ftfc_10q-093012.htm

10-Q 1 ftfc_10q-093012.htm FORM 10-Q ftfc_10q-093012.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 September 30, 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

(State or other jurisdiction of incorporation or organization)

34-1991436

(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 November 9, 2012: 7,835,785 shares

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	Page Number

Item 1. Consolidated Financial Statements

Consolidated Statements of Financial Position as of September 30, 2012 (Unaudited) and December 31, 2011	3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)	4

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)	5

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)	6

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	47

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3. Defaults upon Senior Securities	47

Item 4. Mine Safety Disclosures	47

Item 5. Other Information	47

Item 6. Exhibits	48

Signatures	48

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

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

	September 30, 2012			December 31, 2011
	(Unaudited)
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $89,836,280 and $78,128,103 as of September 30, 2012 and December 31, 2011, respectively)	$	96,981,267		$	81,051,207
Available-for-sale equity securities at fair value (cost: $725,492 and $750,941 as of September 30, 2012 and December 31, 2011, respectively)		946,562			898,893
Mortgage loans on real estate		8,662,046			1,985,394
Investment real estate		3,335,720			3,466,581
Policy loans		1,474,373			1,472,666
Other long-term investments		18,534,991			9,875,675
Total investments		129,934,959			98,750,416
Cash and cash equivalents		12,881,116			27,705,711
Accrued investment income		1,438,636			1,122,574
Recoverable from reinsurers		1,170,390			1,132,121
Agents' balances and due premiums		374,853			381,901
Loans from premium financing, net		485,620			1,022,416
Deferred policy acquisition costs		6,686,074			5,251,999
Value of insurance business acquired		7,604,592			7,912,469
Property and equipment, net		135,749			170,843
Other assets		1,724,781			1,297,205
Total assets	$	162,436,770		$	144,747,655
Liabilities and Shareholders' Equity
Policy liabilities
Policyholders' account balances	$	93,544,057		$	81,730,322
Future policy benefits		30,660,347			28,977,186
Policy claims		547,929			515,522
Premiums paid in advance		51,837			46,613
Total policy liabilities		124,804,170			111,269,643
Deferred federal income taxes		3,485,596			2,622,711
Other liabilities		688,444			2,457,188
Total liabilities		128,978,210			116,349,542
Shareholders' equity
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 and 6,798,535 issued and 7,835,785 and 6,798,535 outstanding as of September 30, 2012 and December 31, 2011, respectively, and 36,560 and 566,404 subscribed as of September 30, 2012 and December 31, 2011, respectively		80,109			73,649
Additional paid-in capital		28,668,886			24,086,146
Treausury Stock, at cost (138,588 shares as of September 30, 2012)		(485,058	)		-
Accumulated other comprehensive income		6,074,739			2,696,224
Accumulated earnings (deficit)		(880,116	)		1,542,094
Total shareholders' equity		33,458,560			28,398,113
Total liabilities and shareholders' equity	$	162,436,770		$	144,747,655

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues
Premiums	$	1,943,647		$	1,525,552		$	5,806,616		$	4,576,930
Income from premium financing		20,591			54,701			97,282			127,754
Net investment income		1,565,135			629,440			4,303,960			1,788,875
Net realized investment gains		378,378			573,823			471,189			599,173
Other income		3,544			5,131			15,354			7,916
Total revenues		3,911,295			2,788,647			10,694,401			7,100,648
Benefits, Claims and Expenses
Benefits and claims
Increase in future policy benefits		472,508			462,699			1,645,523			1,408,649
Death benefits		606,062			258,413			1,891,630			1,134,920
Surrenders		156,212			95,799			430,212			247,605
Interest credited to policyholders		873,679			380,171			2,505,815			1,087,522
Dividend and accumulation benefits		93,576			-			274,674			-
Total benefits and claims		2,202,037			1,197,082			6,747,854			3,878,696
Policy acquisition costs deferred		(459,085	)		(500,681	)		(1,885,010	)		(1,575,579	)
Amortization of deferred policy acquisition costs		52,998			18,877			437,537			206,594
Amortization of value of insurance business acquired		92,211			58,211			307,877			172,688
Commissions		545,148			538,106			1,835,323			1,547,115
Other underwriting, insurance and acquisition expenses		940,584			742,502			2,754,979			2,099,985
Total expenses		1,171,856			857,015			3,450,706			2,450,803
Total benefits, claims and expenses		3,373,893			2,054,097			10,198,560			6,329,499
Income before total federal income tax expense		537,402			734,550			495,841			771,149
Current federal income tax expense		53,365			29,607			120,145			33,270
Deferred federal income tax expense (benefit)		11,960			56,676			(44,054	)		88,342
Total federal income tax expense		65,325			86,283			76,091			121,612
Net income	$	472,077		$	648,267		$	419,750		$	649,537
Net income per common share basic and diluted	$	0.06		$	0.09		$	0.05		$	0.09

