10-Q 1 ftfc_10q-033112.htm FORM 10-Q ftfc_10q-033112.htm
United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[ X ]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934
For the quarterly period ended March 31, 2012

[    ]
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 12, 2012:  7,944,532 shares

 
 

 

FIRST TRINITY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2012

TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Statements of Financial Position as of March 31, 2012 (Unaudited) and December 31, 2011 3
     
  Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)  4
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited) 5
     
  Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2012 and 2011 (Unaudited) 6
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)  7
     
  Notes to Consolidated Financial Statements (Unaudited) 8
     
Item 2.  Management’s Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources 23
     
Item 4. Controls and Procedures  35
     
Part II.  OTHER INFORMATION
 
     
Item 1.   Legal Proceedings    35
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds  35
     
Item 3.  Defaults upon Senior Securities  35
     
Item 4.  Mine Safety Disclosures  35
     
Item 5. Other Information  35
     
Item 6. Exhibits 36
     
Signatures   36
 
Exhibit No. 31.1
Exhibit No. 31.2
Exhibit No. 32.1
Exhibit No. 32.2
Exhibit No 101.INS
Exhibit No. 101.SCH
Exhibit No. 101.CAL
Exhibit No. 101.DEF
Exhibit No. 101.LAB
Exhibit No. 101.PRE
 
 
2

 
 
PART I  – FINANCIAL INFORMATION
 
Item 1.    Consolidated Financial Statements
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Financial Position
 
   
March 31, 2012
   
December 31, 2011
 
   
(Unaudited)
       
Assets            
Investments
           
Available-for-sale fixed maturity securities at fair value (amortized cost: $87,489,526 and $78,128,103 as of March 31, 2012 and December 31, 2011, respectively)
  $ 90,936,864     $ 81,051,207  
Available-for-sale equity securities at fair value (cost: $1,251,506 and $750,941 as of March 31, 2012 and December 31, 2011, respectively)
    1,483,717       898,893  
Mortgage loans on real estate
    3,678,945       1,985,394  
Investment real estate
    3,426,294       3,466,581  
Policy loans
    1,480,128       1,472,666  
Other long-term investments
    13,759,318       9,875,675  
Total investments
    114,765,266       98,750,416  
Cash and cash equivalents
    21,208,897       27,705,711  
Accrued investment income
    1,276,314       1,122,574  
Recoverable from reinsurers
    1,164,077       1,132,121  
Agents' balances and due premiums
    380,611       381,901  
Loans from premium financing, net
    827,370       1,022,416  
Deferred policy acquisition costs
    5,949,478       5,251,999  
Value of insurance business acquired
    7,804,814       7,912,469  
Property and equipment, net
    157,008       170,843  
Other assets
    1,466,910       1,297,205  
Total assets
  $ 155,000,745     $ 144,747,655  
Liabilities and Shareholders' Equity
               
Policy liabilities
               
Policyholders' account balances
  $ 90,786,259     $ 81,730,322  
Future policy benefits
    29,588,570       28,977,186  
Policy claims
    473,518       515,522  
Premiums paid in advance
    81,231       46,613  
Total policy liabilities
    120,929,578       111,269,643  
Deferred federal income taxes
    2,714,520       2,622,711  
Other liabilities
    920,157       2,457,188  
Total liabilities
    124,564,255       116,349,542  
Shareholders' equity
               
Common stock, par value $.01 per share, 20,000,000 shares authorized, 7,932,441 and 6,798,535 issued and outstanding as of March 31, 2012 and December 31, 2011, respectively, and 7,605 and 566,404 subscribed as of March 31, 2012 and December 31, 2011, respectively
    79,400       73,649  
Additional paid-in capital
    28,171,882       24,086,146  
Accumulated other comprehensive income
    3,160,862       2,696,224  
Accumulated earnings (deficit)
    (975,654 )     1,542,094  
Total shareholders' equity
    30,436,490       28,398,113  
Total liabilities and shareholders' equity
  $ 155,000,745     $ 144,747,655  
 
See notes to consolidated financial statements (unaudited).
 
 
3

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Revenues
           
Premiums
  $ 2,056,139     $ 1,586,641  
Income from premium financing
    29,531       43,697  
Net investment income
    1,472,495       584,796  
Net realized investment gains
    68,540       1,750  
Other income
    25,305       2,631  
Total revenues
    3,652,010       2,219,515  
Benefits, Claims and Expenses
               
Benefits and claims
               
Increase in future policy benefits
    608,641       480,575  
Death benefits
    659,706       418,094  
Surrenders
    129,447       71,364  
Interest credited to policyholders
    786,632       342,686  
Dividend and accumulation benefits
    97,203       -  
Total benefits and claims
    2,281,629       1,312,719  
Policy acquisition costs deferred
    (947,411 )     (552,385 )
Amortization of deferred policy acquisition costs
    242,957       137,716  
Amortization of value of insurance business acquired
    107,655       61,285  
Commissions
    795,913       478,003  
Other underwriting, insurance and acquisition expenses
    844,810       714,330  
Total benefits, claims and expenses
    3,325,553       2,151,668  
Income before total federal income tax expense
    326,457       67,847  
Current federal income tax expense
    54,280       3,663  
Deferred federal income tax expense (benefit)
    (45,075 )     45,955  
Total federal income tax expense
    9,205       49,618  
Net income
  $ 317,252     $ 18,229  
Net income per common share basic and diluted
  $ 0.04     $ 0.00  
 
See notes to consolidated financial statements (unaudited).
 
 
4

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Net income
  $ 317,252     $ 18,229  
Other comprehensive income (loss)
               
Total net unrealized gains arising during the period
    677,033       17,015  
Less: Net realized investment gains
    68,540       1,750  
Net unrealized gains
    608,493       15,265  
Adjustment to deferred acquisition costs
    (6,975 )     (2,510 )
Other comprehensive income before tax expense
    601,518       12,755  
Income tax expense
    136,880       21,208  
Total other comprehensive income (loss)
    464,638       (8,453 )
Total comprehensive income
  $ 781,890     $ 9,776  
 
See notes to consolidated financial statements (unaudited).
 
