Unaudited) Three Months Ended March 31,			Year Ended December 31.
	2013			2012
Balance, beginning of year	$	491,460		$	1,274,707
Loans financed		-			847,845
Unearned interest		-			51,525
Capitalized fees and interest		-			12,827
Payment of loans and unearned interest		(125,429	)		(1,695,444	)
Ending loan balance including unearned interest		366,031			491,460
Unearned interest included in ending loan balances		(1,389	)		(1,389	)
Loan balance net of unearned interest		364,642			490,071
Less allowance for loan loss		(228,999	)		(228,999	)
Loan balance net of unearned interest and allowance for loan losses	$	135,643		$	261,072

Our liabilities as of March 31, 2013 and December 31, 2012 are summarized as follows:

	(Unaudited) March 31, 2013		December 31, 2012		Increase (Decrease) 2013 to 2012			Percentage Change 2013 to 2012

Policy liabilities
Policyholders' account balances	$	99,855,190	$	95,043,370	$	4,811,820			5.1	%
Future policy benefits		31,667,959		31,065,560		602,399			1.9	%
Policy claims		612,023		717,521		(105,498	)		-14.7	%
Other policy liabilities		96,864		139,722		(42,858	)		-30.7	%
Total policy liabilities		132,232,036		126,966,173		5,265,863			4.1	%
Deferred federal income taxes		3,261,461		3,301,524		(40,063	)		-1.2	%
Other liabilities		1,425,089		1,460,508		(35,419	)		-2.4	%
Total liabilities	$	136,918,586	$	131,728,205	$	5,190,381			3.9	%

Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, unearned investment income and payable for securities purchased with trade dates and settlement dates in different accounting periods.

The $5,265,863 increase in policy liabilities is primarily due to deposits on annuity and deposit-type contracts exceeding withdrawals by $3,908,780, $903,040 of interest credited to policyholder account deposits, $602,399 of increased future policy benefit reserves, $105,498 of decreased liabilities for policy claims and $42,858 of decreased other policy liabilities.

The $40,063 decrease in deferred federal income taxes during the three months ended March 31, 2013 was due to $38,325 of increased deferred federal income taxes on the unrealized appreciation of available-for-sale fixed maturity and equity securities. This increase was offset by $78,388 of operating deferred tax benefits.

The $35,419 decrease in other liabilities is as expected.

Liquidity and Capital Resources

Our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through March 31, 2013, we have received $27,119,480 from the sale of our shares. Our operations have been profitable and have generated $5,453,295 of net income from operations since we were incorporated in 2004 as shown in the accumulated earnings balance in the March 31, 2013 consolidated statement of financial position. The Company issued 323,777 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2011, however, that resulted in accumulated earnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. The Company also issued approximately 378,000 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2012, that resulted in accumulated earnings being charged an additional $2,835,000 with an offsetting credit of $2,835,000 to common stock and additional paid-in capital. The impact of these two stock dividend charges of $5,263,328 to accumulated earnings decreased the balance of accumulated earnings as of March 31, 2013 to $183,007.

As of March 31, 2013, we had cash and cash equivalents totaling $5,801,546. As of March 31, 2013, cash and cash equivalents of $677,982 and $960,053, respectively, of the total $5,801,546 were held by TLIC and Family Benefit Life and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the 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. Based on these limitations, there is capacity for TLIC to pay a dividend up to $377,777 in 2013 without prior approval. In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $887,520 in 2013 without prior approval.

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 $490,641 as of March 31, 2013. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.

Our cash flows for the three months ended March 31, 2013 and 2012 are summarized as follows:

	(Unaudited) Three Months Ended March 31,						Increase (Decrease)			Percentage Change
	2013			2012			2013 to 2012			2013 to 2012
Net cash provided by operating activities	$	702,252		$	313,695		$	388,556			123.9	%
Net cash used in investing activities		(9,714,788	)		(14,930,061	)		5,215,273			-34.9	%
Net cash provided by financing activities		3,866,608			8,119,552			(4,252,943	)		-52.4	%
Increase (decrease) in cash		(5,145,928	)		(6,496,814	)		1,350,886			-20.8	%
Cash and cash equivalents, beginning of period		10,947,474			27,705,711			(16,758,237	)		-60.5	%
Cash and cash equivalents, end of period	$	5,801,546		$	21,208,897		$	(15,407,351	)		-72.6	%

The $388,556 increase in cash provided by operating activities during the three months ended March 31, 2013 is primarily due to decreased benefits and claims and increases in net investment income that exceed decreases in premiums and increases in other underwriting, insurance and acquisition expenses.

The $5,215,273 of decreased cash used for investing activities during the three months ended March 31, 2013 was primarily related to increased purchase activity in 2012 compared to 2013.

The $4,252,943 decrease in cash provided by financing activities for the three months ended March 31, 2013 resulted from $2,954,285 of decreased policyholder account deposits in excess of withdrawals, $1,253,522 of decreased net proceeds from the public and private placement stock offerings and $45,137 for purchasing treasury shares.