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net income	$	472,077		$	648,267		$	419,750		$	649,537
Other comprehensive income (loss)
Total net unrealized gains (losses) arising during the period		2,868,334			(112,202	)		4,766,190			90,883
Less: Net realized investment gains		378,378			573,823			471,189			599,173
Net unrealized gains (losses)		2,489,956			(686,025	)		4,295,001			(508,290	)
Adjustment to deferred acquisition costs		(5,547	)		345			(13,398	)		(5,748	)
Other comprehensive income (loss) before income tax expense (benefit)		2,484,409			(685,680	)		4,281,603			(514,038	)
Income tax expense (benefit)		511,973			(34,562	)		903,088			39,481
Total other comprehensive income (loss)		1,972,436			(651,118	)		3,378,515			(553,519	)
Total comprehensive income (loss)	$	2,444,513		$	(2,851	)	$	3,798,265		$	96,018

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

	Common Stock $.01 Par Value		Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income			Accumulated Earnings (Deficit)			Total Shareholders' Equity
Balance as of January 1, 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		6,357		4,044,125		-			-			-			4,050,482
Comprehensive income:
Net income		-		-		-			-			649,537			649,537
Other comprehensive loss		-		-		-			(553,519	)		-			(553,519	)
Balance as of September 30, 2011	$	72,128	$	23,146,830	$	-		$	2,751,851		$	(5,168,362	)	$	20,802,447

Balance as of January 1, 2012	$	73,649	$	24,086,146	$	-		$	2,696,224		$	1,542,094		$	28,398,113
Stock dividend		3,789		2,838,171		-			-			(2,841,960	)		-
Subscriptions of common stock		2,671		1,744,569		-			-			-			1,747,240
Repurchase of common stock		-		-		(485,058	)		-			-			(485,058	)
Comprehensive income:
Net income		-		-		-			-			419,750			419,750
Other comprehensive income		-		-		-			3,378,515			-			3,378,515
Balance as of September 30, 2012	$	80,109	$	28,668,886	$	(485,058	)	$	6,074,739		$	(880,116	)	$	33,458,560

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
Operating activities
Net income	$	419,750		$	649,537
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation		165,182			159,993
Accretion of discount on investments		(116,930	)		(643,351	)
Realized investment gains		(471,189	)		(599,173	)
Gain on sale of fixed asset		(2,934	)		(2,171	)
Loss on sale of invested real estate		-			2,150
Amortization of policy acquisition cost		437,537			206,594
Policy acquisition cost deferred		(1,885,010	)		(1,575,579	)
Loan origination fees deferred		(149,588	)		-
Amortization of value of insurance business acquired		307,877			172,688
Provision for deferred federal income tax		(44,054	)		88,342
Interest credited on policyholder deposits		2,505,815			1,087,522
Change in assets and liabilities:
Accrued investment income		(316,062	)		(85	)
Policy loans		(1,707	)		(57,196	)
Allowance for loan losses		5,997			(214,136	)
Recoverable from reinsurers		(38,269	)		(67,856	)
Agents' balances and due premiums		7,048			(43,066	)
Other assets		(427,576	)		41,162
Future policy benefits		1,683,161			1,456,098
Policy claims		32,407			(24,977	)
Premiums paid in advance		5,224			10,985
Other liabilities		(302,149	)		573,184
Net cash provided by operating activities		1,814,530			1,220,665