 
5

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2012 and 2011
(Unaudited)
 
   
Common
Stock
$.01 Par Value
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Income
   
Accumulated
Earnings
(Deficit)
   
Total
Shareholders'
Equity
 
Balance as of January 1, 2011
  $ 62,533     $ 16,677,615     $ 3,305,370     $ (3,389,571 )   $ 16,655,947  
Stock dividend
    3,238       2,425,090       -       (2,428,328 )     -  
Subscriptions of common stock
    2,348       1,491,550       -       -       1,493,898  
Comprehensive income:
                                       
Net income
    -       -       -       18,229       18,229  
Other comprehensive loss
    -       -       (8,453 )     -       (8,453 )
Balance as of March 31, 2011
  $ 68,119     $ 20,594,255     $ 3,296,917     $ (5,799,670 )   $ 18,159,621  
                                         
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  
 
See notes to consolidated financial statements (unaudited).
 
 
6

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Operating activities
           
Net income
  $ 317,252     $ 18,229  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for depreciation
    52,056       29,175  
Accretion of discount on investments
    (233,047 )     (214,155 )
Realized investment gains
    (68,540 )     (1,750 )
Gain on sale of fixed asset
    (2,934 )     -  
Amortization of policy acquisition cost
    242,957       137,716  
Policy acquisition cost deferred
    (947,411 )     (552,385 )
Amortization of value of insurance business acquired
    107,655       61,285  
Provision for deferred federal income tax
    (45,075 )     45,955  
Interest credited on policyholder deposits
    788,130       345,792  
Change in assets and liabilities
               
Accrued investment income
    (153,740 )     (11,244 )
Policy loans
    (7,462 )     (24,341 )
Allowance for loan losses
    (7,484 )     -  
Recoverable from reinsurers
    (31,956 )     (41,303 )
Agents' balances and due premiums
    1,290       (80,182 )
Other assets
    (169,705 )     (3,530 )
Future policy benefits
    611,384       497,720  
Policy claims
    (42,004 )     (1,581 )
Premiums paid in advance
    34,618       31,933  
Other liabilities
    (132,289 )     (169,336 )
Net cash provided by operating activities
    313,695       67,998  
                 
Investing activities
               
Purchase of fixed maturity securities
    (11,490,292 )     (100,000 )
Maturities of fixed maturity securities
    859,481       500,000  
Sales of fixed maturity securities
    1,351,559       30,113  
Purchase of equity securities
    (500,565 )     -  
Purchase of mortgage loans
    (1,715,776 )     (412,500 )
Payments on mortgage loans
    22,225       35,174  
Purchase of other long-term investments
    (4,353,500 )     -  
Payments on other long-term investments
    689,277       555,076  
Maturity of certificate of deposit
    -       102,273  
Loans made for premiums financed
    (361,741 )     (600,277 )
Loans repaid for premiums financed
    564,271       770,902  
Sales of furniture and equipment
    5,000       -  
Purchases of furniture and equipment
    -       (118,729 )
Net cash provided by (used by) investing activities
    (14,930,061 )     762,032  
                 
Financing activities
               
Policyholder account deposits
    8,065,887       2,148,291  
Policyholder account withdrawals
    (1,202,822 )     (349,164 )
Proceeds from public stock offering
    1,256,487       1,493,898  
Net cash provided by financing activities
    8,119,552       3,293,025  
                 
Increase (decrease) in cash
    (6,496,814 )     4,123,055  
                 
Cash and cash equivalents, beginning of period
    27,705,711       12,985,278  
Cash and cash equivalents, end of period
  $ 21,208,897     $ 17,108,333  
 
See notes to consolidated financial statements (unaudited).
 
 
7

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(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.  As of March 31, 2012, the Company had received gross proceeds of $10,747,245 from the subscription of 1,432,966 shares of its common stock in this offering and incurred $1,623,843 in offering costs.  The public offering is for 1,333,334 shares of the Company’s common stock for $7.50 per share.  All these shares were sold as of February 17, 2012 and the Company has now received $8.5 million after reduction for offering expenses and sales commissions.  The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions.  All these over subscription shares were sold as of April 30, 2012 and the Company has now received $850,000 after reduction for offering expenses and sales commissions.

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.

The Company’s operations, prior to the acquisition of FLAC, involved the sale of a modified premium whole life insurance policy with a flexible premium deferred annuity rider through its subsidiary Old TLIC in the state of Oklahoma.

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.

FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums. 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 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.

 
8

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)

1.
Organization and Significant Accounting Policies (continued)

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 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, 2012 are not necessarily indicative of the results to be expected for the year ended December 31, 2012 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, 2011.
 
Principles of Consolidation

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

Reclassifications

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

Use of Estimates

The preparation of financial statements in conformity with 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 10, 2011, 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 hold.  The dividend was payable to the holders of shares of the Corporation as of March 10, 2011.  Fractional shares were rounded to the nearest whole number of shares.  The Company issued 323,777 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.  This was a non-cash investing and financing activity.

On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders will receive a share of common stock for each 20 shares of common stock of the Company they hold.  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.  Approximately 378,000 shares were issued in connection with the stock dividend that resulted in accumulated deficit being charged by approximately $2,835,000 with an offsetting credit of approximately $2,835,000 to common stock and additional paid-in capital.  This was a non-cash investing and financing activity.
 
 
9

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)

1.
Organization and Significant Accounting Policies (continued)

Subsequent Events

Management has evaluated all events subsequent to March 31, 2012 through the date that these financial statements have been issued.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In May 2011, the FASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.

The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.

Presentation of Comprehensive Income
 
In June 2011, the Financial Accounting Standards Board (FASB) issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity.  The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
 
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
 
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
 
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts.  This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred.  If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Intangibles - Goodwill and Other
 
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied.  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 a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill.  If an entity determines that it is more likely than not, it must perform an impairment test.
 