Our shareholders’ equity as of March 31, 2013 and December 31, 2012 is summarized as follows:

	(Unaudited) March 31, 2013			December 31, 2012			Increase (Decrease) 2013 to 2012			Percentage Change 2013 to 2012
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 issued as of March 31, 2013 and December 31, 2012 and 7,776,164 and 7,789,060 outstanding as of March 31, 2013 and December 31, 2012, respectively, and 75,820 and 63,070 subscribed as of March 31, 2013 and December 31, 2012, respectively	$	80,502		$	80,374		$	128			0.2	%
Additional paid-in capital		28,710,485			28,707,648			2,837			0.0	%
Treasury stock, at cost (198,209 and 185,313 shares as of March 31, 2013 and December 31, 2012, respectively)		(693,732	)		(648,595	)		(45,137	)		7.0	%
Accumulated other comprehensive income		5,933,971			5,780,670			153,301			2.7	%
Accumulated earnings (deficit)		183,007			(197,985	)		380,992			-192.4	%
Total shareholders' equity	$	34,214,233		$	33,722,112		$	492,121			1.5	%

The increase in shareholders’ equity of $492,121 for the three months ended March 31, 2013 is due to $2,965 of proceeds generated from the public stock offering (gross proceeds of $108,375 and offering expenses of $105,410), $153,301 of other comprehensive income, $380,992 of net income less $45,137 for purchases of 12,896 shares of treasury stock from a former member of the Board of Directors and a charitable organization for which that former Director had donated 10,250 shares of the Company’s common stock.

Equity per common share outstanding increased 1.6% to $4.36 as of March 31, 2013 compared to $4.29 per share as of December 31, 2012, based upon 7,851,984 common shares outstanding and subscribed as of March 31, 2013 and 7,852,130 common shares outstanding and subscribed as of December 31, 2012.

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 2013 or 2012. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.

We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products. Our investment portfolio recovered from the disruptions in the capital markets and had unrealized appreciation on available-for-sale securities of $7,456,282 and $3,679,549 as of March 31, 2013 and 2012, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. This $3,776,733 increase in unrealized gain arising for the three months ended March 31, 2013 has been offset by the net realized investment gain of $149,269 due to the sale and call activity for available-for-sale fixed maturity securities and sale of mortgage loans on real estate during 2013.

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

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

We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies. We maintain conservative durations in our fixed maturity portfolio. As of March 31, 2013, cash and the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 10.3% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.

In addition to the measures described above, TLIC and Family Benefit Life must comply with the NAIC promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC and Family Benefit Life met during 2012 and 2011, the SVL also requires the Company to perform annual cash flow testing for TLIC and Family Benefit Life. This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.

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

We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and Family Benefit Life that are limited by law to the lesser of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) return of invested capital from FTCC as those operations are discontinued, (4) public and private offerings of our common stock and (5) corporate borrowings, if necessary.

We will use the majority of our capital provided from the public stock offerings to expand life insurance operations and acquire life insurance companies. The operations of TLIC and Family Benefit Life 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 June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities. The offering was completed April 30, 2012. The Company raised $11,000,010 from this offering and incurred $1,650,001 in offering costs resulting in $9,350,009 in net proceeds.

On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement was for 600,000 shares of the Company’s common stock for $8.50 per share. If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses. The offering was suspended on March 8, 2013 and resulted in gross proceeds of $644,470 from the subscription of 75,820 shares of its common stock and incurred $338,333 in offering costs.

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

We believe that our existing cash and cash equivalents as of March 31, 2013 will be sufficient to fund our anticipated operating expenses.

Off-Balance Sheet Arrangements

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

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:

	•			general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets;
	•			differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes;
	•			the effect of increased claims activity from natural or man-made catastrophes, pandemic disease, or other events resulting in catastrophic loss of life;
	•			adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses such as FTCC;
	•			inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset;
	•			investment losses and defaults;
	•			competition in our product lines;
	•			attraction and retention of qualified employees and agents;
	•			ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks;
	•			the availability, affordability and adequacy of reinsurance protection;
	•			the effects of emerging claim and coverage issues;
	•			the cyclical nature of the insurance business;
	•			interest rate fluctuations;
	•			changes in our experiences related to deferred policy acquisition costs;
	•			the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us;
	•			rating agencies’ actions;
	•			domestic or international military actions;
	•			the effects of extensive government regulation of the insurance industry;
	•			changes in tax and securities law;
	•			changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;
	•			regulatory or legislative changes or developments;
	•			the effects of unanticipated events on our disaster recovery and business continuity planning;
	•			failures or limitations of our computer, data security and administration systems;
	•			risks of employee error or misconduct;
	•			the introduction of alternative healthcare solutions;
	•			the assimilation of life insurance businesses we acquire and the sound management of these businesses; and
	•			the availability of capital to expand our business.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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, 2013 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. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

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

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

32.1	Section 1350 Certification of Principal Executive Officer

32.2	Section 1350 Certification of Principal Financial Officer

101.INS**	XBRL Instance

101.SCH**	XBRL Taxonomy Extension Schema

101.CAL**	XBRL Taxonomy Extension Calculation

101.DEF**	XBRL Taxonomy Extension Definition

101.LAB**	XBRL Taxonomy Extension Labels

101.PRE**	XBRL Taxonomy Extension Presentation

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

SIGNATURES

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

	FIRST TRINITY FINANCIAL CORPORATION
	an Oklahoma corporation


May 14, 2013	By:	/s/ Gregg E. Zahn
		Gregg E. Zahn, President and Chief Executive Officer


May 14, 2013	By:	/s/ Jeffrey J. Wood
		Jeffrey J. Wood, Chief Financial Officer

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First Trinity Financial (FTFC) 10-Q2013 Q1 Quarterly report

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