Investing activities
Purchase of fixed maturity securities		(18,476,679	)		(2,194,847	)
Maturities of fixed maturity securities		1,378,000			600,000
Sales of fixed maturity securities		4,971,785			3,422,767
Purchase of equity securities		(504,568	)		(1,198,706	)
Sales of equity securities		891,480			-
Purchase of mortgage loans		(7,341,848	)		(412,500	)
Payments on mortgage loans		833,373			187,944
Purchase of invested real estate		-			(13,550	)
Sale of invested real estate		-			49,000
Purchase of other long-term investments		(9,573,807	)		(2,995,500	)
Payments on other long-term investments		1,545,128			918,608
Maturity of certificate of deposit		-			102,273
Loans made for premiums financed		(924,868	)		(2,103,627	)
Loans repaid for premiums financed		1,455,667			2,249,726
Sales of furniture and equipment		5,000			2,300
Purchases of furniture and equipment		(1,294	)		(121,248	)
Net cash used in investing activities		(25,742,631	)		(1,507,360	)

Financing activities
Policyholder account deposits		11,386,515			8,076,604
Policyholder account withdrawals		(3,545,191	)		(1,493,209	)
Purchase of treasury stock		(485,058	)		-
Proceeds from public stock offering		1,747,240			4,050,482
Net cash provided by financing activities		9,103,506			10,633,877

Increase (decrease) in cash		(14,824,595	)		10,347,182
Cash and cash equivalents, beginning of period		27,705,711			12,985,278
Cash and cash equivalents, end of period	$	12,881,116		$	23,332,460

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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. The offering was completed April 30, 2012. The Company raised $11,000,010 from this offering.

On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas and Missouri. The private placement is for 600,000 shares of the Company’s common stock for $8.50 per share. If all shares are sold, the Company will receive $4,335,000 after reduction for offering expenses. As of September 30, 2012, the Company has received gross proceeds of $310,760 from the subscription of 36,560 shares of its common stock in this private placement and incurred $46,614 in offering costs.

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

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

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

FTCC was incorporated in 2006, and began operations in January 2007. FTCC provides financing for casualty insurance premiums for individuals and companies and is licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the three and nine months ended September 30, 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 and prior quarter financial statements to conform to current year and current quarter classifications. These reclassifications had no effect on previously reported net income or shareholders' equity.

Use of Estimates

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

Common Stock

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

On January 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. On January 11, 2012, the Company’s Board of Directors approved another 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, 2012. Fractional shares were rounded to the nearest whole number of shares. The Company issued 378,928 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. These stock dividends were non-cash investing and financing activities.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Subsequent Events

Management has evaluated all events subsequent to September 30, 2012 through the date that these financial statements have been issued.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In May 2011, the Financial Accounting Standards Board (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 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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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.

Testing Indefinite-Lived Intangible Assets for Impairment

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

The updated guidance is effective for the quarter ending March 31, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

2. Investments

Fixed Maturity and Equity Securities Available-For-Sale

Investments in fixed maturity and equity securities available-for-sale as of September 30, 2012 and December 31, 2011 are summarized as follows:

September 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities
U.S. government	$	2,568,969	$	275,199	$	-	$	2,844,168
Residential mortgage-backed securities		114,048		75,233		-		189,281
Corporate bonds		85,602,523		6,835,482		183,607		92,254,398
Foreign bonds		1,550,740		194,371		51,691		1,693,420
Total fixed maturity securities	$	89,836,280	$	7,380,285	$	235,298	$	96,981,267

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Equity securities
Mutual funds	$	160,366	$	45,601	$	-	$	205,967
Corporate preferred stock		247,960		22,375		-		270,335
Corporate common stock		317,166		153,094		-		470,260
Total equity securities		725,492		221,070		-		946,562
Total fixed maturity and equity securities	$	90,561,772	$	7,601,355	$	235,298	$	97,927,829

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair 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

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair 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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 2012 and December 31, 2011 are summarized as follows:

September 30, 2012	Fair Value		Unrealized Loss		Number of Securities
Fixed maturity securities
Less than 12 months
Corporate bonds	$	3,753,299	$	183,607		24
Foreign bonds		551,439		51,691		2
Total fixed maturity securities	$	4,304,738	$	235,298		26

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 September 30, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 83%. 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 96% and 88% investment grade as rated by Standard & Poor’s as of September 30, 2012 and December 31, 2011, respectively. There were no equity securities in an unrealized loss position as of September 30, 2012 and 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).