 
10

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)

1.
Organization and Significant Accounting Policies (continued)

The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill.  If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any.  In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill.  If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

 
11

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(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, 2012 and December 31, 2011 are summarized as follows:
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
Fixed maturity securities
                       
U.S. government
  $ 1,398,955     $ 45,126     $ 510     $ 1,443,571  
Residential mortgage-backed securities
    130,467       82,028       -       212,495  
Corporate bonds
    84,117,909       3,723,955       564,843       87,277,021  
Foreign bonds
    1,842,195       193,123       31,541       2,003,777  
Total fixed maturity securities
    87,489,526       4,044,232       596,894       90,936,864  
                             
           
Gross
   
Gross
         
           
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Equity securities                                
Mutual funds
    651,381       42,778       4,302       689,857  
Corporate preferred stock
    247,960       21,880       -       269,840  
Corporate common stock
    352,165       171,855       -       524,020  
Total equity securities
    1,251,506       236,513       4,302       1,483,717  
Total fixed maturity and equity securities
  $ 88,741,032     $ 4,280,745     $ 601,196     $ 92,420,581  
                                 
           
Gross
   
Gross
         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
Fixed maturity securities
                               
U.S. government
  $ 2,762,683     $ 46,489     $ -     $ 2,809,172  
Residential mortgage-backed securities
    135,538       67,443       -       202,981  
Corporate bonds
    73,083,134       2,708,377       39,646       75,751,865  
Foreign bonds
    2,146,748       185,566       45,125       2,287,189  
Total fixed maturity securities
    78,128,103       3,007,875       84,771       81,051,207  
                             
           
Gross
   
Gross
         
           
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Equity securities                                
Mutual funds
    150,815       32,707       -       183,522  
Corporate preferred stock
    247,960       -       -       247,960  
Corporate common stock
    352,166       115,245       -       467,411  
Total equity securities
    750,941       147,952       -       898,893  
Total fixed maturity and equity securities
  $ 78,879,044     $ 3,155,827     $ 84,771     $ 81,950,100  

 
12

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(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, 2012 and December 31, 2011 are summarized as follows:

March 31, 2012
 
Fair Value
   
Unrealized
Loss
   
Number of
Securities
 
Fixed maturity securities
                 
Less than 12 months
                 
Corporate bonds
  $ 28,438,018     $ 564,843       162  
U. S. Government
    221,712       510       1  
Foreign bonds
    770,884       31,541       3  
Total fixed maturity securities
  $ 29,430,614     $ 596,894       166  
Equity securities
                       
Less than 12 months
                       
Mutual funds
  $ 494,318     $ 4,302       1  
                         
December 31, 2011
 
Fair Value
   
Unrealized
Loss
   
Number of
Securities
 
Fixed maturity securities
                       
Less than 12 months
                       
Corporate bonds
  $ 922,288     $ 39,646       5  
Foreign bonds
    965,011       45,125       4  
Total fixed maturity securities
  $ 1,887,299     $ 84,771       9  
 
As of March 31, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 92%.  As of December 31, 2011, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 90%.  Fixed maturity securities were 90% and 88% investment grade as rated by Standard & Poor’s as of March 31, 2012 and December 31, 2011, respectively.  There were no equity securities in an unrealized loss position as of December 31, 2011.

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

For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors.  The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings.  The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss).
 
 
13

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)
 
2.
Investments (continued)

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 our review, the Company experienced no other-than-temporary impairments during the three months ended March 31, 2012 and year ended December 31, 2011.

Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2012, 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, 2012 and December 31, 2011 are summarized as follows:
 
   
March 31, 2012
   
December 31, 2011
 
             
Unrealized appreciation on available-for-sale securities   $ 3,679,549     $ 3,071,056  
Adjustment to deferred acquisition costs
    (32,571 )     (25,596 )
Deferred income taxes
    (486,116 )     (349,236 )
                 
Net unrealized appreciation on available-for-sale securities
  $ 3,160,862     $ 2,696,224  
 
The amortized cost and fair value of fixed maturity available-for-sale securities as of March 31, 2012, by contractual maturity, are summarized as follows:
 
   
Available-for-Sale
 
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 2,351,873     $ 2,435,158  
Due in one year through five years
    25,034,394       26,274,872  
Due after five years through ten years
    47,997,574       49,703,322  
Due after ten years
    11,975,218       12,311,017  
Due at multiple maturity dates
    130,467       212,495  
    $ 87,489,526     $ 90,936,864  
 
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.

 
14

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)

2.
Investments (continued)

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity available-for-sale securities for the three months ended March 31, 2012 and 2011 are summarized as follows:

   
Three Months Ended March 31,
 
   
Fixed Maturity Securities
 
   
2012
   
2011
 
Proceeds
  $ 2,211,040     $ 530,113  
Gross realized gains
    68,540       1,750  
Gross realized losses
    -       -  
 
The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2012 and 2011 and the amount of realized investment gains (losses) on fixed maturity for the three months ended March 31, 2012 and 2011 are summarized as follows:

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Change in unrealized investment gains:
           
Available-for-sale securities:
           
Fixed maturity securities
  $ 524,234     $ 35,950  
Equity securities
    84,259       (20,685 )
Other realized investment gains:
               
Available-for-sale securities:
               
Fixed maturity securities
    68,540       1,750  
 
Major categories of net investment income for the three months ended March 31, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Fixed maturity securities
  $ 1,421,077     $ 584,873  
Equity securities
    12,561       4,093  
Mortgage loans
    38,321       27,752  
Real estate
    93,475       84,338  
Policy loans
    24,993       7,230  
Short-term and other investments
    9,045       9,222  
Gross investment income
    1,599,472       717,508  
                 
Investment expenses
    (126,977 )     (132,712 )
Net investment income
  $ 1,472,495     $ 584,796  
 
 
15

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)
 
2.
Investments (continued)

Included in invested assets are securities and other assets having amortized cost values of $2,679,755 and $2,671,077 as of March 31, 2012 and December 31, 2011, 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 and liabilities include fixed maturity and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

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 and asset-backed securities where independent pricing information was not able to be obtained for a significant portion of the underlying assets.

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

 
16

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)
 
3.
Fair Value Measurements (continued)
 
The Company’s fair value hierarchy for those financial instruments measured and carried at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 is summarized as follows:
 
Financial Instruments Measured and Carried at Fair Value

March 31, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                       
U.S. government
  $ -     $ 1,443,571     $ -     $ 1,443,571  
Residential mortgage-backed securities
    -       212,495       -       212,495  
Corporate bonds
    -       87,277,021       -       87,277,021  
Foreign bonds
    -       2,003,777       -       2,003,777  
Total fixed maturity securities
  $ -     $ 90,936,864     $ -     $ 90,936,864  
                                 
Equity securities, available-for-sale
                               
Mutual funds
  $ 600,549     $ 89,308     $ -     $ 689,857  
Corporate preferred stock
    -       269,840     $ -       269,840  
Corporate common stock
    446,520       -       77,500       524,020  
Total equity securities
  $ 1,047,069     $ 359,148     $ 77,500     $ 1,483,717  
                                 
December 31, 2011
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                               
U.S. government
  $ -     $ 2,809,172     $ -     $ 2,809,172  
Residential mortgage-backed securities
    -       202,981       -       202,981  
Corporate bonds
    -       75,751,865       -       75,751,865  
Foreign bonds
    -       2,287,189       -       2,287,189  
Total fixed maturity securities
  $ -     $ 81,051,207     $ -     $ 81,051,207  
                                 
Equity securities, available-for-sale
                               
Mutual funds
  $ -     $ 183,522     $ -     $ 183,522  
Corporate preferred stock
    -       247,960     $ -       247,960  
Corporate common stock
    389,911       -       77,500       467,411  
Total equity securities
  $ 389,911     $ 431,482     $ 77,500     $ 898,893  
 
At March 31, 2012, Level 3 financial instruments consisted of two private placement common stocks that have no active trading.  These 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.