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 nine months ended September 30, 2012 and the year ended December 31, 2011.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

2. Investments (continued)

Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 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.

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 September 30, 2012 and December 31, 2011 are summarized as follows:

	September 30, 2012			December 31, 2011

Unrealized appreciation on available-for-sale securities	$	7,366,057		$	3,071,056
Adjustment to deferred acquisition costs		(38,994	)		(25,596	)
Deferred income taxes		(1,252,324	)		(349,236	)
Net unrealized appreciation on available-for-sale securities	$	6,074,739		$	2,696,224

The amortized cost and fair value of fixed maturity available-for-sale securities as of September 30, 2012, by contractual maturity, are summarized as follows:

	Available-for-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	3,010,797	$	3,106,105
Due in one year through five years		27,281,689		29,275,696
Due after five years through ten years		48,466,701		52,526,457
Due after ten years		10,963,045		11,883,728
Due at multiple maturity dates		114,048		189,281
	$	89,836,280	$	96,981,267

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.

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,					Nine Months Ended Sepember 30,
	2012			2011		2012			2011
Proceeds	$	3,205,210		$	3,166,481	$	7,241,265		$	4,022,767
Gross realized gains		380,992			573,823		476,614			599,579
Gross realized losses		(2,614	)		-		(5,425	)		(406	)

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

2. Investments (continued)

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2012 and 2011 and the amount of realized investment gains on fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Change in unrealized investment gains:
Available-for-sale securities:
Fixed maturity securities	$	2,465,576	$	(612,053	)	$	4,221,883	$	(433,431	)
Equity securities		24,380		(73,972	)		73,118		(74,859	)
Other realized investment gains:
Available-for-sale securities:
Fixed maturity securities		20,230		573,823			109,725		599,173
Equity securities		358,148		-			361,464		-

Major categories of net investment income for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Fixed maturity securities	$	1,341,056		$	586,003		$	3,900,111		$	1,735,605
Equity securities		11,077			42,686			39,243			50,892
Mortgage loans		213,949			25,841			365,975			83,516
Real estate		93,684			89,600			280,635			267,407
Policy loans		27,785			8,365			76,615			26,744
Short-term and other investments		2,843			584			17,471			8,681
Gross investment income		1,690,394			753,079			4,680,050			2,172,845
Investment expenses		(125,259	)		(123,639	)		(376,090	)		(383,970	)
Net investment income	$	1,565,135		$	629,440		$	4,303,960		$	1,788,875

Included in invested assets are securities and other assets having amortized cost values of $3,228,517 and $2,671,077 and fair values of $3,478,020 and $2,713,063 as of September 30, 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:

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

3. Fair Value Measurements (continued)

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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 2012 and December 31, 2011 is summarized as follows:

September 30, 2012	Level 1		Level 2		Level 3		Total
Fixed maturity securities, available-for-sale
U.S. government	$	-	$	2,844,168	$	-	$	2,844,168
Residential mortgage-backed securities		-		189,281		-		189,281
Corporate bonds		-		92,254,398		-		92,254,398
Foreign bonds		-		1,693,420		-		1,693,420
Total fixed maturity securities	$	-	$	96,981,267	$	-	$	96,981,267
Equity securities, available-for-sale
Mutual funds	$	106,427	$	99,540	$	-	$	205,967
Corporate preferred stock		-		270,335		-		270,335
Corporate common stock		427,760		-		42,500		470,260
Total equity securities	$	534,187	$	369,875	$	42,500	$	946,562

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

As of September 30, 2012, Level 3 financial instruments consisted of one private placement common stock that has no active trading. As of December 31, 2011, 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.

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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

3. Fair Value Measurements (continued)

The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government agencies, 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 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 September 30, 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 change in the fair value of the Company’s Level 3 equity securities, available-for-sale for the three and nine months ended September 30, 2012 and 2011 is summarized as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Beginning balance	$	77,500		$	77,500	$	77,500		$	77,500

Sales		(35,000	)		-		(35,000	)		-

Ending balance	$	42,500		$	77,500	$	42,500		$	77,500

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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 September 30, 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:

	September 30, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Mortgage loans on real estate
Commercial	$	2,293,766	$	2,360,760	$	-	$	-	$	2,360,760
Residential		6,368,280		6,368,280		-		-		6,368,280
Policy loans		1,474,373		1,474,373		-		-		1,474,373
Other long-term investments		18,534,991		20,752,300		-		-		20,752,300
Cash and cash equivalents		12,881,116		12,881,116		12,881,116		-		-
Accrued investment income		1,438,636		1,438,636		-		-		1,438,636
Loans from premium financing		485,620		485,620		-		-		485,620
Total financial assets	$	43,476,782	$	45,761,085	$	12,881,116	$	-	$	32,879,969
Financial liabilities
Policyholders' account balances	$	93,544,057	$	92,952,819	$	-	$	-	$	92,952,819
Policy claims		547,929		547,929		-		-		547,929
Total financial liabilities	$	94,091,986	$	93,500,748	$	-	$	-	$	93,500,748

	December 31, 2011
	Carrying Amount		Fair 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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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. The residential mortgages have been recently purchased and therefore the spot rate yield curve equaled the purchase price.

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 $235,001 and $229,004 as of September 30, 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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 for the three and nine months ended September 30, 2012 and 2011 and assets as of September 30, 2012 and December 31, 2011 are summarized as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues:
Life and annuity insurance operations	$	3,521,425		$	2,713,398		$	10,189,056		$	6,951,075
Premium finance operations		20,717			55,014			97,525			126,201
Corporate operations		369,153			20,235			407,820			23,372
Total	$	3,911,295		$	2,788,647		$	10,694,401		$	7,100,648
Income (loss) before income taxes:
Life and annuity insurance operations	$	398,533		$	877,183		$	734,680		$	1,200,390
Premium finance operations		(78,135	)		(54,840	)		(182,290	)		(129,682	)
Corporate operations		217,004			(87,793	)		(56,549	)		(299,559	)
Total	$	537,402		$	734,550		$	495,841		$	771,149
Depreciation and amortization expense:
Life and annuity insurance operations	$	195,896		$	120,851		$	877,170		$	504,356
Premium finance operations		911			927			2,765			2,781
Corporate operations		9,864			8,899			30,661			32,138
Total	$	206,671		$	130,677		$	910,596		$	539,275

	September 30, 2012		December 31, 2011
Assets:
Life and annuity insurance operations	$	154,913,578	$	137,931,960
Premium finance operations		1,425,179		1,864,370
Corporate operations		6,098,013		4,951,325
Total	$	162,436,770	$	144,747,655

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 and nine months ended September 30, 2012 and 2011 is summarized as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Allowance at beginning of period	$	223,135	$	235,619		$	229,004	$	443,071
Entries to statement of financial position		11,866		-			5,997		(191,991	)
Entries to statement of operations		-		(6,684	)		-		(22,145	)
Allowance at end of period	$	235,001	$	228,935		$	235,001	$	228,935

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 2009 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

In most states, 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.

Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources

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

FINANCIAL HIGHLIGHTS

Consolidated Condensed Results of Operations for the Three Months Ended September 30, 2012