 
17

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)
 
3.
Fair Value Measurements (continued)

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

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

The Company’s equity securities are included in Level 1 except for mutual funds and the preferred stock included in Level 2 and the private placement common stocks are included in Level 3.  Level 1 for these equity securities is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and based upon unadjusted prices.  Level 2 for the mutual funds and preferred stock is appropriate since they are not actively traded as of March 31, 2012.  The Company’s fixed maturity and equity securities portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.

The Company uses various financial instruments in the normal course of its business.  The Company’s insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below.

 
18

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)
3.
Fair Value Measurements (continued)

The carrying value and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of March 31, 2012 and December 31, 2011, 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, 2012
 
   
Carrying
   
Fair
                   
   
Amount
   
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                             
Mortgage loans on real estate
                             
Commercial
  $ 1,842,621     $ 1,886,222     $ -     $ -     $ 1,886,222  
Residential
    1,836,324       1,879,776       -       -       1,879,776  
Policy loans
    1,480,128       1,480,128       -       -       1,480,128  
Other long-term investments
    13,759,318       15,382,874       -       -       15,382,874  
Cash and cash equivalents
    21,208,897       21,208,897       21,208,897       -       -  
Accrued investment income
    1,276,314       1,276,314       -       -       1,276,314  
Loans from premium financing
    827,370       827,370       -       -       827,370  
Total financial assets
  $ 42,230,972     $ 43,941,581     $ 21,208,897     $ -     $ 22,732,684  
Financial liabilities
                                       
Policyholders' account balances
  $ 90,786,259     $ 86,955,470     $ -     $ -     $ 86,955,470  
Policy claims
    473,518       473,518       -       -       473,518  
Total financial liabilities
  $ 91,259,777     $ 87,428,988     $ -     $ -     $ 87,428,988  
   
 
December 31, 2011
 
   
Carrying
   
Fair
                         
   
Amount
   
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                                       
Mortgage loans on real estate
                                       
Commercial
  $ 1,856,160     $ 1,934,303     $ -     $ -     $ 1,934,303  
Residential
    129,234       131,319       -       -       131,319  
Policy loans
    1,472,666       1,472,666       -       -       1,472,666  
Other long-term investments
    9,875,675       11,610,716       -       -       11,610,716  
Cash and cash equivalents
    27,705,711       27,705,711       27,705,711       -       -  
Accrued investment income
    1,122,574       1,122,574       -       -       1,122,574  
Loans from premium financing
    1,022,416       1,022,416                       1,022,416  
Total financial assets
  $ 43,184,436     $ 44,999,705     $ 27,705,711     $ -     $ 17,293,994  
Financial liabilities
                                       
Policyholders' account balances
  $ 81,730,322     $ 80,609,804     $ -     $ -     $ 80,609,804  
Policy claims
    515,522       515,522       -       -       515,522  
Total financial liabilities
  $ 82,245,844     $ 81,125,326     $ -     $ -     $ 81,125,326  
 
 
19

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(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:

Mortgage Loans on Real Estate

The fair values for commercial and residential mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period.
 
Other Long-Term Investments

Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach.  Projected cash flows are discounted using applicable rates.

Cash and Cash Equivalents, Policy loans and Accrued Investment Income

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

Loans from Premium Financing

The carrying value of loans from premium financing is net of unearned interest and any estimated loan losses and approximates fair value.  Estimated loan losses were $221,520 and $229,004 as of March 31, 2012 and December 31, 2011, respectively.

Investment Contracts – Policyholders’ Account Balances

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

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

Policy Claims

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

 
20

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(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 and for the three months ended March 31, 2012 and 2011 and as of March 31, 2012 and December 31, 2011 are summarized as follows:

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Revenues:
           
Life and annuity insurance operations
  $ 3,583,603     $ 2,170,995  
Premium finance operations
    47,056       44,014  
Corporate operations
    21,351       4,506  
Total
  $ 3,652,010     $ 2,219,515  
Income (loss) before income taxes:
               
Life and annuity insurance operations
  $ 499,383     $ 252,374  
Premium finance operations
    (12,755 )     (53,569 )
Corporate operations
    (160,171 )     (130,958 )
Total
  $ 326,457     $ 67,847  
Depreciation and amortization expense:
               
Life and annuity insurance operations
  $ 397,478     $ 222,834  
Premium finance operations
    927       927  
Corporate operations
    4,263       4,415  
Total
  $ 402,668     $ 228,176  
                 
   
March 31, 2012
   
December 31, 2011
 
Assets:
               
Life and annuity insurance operations
  $ 147,126,287     $ 137,931,960  
Premium finance operations
    1,846,701       1,864,370  
Corporate operations
    6,027,757       4,951,325  
Total
  $ 155,000,745     $ 144,747,655  
 
 
21

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012
(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, 2012 and 2011 is summarized as follows:

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Allowance at beginning of period
  $ 229,004     $ 443,071  
Additions (reductions) charged to operations
    (7,484 )     -  
Allowance at end of period
  $ 221,520     $ 443,071  
 
6. 
Federal Income Taxes
 
The provision for federal income taxes is based on the 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 2008 through 2011 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.
 
 
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Item 2.  Management's Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources

Overview

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

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

With the acquisition of Family Benefit Life in late 2011, we will be expanding into Arizona, Colorado, Missouri and New Mexico in 2012.

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

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

Recent Acquisitions

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business.  In 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, also 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.

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 loans 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.
 
 
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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, Results of Operations and Liquidity and Capital Resources— Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  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, 2011.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In May 2011, the FASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.

The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.