	Three Months Ended September 30,				Total Increase (Decrease)			Percentage Change			Family Benefit Life			Net Increase (Decrease)
	2012		2011		2012 less 2011			2012 to 2011			2012 Results			2012 less 2011
Premiums	$	1,943,647	$	1,525,552	$	418,095			27.4	%	$	183,569		$	234,526
Net investment income		1,565,135		629,440		935,695			148.7	%		610,531			325,164
Net realized investment gains		378,378		573,823		(195,445	)		-34.1	%		-			(195,445	)
Other revenues		24,135		59,832		(35,697	)		-59.7	%		1,162			(36,859	)
Total revenues		3,911,295		2,788,647		1,122,648			40.3	%		795,262			327,386
Benefits and claims		2,202,037		1,197,082		1,004,955			84.0	%		578,460			426,495
Expenses		1,171,856		857,015		314,841			36.7	%		306,435			8,406
Total benefits, claims and expenses		3,373,893		2,054,097		1,319,796			64.3	%		884,895			434,901
Income (loss) before federal income tax expense (benefit)		537,402		734,550		(197,148	)		-26.8	%		(89,633	)		(107,515	)
Federal income tax expense (benefit)		65,325		86,283		(20,958	)		-24.3	%		(6,634	)		(14,324	)
Net income (loss)	$	472,077	$	648,267	$	(176,190	)		-27.2	%	$	(82,999	)	$	(93,191	)
Net income per common share basic and diluted	$	0.06	$	0.09	$	(0.03	)

Consolidated Condensed Results of Operations for the Nine Months Ended September 30, 2012

	Nine Months Ended September 30,				Total Increase (Decrease)			Percentage Change			Family Benefit Life			Net Increase (Decrease)
	2012		2011		2012 less 2011			2012 to 2011			2012 Results			2012 less 2011
Premiums	$	5,806,616	$	4,576,930	$	1,229,686			26.9	%	$	704,339		$	525,347
Net investment income		4,303,960		1,788,875		2,515,085			140.6	%		1,817,680			697,405
Net realized investment gains		471,189		599,173		(127,984	)		-21.4	%		-			(127,984	)
Other revenues		112,636		135,670		(23,034	)		-17.0	%		4,702			(27,736	)
Total revenues		10,694,401		7,100,648		3,593,753			50.6	%		2,526,721			1,067,032
Benefits and claims		6,747,854		3,878,696		2,869,158			74.0	%		1,705,813			1,163,345
Expenses		3,450,706		2,450,803		999,903			40.8	%		875,622			124,281
Total benefits, claims and expenses		10,198,560		6,329,499		3,869,061			61.1	%		2,581,435			1,287,626
Income (loss) before federal income tax expense		495,841		771,149		(275,308	)		-35.7	%		(54,714	)		(220,594	)
Federal income tax expense		76,091		121,612		(45,521	)		-37.4	%		60,146			(105,667	)
Net income (loss)	$	419,750	$	649,537	$	(229,787	)		-35.4	%	$	(114,860	)	$	(114,927	)
Net income per common share basic and diluted	$	0.05	$	0.09	$	(0.04	)

Consolidated Condensed Financial Position as of September 30, 2012

	September 30, 2012		December 31, 2011		Increase (Decrease) 2012 to 2011			Percentage Change 2012 to 2011
	(Unaudited)

Investment assets	$	129,934,959	$	98,750,416	$	31,184,543			31.6	%
Other assets		32,501,811		45,997,239		(13,495,428	)		-29.3	%
Total assets	$	162,436,770	$	144,747,655	$	17,689,115			12.2	%

Policy liabilities	$	124,804,170	$	111,269,643	$	13,534,527			12.2	%
Other liabilities		4,174,040		5,079,899		(905,859	)		-17.8	%
Total liabilities		128,978,210		116,349,542		12,628,668			10.9	%
Shareholders' equity		33,458,560		28,398,113		5,060,447			17.8	%
Total liabilities and shareholders' equity	$	162,436,770	$	144,747,655	$	17,689,115			12.2	%

Shareholders' equity per common share	$	4.25	$	3.67	$	0.58			15.8	%

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.

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

Presentation of Comprehensive Income

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

Intangibles - Goodwill and Other

Testing Indefinite-Lived Intangible Assets for Impairment

Business Segments

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

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

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

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

Please see below and Note 4 to the Consolidated Financial Statements for the three and nine months ended September 30, 2012 and 2011 and as of September 30, 2012 and December 31, 2011 for additional information regarding segment data.

Results of Operations – Three Months Ended September 30, 2012 and 2011

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. The impact on total revenues of Family Benefit Life total revenues, acquired on December 28, 2011, for the three months ended September 30, 2012 is summarized in the tables below.

Our revenues for the three months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,				Total Increase (Decrease)			Percentage Change			Family Benefit Life		Net Increase (Decrease)
	2012		2011		2012 less 2011			2012 to 2011			2012 Results		2012 less 2011
Premiums	$	1,943,647	$	1,525,552	$	418,095			27.4	%	$	183,569	$	234,526
Income from premium financing		20,591		54,701		(34,110	)		-62.4	%		-		(34,110	)
Net investment income		1,565,135		629,440		935,695			148.7	%		610,531		325,164
Net realized investment gains		378,378		573,823		(195,445	)		-34.1	%		-		(195,445	)
Other income		3,544		5,131		(1,587	)		-30.9	%		1,162		(2,749	)
Total revenues	$	3,911,295	$	2,788,647	$	1,122,648			40.3	%	$	795,262	$	327,386

The increase of $327,386 in total revenues for the three months ended September 30, 2012, excluding Family Benefit Life revenues, is discussed below.

Premiums

Our premiums for the three months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,				Increase (Decrease)			Percentage Change
	2012		2011		2012 less 2011			2012 to 2011
Family Benefit Life	$	183,569	$	-	$	183,569			-
Whole life and term first year		108,871		12,246		96,625			789.0	%
Whole life and term renewal		542,167		539,528		2,639			0.5	%
Final expense first year		267,100		280,047		(12,947	)		-4.6	%
Final expense renewal		841,940		693,731		148,209			21.4	%
Total premiums	$	1,943,647	$	1,525,552	$	418,095			27.4	%

The $234,526 increase in premiums for the three months ended September 30, 2012, excluding Family Benefit Life premiums, is primarily due to a $148,209 increase in final expense renewal premiums and $96,625 increase in whole life and term first year premiums.

Premiums from whole life and term products should increase during the remainder of 2012. Our captive agents were focused on a public stock offering that began on June 29, 2010 and ended on April 30, 2012. During those 22 months, the captive agents were not actively marketing whole life and term products. These agents are now focused on whole life and term product sales.

Income from Premium Financing

The income from premium financing has steadily decreased during the past two years. There was a decrease of $34,110 in third quarter 2012.

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

Net Investment Income

The major components of our net investment income for the three months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,						Total Increase (Decrease)			Percentage Change			Family Benefit Life			Net Increase (Decrease)
	2012			2011			2012 less 2011			2012 to 2011			2012 Results			2012 less 2011
Fixed maturity securities	$	1,341,056		$	586,003		$	755,053			128.8	%	$	606,341		$	148,712
Equity securities		11,077			42,686			(31,609	)		-74.1	%		4,737			(36,346	)
Mortgage loans		213,949			25,841			188,108			727.9	%		1,405			186,703
Real estate		93,684			89,600			4,084			4.6	%		3,750			334
Policy loans		27,785			8,365			19,420			232.2	%		18,227			1,193
Short-term and other investments		2,843			584			2,259			386.8	%		1,071			1,188
Gross investment income		1,690,394			753,079			937,315			124.5	%		635,531			301,784
Investment expenses		(125,259	)		(123,639	)		1,620			-1.3	%		(25,000	)		(23,380	)
Net investment income	$	1,565,135		$	629,440		$	935,695			148.7	%	$	610,531		$	325,164

The $301,784 increase in gross investment income for the three months ended September 30, 2012, excluding Family Benefit Life gross investment income, is due to the 2012 investment of excess cash primarily in fixed maturity securities, lottery receivables (included in gross investment income from fixed maturity securities) and mortgage loans.

The $23,380 decrease in investment expenses for the three months ended September 30, 2012, excluding Family Benefit Life investment expenses, is due to a $23,000 decrease in fees for investment advisory management services.

Net Realized Investment Gains

There was a $195,445 decrease in net realized investment gains during the three months ended September 30, 2012.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $20,230 for the three months ended September 30, 2012 resulted from proceeds of $2,613,575 on these securities that had carrying values of $2,593,345 at the 2012 disposal dates.