Presentation of Comprehensive Income
 
In June 2011, the Financial Accounting Standards Board (FASB) issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity.  The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
 
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
 
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
 
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts.  This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred.  If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Intangibles - Goodwill and Other
 
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied.  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 a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill.  If an entity determines that it is more likely than not, it must perform an impairment test.
 
The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill.  If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any.  In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill.  If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
 
 
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The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

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, 2012 and 2011 and as of March 31, 2012 and December 31, 2011 for additional information regarding segment data.

Results of Operations

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.

Total consolidated revenues increased 64.5% from $2,219,515 for the three months ended March 31, 2011 to $3,652,010 for the three months ended March 31, 2012, an increase of $1,432,495.  $1,107,997 of this first quarter 2012 increase relates to the contribution to revenues from Family Benefit Life that was acquired on December 28, 2011.

Premiums

Premiums increased 29.6% from $1,586,641 for the three months ended March 31, 2011 to $2,056,139 for the three months ended March 31, 2012, an increase of $469,498.  The first quarter 2012 increase was due to the following:

 
·
$326,938 increase due to the premiums generated by Family Benefit Life, acquired on December 28, 2012.

 
·
$161,203 increase in final expense renewal premiums.

 
·
$11,602 increase in whole life and term first year premiums.  The captive agents have been focused on the public stock offering that began on June 29, 2010.  This offering will end in second quarter 2012 at which time these agents will focus on production of whole life and term products.  Therefore, premiums from these products should increase during the remainder of 2012.

 
·
$8,251 increase in final expense first year premiums.

 
·
$38,496 decrease in renewal premiums of whole life and term premiums due to the focus of our captive agents on the public stock offering that began on June 29, 2010 and not on life insurance production.

Income from Premium Financing

Income from premium financing decreased 32.4% from $43,697 for the three months ended March 31, 2011 to $29,531 for the three months ended March 31, 2012, a decrease of $14,166.  The income from premium financing has steadily decreased during the past two years.  Premium financing operations are almost entirely based on the production of loan agreements with Oklahoma agents since we are no longer actively issuing loans in Louisiana and Mississippi and have no production in Alabama and Arkansas.  The Company continues to evaluate premium financing operations to determine if it can continue based almost entirely on Oklahoma production.
 
 
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Net Investment Income

Net investment income increased 151.8% from $584,796 for the three months ended March 31, 2011 to $1,472,495 for the three months ended March 31, 2012, an increase of $887,699. $779,113 of this first quarter 2012 increase relates to the contribution to net investment income from Family Benefit Life that was acquired on December 28, 2011.

Gross investment income increased 122.9% from $717,508 for the three months ended March 31, 2011 to $1,599,472 for the three months ended March 31, 2012, an increase of $881,964.  $804,113 of this first quarter 2012 increase relates to the contribution to gross net investment income from Family Benefit Life that was acquired on December 28, 2011.  In addition, the Company is investing its excess cash resulting in a $77,851 increase in gross investment income.  However, it continues to be difficult to locate adequate yield in investment grade securities.

Investment expenses decreased 4.3% from $132,712 for the three months ended March 31, 2011 to $126,977 for the three months ended March 31, 2012, a decrease of $5,735.  The investment expenses of Family Benefit Life, acquired on December 28, 2012, were $25,000.  The remaining decrease in expenses of $30,735 are primarily attributed to the net impact of the following changes: $54,000 decrease in investment advisory management services and a $2,000 decrease in real estate taxes that exceeded a $23,000 increase in depreciation of the real estate held for investment due to the change on April 1, 2011 of the useful life of the building from 39 year to 19 years.

Net Realized Investment Gains

Net realized investment gains were $68,540 and $1,750 for the three months ended March 31, 2012 and 2011, respectively, an increased net realized investment gain of $66,790.  Family Benefit Life, acquired on December 28, 2012, had no realized investment gains or losses during the three months ended March 31, 2012.  The increased net realized investment gains are primarily due to sales of fixed maturity available-for-sale securities during first quarter 2012.

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 on fixed maturity securities available-for-sale having a carrying value of $2,142,500 at the 2012 disposal dates.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $1,750 for the three months ended March 31, 2011 resulted from proceeds of $530,113 on fixed maturity securities available-for-sale having a carrying value of $528,363 at the 2011 disposal dates.

There were no sales of equity securities available-for-sale for the three months ended March 31, 2012 and 2011.

We have recorded no other-than-temporary impairments in 2012 and 2011.

As of March 31, 2012, we held 166 fixed maturity securities available-for-sale with an unrealized loss of $596,894, fair value of $29,430,614 and amortized cost of $30,027,508.  All of these fixed maturity securities available-for-sale had a fair value to cost ratio equal to or greater than 92%.  Of those March 31, 2012 losses, 125 of the fixed maturity securities available-for-sale belonged to Family Benefit Life, acquired on December 28, 2011, and had an unrealized loss of $399,985, fair value of $21,022,374 and amortized cost of $21,422,359.

As of December 31, 2011, we held nine fixed maturity securities available-for-sale with an unrealized loss of $84,771, fair value of $1,887,299 and amortized cost of $1,972,070.  All of these fixed maturity securities available-for-sale had a fair value to cost ratio equal to or greater than 90%.

 
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Other Income

Other income was $25,305 and $2,631 for the three months ended March 31, 2012 and 2011, an increase of $22,674.  The first quarter 2012 increase is primarily due to the recovery in lawsuits of $17,481 of loans from premium financing previously written off, a $2,934 gain on sale of furniture and a $2,259 increase in 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.
 
Total consolidated benefits, claims and expenses increased 54.6% from $2,151,668 for the three months ended March 31, 2011 to $3,325,553 for the three months ended March 31, 2012, an increase of $1,173,885.  $708,009 of this first quarter 2012 increase relates to the benefits, claims and expenses from Family Benefit Life that was acquired on December 28, 2011.
 
Benefits and Claims

Benefits and claims increased 73.8% from $1,312,719 for the three months ended March 31, 2011 to $2,281,629 for the three months ended March 31, 2012, an increase of $968,910.  $563,169 of this first quarter 2012 increase relates to benefits and claims from Family Benefit Life that was acquired on December 28, 2011.

The increase in benefits and claims is primarily due to the following:

 
·
$443,946 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).  $300,965 of this 2012 increase relates to interest credited to policyholders from Family Benefit Life that was acquired on December 28, 2011.

 
·
$241,612 increase in death benefits primarily due to an increase in the number of claims incurred, increase in the average claim amount and an increase in the amount and number of claims in course of settlement. $134,518 of this 2012 increase relates to death benefits from Family Benefit Life that was acquired on December 28, 2011.

 
·
$128,066 increase in the change in future policy benefits.  There was a $36,252 decrease in the change in future policy benefits for Family Benefit Life, acquired on December 28, 2011.

 
·
Family Benefit Life, acquired on December 28, 2011, paid $97,203 of dividend and accumulation benefits during the three months ended March 31, 2012.

 
·
$58,083 increase in surrenders.  $66,735 of this 2012 increase relates to surrenders from Family Benefit Life that was acquired on December 28, 2011.  The Company’s historic operations experienced an $8,652 decrease in surrenders reflecting improved persistency.

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.
 
 
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For the three months ended March 31, 2012 and 2011, capitalized costs were $947,411 and $552,385, respectively.  Amortization of deferred policy acquisition costs for the three months ended March 31, 2012 and 2011 were $242,957 and $137,716, respectively.  Family Benefit Life had little impact on the deferral or amortization of deferred acquisition costs since its first quarter 2012 production of new life and annuity policies was minimal.  The Company’s management is focused on reinvigorating the Family Benefit Life new business production and is in the process of filing new products for state approval that should begin being marketed during the second half of 2012.

The $395,026 increase in the acquisition costs deferred primarily relates to increased new business production of annuity contracts.

The $105,241 increase in the amortization of deferred acquisition costs primarily reflects the increased annuity lapses after the surrender charge period and the first year return of annuity considerations inherent in the annuity contracts.

Amortization of Value of Insurance Business Acquired

The cost of acquiring insurance business is amortized primarily 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 $107,655 and $61,285 for the three months ended March 31, 2012 and 2011, respectively.  The increase in the first quarter 2012 amortization of value of insurance business acquired relates to the acquisition of Family Benefit Life on December 28, 2011.

Commissions

Commissions increased 66.5% from $478,003 for the three months ended March 31, 2011 to $795,913 for the three months ended March 31, 2012, an increase of $317,910.  The increase is primarily due to:

 
·
$266,465 increase in annuity first year, single and renewal commissions that correspond to the $7,322,338 of increased first quarter 2012 annuity considerations deposited.

 
·
$18,623 increase in final expense renewal commissions that corresponds to the $161,203 increase in final expense renewal year premiums.

 
·
$14,240 increase in final expense first year commissions that corresponds to the $8,251 increase in final expense first year premiums.

 
·
$11,871 increase in first year whole life and term commissions that corresponds to the $11,602 increase in other first year premiums.  The captive agents have been focused on the public stock offering that began on June 29, 2010.  This offering will end in second quarter 2012 at which time these agents will focus on production of whole life and term products. Therefore, commissions from these products should increase during the remainder of 2012.

 
·
$10,524 commissions from Family Benefit Life, acquired on December 28, 2011, for the three months ended March 31, 2012 that corresponds to $326,938 of Family Benefit Life premiums and $263,452 of annuity considerations deposited.

 
·
$3,813 decrease in renewal whole life and term commissions that corresponds to a $38,496 decrease in renewal whole life and term premiums.

Other Underwriting, Insurance and Acquisition Expenses

Other underwriting, insurance and acquisition expenses increased 18.3% from $714,330 for the three months ended March 31, 2011 to $844,810 for the three months ended March 31, 2012, an increase of $130,480.  The increase is primarily due to:

 
·
$228,039 of Family Benefit Life’s other underwriting, insurance and acquisition expenses for the three months ended March 31, 2012.
 
 
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·
$150,000 decrease in other underwriting, insurance and acquisition expenses related to an estimated reduction in 2011 bonuses to be paid during 2012.

 
·
$22,000 increase in professional fees primarily related to engagement of actuaries, lawyers and other professionals to assist with due diligence and other acquisition activities and stock dividend fees.

 
·
$19,000 increase in agency costs due to re-training of our captive agents on life insurance production as they complete the public stock offering and return to insurance marketing.

 
·
$17,000 increase in salaries and wages primarily due to increased 2012 staffing levels.

 
·
$11,000 increase in third party administration fees related to an increase in services provided, increased number of policies administered and increased underwriting and new business services related to increased final expense production.

 
·
$16,000 decrease in insurance examination fees due to completion of the triennial examination in 2011.

 
·
$10,000 decrease in loan losses and other operating expenses in the premium finance operations due to the decline in production of new loans and our focus on business in Oklahoma and with profitable agencies.

 
·
$9,000 increase in other underwriting, insurance and acquisition expenses.

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 and must file separate tax returns until they have been a member of the consolidated filing group for five years.  Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.  For the three months ended March 31, 2012 and 2011, deferred income tax expense (benefit) was ($45,075) and $45,955, respectively.  Current income taxes were $54,280 and $3,663 for the three months ended March 31, 2012 and 2011, respectively.

Net Income  and Net Income) Per Common Share Basic and Diluted

Net income was $317,252 and $18,229 for the three months ended March 31, 2012 and 2011, 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, 2012 and 2011 were 7,843,665 and 7,016,344, respectively.  These weighted average shares reflect the retrospective adjustment for the impacts of the 5% stock dividend declared by the Company on January 10, 2011 and January 11, 2012 and payable to holders of shares of the Company as of March 10, 2011 and March 10, 2012.

The Company issued 323,777 shares in connection with the 2011 stock dividend that resulted in accumulated deficit being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.  This was a non-cash investing and financing activity.  Approximately 378,000 shares were issued in connection with the 2012 stock dividend that resulted in accumulated deficit being charged by approximately $2,835,000 with an offsetting credit of approximately $2,835,000 to common stock and additional paid-in capital.  This was also a non-cash investing and financing activity.

Business Segments

Life and Annuity Insurance Operations

Revenues from Life and Annuity Insurance Operations increased 65.1% from $2,170,995 for three months ended March 31, 2011 to $3,583,603 for the three months ended March 31, 2012, an increase of $1,412,608.  This increase in first quarter 2012 revenues primarily relates to the acquisition of Family Benefit Life on December 28, 2011, that contributed $1,107,997 to first quarter 2012 revenues.  The remaining increase was due to a $143,000 increase in premiums, $95,000 increase in net investment income and $67,000 increase in net realized investment gains.
 
 
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The income before total federal income taxes from Life and Annuity Insurance Operations was $499,383 and $252,374, respectively, for the three months ended March 31, 2012 and 2011.  The $247,009 increased first quarter 2012 profitability is primarily due to $399,987 of income before federal income taxes from the first quarter 2012 operations of Family Benefit Life, acquired on December 28, 2011, less a $107,094 increase in TLIC death claims.

Premium Finance Operations

Revenues from Premium Finance Operations increased 6.9% from $44,014 for the three months ended March 31, 2011 to $47,056 for the three months ended March 31, 2012, an increase of $3,042.  The increase is due to the recovery in lawsuits of $17,481 of loans from premium financing previously written off that exceeded a $14,000 decrease in production of loan agreements as management focuses on business almost exclusively with Oklahoma profitable agents.

The loss before total federal income taxes from Premium Finance Operations was $12,755 and $53,569 for the three months ended March 31, 2012 and 2011, respectively.  The $40,814 decreased first quarter loss is primarily attributable to a $23,000 reduction in legal expenses in 2012 and the recovery in lawsuits of $17,481 of loans from premium financing previously written off.

Corporate Operations

Revenues from Corporate Operations were $21,351 and $4,506 for the three months ended March 31, 2012 and 2011, respectively.  This $16,485 increase in first quarter revenues is primarily due to a $13,000 increase in net investment income and a $3,000 gain on sale of furniture.

The loss before total federal income taxes from Corporate Operations was $160,171 and $130,958 for the three months ended March 31, 2012 and 2011, respectively.  The $29,213 increased first quarter loss is primarily due to increased operating expenses related to the increased salaries, wages and benefits due to increased 2012 staffing levels and increased utilization of consultants assisting with due diligence and other acquisition activities.

Consolidated Financial Condition

As of March 31, 2012, our available-for-sale fixed maturity securities had a fair value of $90,936,864 and amortized cost of $87,489,526 compared to a fair value of $81,051,207 and an amortized cost of $78,128,103 as of December 31, 2011.  The increase is primarily due to purchases of $11,500,000 in excess of sales and maturities of $2,200,000 during first quarter 2012.  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 in a variety of companies and U. S. Government securities.

As of March 31, 2012, our available-for-sale equity securities had a fair value of $1,483,717 compared to a fair value of $898,893 as of December 31, 2011.  The cost of available-for-sale equity securities were $1,251,506 as of March 31, 2012 and $750,941 as of December 31, 2011.  The increase is primarily due to the purchase of $501,000 of equity securities during first quarter 2012.  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 March 31, 2012, we held the following additional invested assets: mortgage loans on real estate of $3,678,945; investment real estate of $3,426,294; policy loans of $1,480,128 and other long-term investments of $13,759,318.  The other long-term investments are comprised of lottery prize receivables.

As of December 31, 2011, we held the following additional invested assets: mortgage loans on real estate of $1,985,394; investment real estate of $3,466,581; policy loans of $1,472,666 and other long-term investments of $9,875,675.  The other long-term investments are comprised of lottery prize receivables.
 
 
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Total investments were $114,765,266 and $98,750,416 as of March 31, 2012 and December 31, 2011, respectively.

Deferred policy acquisition costs were $5,949,478 and $5,251,999 as of March 31, 2011 and December 31, 2011, respectively.  Policy acquisition expenses related to new insurance sales were capitalized in the amount of $947,411 and $552,385 for the three months ended March 31, 2012 and 2011, respectively.  Amortization of deferred acquisition costs for the three months ended March 31, 2012 and 2011 was $242,957 and $137,716, respectively.

The value of insurance business acquired was $7,804,814 and $7,912,469 as of March 31, 2012 and December 31, 2011, respectively.  Amortization of value of insurance business acquired for the three months ended March 31, 2012 and 2011 was $107,655 and $61,285, respectively.

As of March 31, 2012 and December 31, 2011, we held loans from premium financing of $827,370 and $1,022,416, respectively. The loan balances as of March 31, 2012 and December 31, 2011, respectively, are net of unearned interest of $20,592 and $23,287 and allowance for loan losses of $221,520 and $229,004.

The progression of the Company’s loans from premium financing for the three months ended March 31, 2012 and year ended December 31, 2011 is summarized as follows:

   
Three Months Ended
   
Year Ended
 
   
March 31, 2012
   
December 31, 2011
 
Balance, beginning of year
  $ 1,274,707     $ 1,622,567  
Loans financed
    331,516       2,341,126  
Unearned interest
    22,286       136,189  
Capitalized fees and interest
    5,244       52,155  
Payment of loans and unearned interest
    (564,271 )     (2,877,330 )
Ending loan balance including unearned interest
    1,069,482       1,274,707  
Unearned interest included in ending loan balances
    (20,592 )     (23,287 )
Loan balance net of unearned interest
    1,048,890       1,251,420  
Less allowance for loan loss
    (221,520 )     (229,004 )
Loan balance net of unearned interest and allowance for loan losses
  $ 827,370     $ 1,022,416  
 
As of March 31, 2012, we held the following additional assets (excluding cash and cash equivalents that are discussed below under “Liquidity and Capital Resources”): amounts recoverable from reinsurers of $1,164,077; accrued investment income of $1,276,314; agents’ balances and due premiums of $380,611; property and equipment of $157,008 and other assets of $1,466,910.  Other assets include federal and state incomes taxes recoverable, prepaid expenses, notes receivable and customer account balances receivable.

As of December 31, 2011, we held the following additional assets (excluding cash and cash equivalents that are discussed below under “Liquidity and Capital Resources”): amounts recoverable from reinsurers of $1,132,121; accrued investment income of $1,122,574; agents’ balances and due premiums of $381,901; property and equipment of $170,843 and other assets of $1,297,205.  Other assets include federal and state incomes taxes recoverable, prepaid expenses, notes receivable and customer account balances receivable.

Total liabilities as of March 31, 2012 and December 31, 2011 were $124,564,255 and $116,349,542, respectively.

Total policy liabilities as of March 31, 2012 were $120,929,578 and were composed of policyholders’ account balances of $90,786,259; future policy benefits of $29,588,570; policy claims of $473,518 and premiums paid in advance of $81,231.

 
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Total policy liabilities as of December 31, 2011 were $111,269,643 and were composed of policyholders’ account balances of $81,730,322; future policy benefits of $28,977,186; policy claims of $515,522 and premiums paid in advance of  $46,613.

The liability for deferred federal income taxes was $2,714,520 and $2,622,711 as of March 31, 2012 and December 31, 2011, respectively, an increase of $91,809.
 
Other liabilities as of March 31, 2012 and December 31, 2011 were $920,157 and $2,457,188, respectively.  Other liabilities include deposits on pending policy applications, accrued expenses, accounts payable and unearned investment income.  The $1,537,031 decrease in other liabilities during 2012 is primarily due to a $1,400,000 decrease in deposits on pending applications and a $150,000 reduction in accrued liabilities due to an estimated decrease in 2011 bonuses expected to be paid during 2012.

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, 2011, we have received $26,222,245 from the sale of our shares. Our operations have been profitable and have generated $4,287,674 of net income from operations since we were incorporated in 2004 as shown in the accumulated earnings balance in the March 31, 2012 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 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 (deficit) decreased the balance of accumulated deficit as of March 31, 2012 to $975,654.

 As of March 31, 2012, we had cash and cash equivalents totaling $21,208,897.  As of March 31, 2012, cash and cash equivalents of $10,753,857 and $4,892,580, respectively, of the total $21,208,897 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 derived from realized net profits.  Based on these limitations, there is no capacity for TLIC to pay a dividend in 2012 without prior approval.  However, there is the capacity for Family Benefit Life to pay a dividend up to $934,675 in 2012 without prior approval. There were no dividends paid or a return of capital to the parent company in 2011.
 
The Federal Deposit Insurance Corporation currently insures all non-interest bearing accounts.  We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss.  We do not believe we are at significant risk for such a loss.

During the three months ended March 31, 2012, cash and cash equivalents decreased $6,496,814.  During the three months ended March 31, 2011, cash and cash equivalents increased $4,123,055.

Our operating activities for the three months ended March 31, 2012 and 2011 provided cash of $313,695 and $67,998, respectively.  The $245,697 increase in cash provided by operations in first quarter 2012 is primarily due to increased premiums and investment income in excess of increased benefits, claims, commissions and other underwriting, insurance and acquisition expenses.

Cash used by investing activities for the three months ended March 31, 2012 was $14,930,061.  Cash provided by investing activities for the three months ended March 31, 2011 was $762,032.  The $15,692,093 of increased cash used for investing activities during first quarter 2012 was primarily related to the purchase of investments in fixed maturity securities, equity securities, mortgage loans and lottery receivables in excess of maturities, sales and repayments of our investments.
 
 
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Net cash provided by financing activities for the three months ended March 31, 2012 and 2011 was $8,119,552 and $3,293,025, respectively.  The first quarter 2012 increase in cash provided by financing activities of $4,826,527 resulted from a net increase in policy deposits of $5,063,938 in excess of a net decrease of $237,411 in the net proceeds from the public stock offering.

Shareholders’ equity as of March 31, 2012 was $30,436,490 compared to $28,398,113 as of December 31, 2011.  The increase of $2,038,377 is due to $1,256,487 of proceeds generated from the public stock offering (gross proceeds of $1,476,030 and offering expenses of $219,543), $464,638 of other comprehensive income and $317,252 of net income.

Equity per common share outstanding and subscribed increased 4.4% to $3.83 as of March 31, 2012 compared to $3.67 per share as of December 31, 2011, based upon 7,940,046 common shares outstanding and subscribed as of March 31, 2012 and 7,733,186 outstanding common shares as of December 31, 2011.  These common shares outstanding and subscribed reflect the retrospective adjustment for the impact of the 2011 and 2012 5% stock dividends declared by the Company on January 10, 2011 and paid to holders of shares of the Company as of March 10, 2011 and declared by the Company on January 11, 2012 and paid to holders of shares on the Company as of March 10, 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 2012 or 2011.  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 $3,679,549 and $3,071,056 as of March 31, 2012 and December 31, 2011, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments.  This $608,493 increase in unrealized gain for the three months ended March 31, 2012 has been offset by the net realized investment gain of $68,540 due to the sale and call activity for available-for-sale fixed maturity securities during first quarter 2012.

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 the 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.  The life insurance company's life insurance 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, 2012, 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 21.3% 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 2011 and 2010, 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.
 
 
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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) dividends from FTCC and (4) 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.  As of March 31, 2012, the Company had received gross proceeds of $10,747,245 from the subscription of 1,432,966 shares of its common stock in this offering and incurred $1,623,843 in offering costs.  The public offering is for 1,333,334 shares of the Company’s common stock for $7.50 per share.  All these shares were sold as of February 17, 2012 and the Company has now received $8.5 million after reduction for offering expenses and sales commissions.  The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions.  All these over subscription shares were sold as of April 30, 2012 and the Company has now received $850,000 after reduction for offering expenses and sales commissions.

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, 2012 will be sufficient to fund our anticipated operating expenses.

Loans outstanding from premium financing declined during 2011 and have continued to decline during 2012 as we have decreased production of premium financing contracts.  The growth of the premium finance subsidiary is uncertain and may require additional capital.  The premium financing operations have steadily decreased during the past two years.  Premium financing loan operations are almost entirely based on the production of loan agreements with Oklahoma agents since we are no longer actively issuing loans in Louisiana and Mississippi and have no production in Alabama and Arkansas.  The Company continues to evaluate premium financing operations to determine if it can continue based almost entirely on Oklahoma production.

Off-Balance Sheet Arrangements

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

Forward Looking Information

We caution readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission.  Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments.  Statements using verbs such as "expect", "anticipate", "believe" or words of similar import generally involve forward-looking statements.  Without limiting the foregoing, forward-looking statements include statements which represent our beliefs concerning future levels of sales and redemptions of our products, investment spreads and yields or the earnings and profitability of our activities.
 
 
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Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which are subject to change.  These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.  Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable factors and developments.  Some of these may be national in scope, such as general economic conditions, changes in tax laws and changes in interest rates.  Some may be related to the insurance industry generally, such as pricing competition, regulatory developments, industry consolidation and the effects of competition in the insurance business from other insurance companies and other financial institutions operating in our market area and elsewhere.  Others may relate to the Company specifically, such as credit, volatility and other risks associated with our investment portfolio.  We caution that such factors are not exclusive.  We disclaim any obligation to update forward-looking information.

Item 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, 2012 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

 
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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, 2012
By:
/s/ Gregg E. Zahn  
    Gregg E. Zahn, President and Chief Executive Officer  
       
       
May 14, 2012  By: Jeffrey J. Wood  
    Jeffrey J. Wood, Chief Financial Officer  

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