The net realized investment gains from the sales of equity securities available-for-sale of $358,148 for the three months ended September 30, 2012 resulted from proceeds of $591,635 on these securities that had carrying values of $233,487 at the 2012 disposal dates.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $573,823 for the three months ended September 30, 2011 resulted from proceeds of $3,166,481 on these securities that had carrying values of $2,592,658 at the 2011 disposal dates.

There were no sales of equity securities available-for-sale for the three months ended September 30, 2011.

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

Other Income

The $2,749 decrease in other income for the three months ended September 30, 2012, excluding Family Benefit Life other income, is primarily due to a decrease 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. The impact on total benefits, claims and expenses of Family Benefit Life total benefits, claims and expenses, acquired on December 28, 2011, for the three months ended September 30, 2012 is summarized in the tables below.

Our benefits, claims and expenses for the three months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,						Total Increase(Decrease)		Percentage Change			Family Benefit Life			Net Increase (Decrease)
	2012			2011			2012 less 2011		2012 to 2011			2012 Results			2012 less 2011
Benefits and claims
Increase (decrease) in future policy benefits	$	472,508		$	462,699		$	9,809		2.1	%	$	(163,097	)	$	172,906
Death benefits		606,062			258,413			347,649		134.5	%		199,645			148,004
Surrenders		156,212			95,799			60,413		63.1	%		108,521			(48,108	)
Interest credited to policyholders		873,679			380,171			493,508		129.8	%		339,815			153,693
Dividend and accumulation benefits		93,576			-			93,576		-			93,576			-
Total benefits and claims		2,202,037			1,197,082			1,004,955		84.0	%		578,460			426,495
Expenses
Policy acquisition costs deferred		(459,085	)		(500,681	)		41,596		-8.3	%		-			41,596
Amortization of deferred policy acquisition costs		52,998			18,877			34,121		180.8	%		-			34,121
Amortization of value of insurance business acquired		92,211			58,211			34,000		58.4	%		56,277			(22,277	)
Commissions		545,148			538,106			7,042		1.3	%		8,339			(1,297	)
Other underwriting, insurance and acquisition expenses		940,584			742,502			198,082		26.7	%		241,819			(43,737	)
Total expenses		1,171,856			857,015			314,841		36.7	%		306,435			8,406
Total benefits, claims and expenses	$	3,373,893		$	2,054,097		$	1,319,796		64.3	%	$	884,895		$	434,901

The increase of $434,901 in total benefits, claims and expenses for the three months ended September 30, 2012, excluding Family Benefit Life benefits, claims and expenses, is discussed below.

Benefits and Claims

The $426,495 increase in benefits and claims for the three months ended September 30, 2012, excluding Family Benefit Life benefits and claims, is primarily due to the following:

$172,906 increase in the change in future policy benefits primarily relates to an increase in the number of final expense and ordinary policies in force.

$153,693 increase in interest credited to policyholders is 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).

$148,004 increase in death benefits is primarily due to an increase in the number of final expense claims incurred. There was a 1,003 increase in the number of final expense policies in force from 7,827 policies as of September 30, 2011 to 8,830 policies as of September 30, 2012. Correspondingly, there was a $9,067,109 increase in the amount of final expense insurance policies in force from $65,682,218 as of September 30, 2011 to $74,749,327 as of September 30, 2012. This final expense policy expansion has increased our mortality exposure.

$48,108 decrease in surrenders reflects a slight improvement in 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.

For the three months ended September 30, 2012 and 2011, capitalized costs were $459,085 and $500,681, respectively. Amortization of deferred policy acquisition costs for the three months ended September 30, 2012 and 2011 were $52,998 and $18,877, respectively.

Family Benefit Life had little impact on the deferral or amortization of deferred acquisition costs since its third 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 2013.

The $41,596 decrease in the acquisition costs deferred primarily relates to decreased new business production of final expense products and annuity contracts in third quarter 2012 that exceeded an increase in the production of ordinary policies. The $34,121 increase in the third quarter 2012 amortization of deferred acquisition costs primarily reflects the increase in final expense claims incurred and the increased annuity lapses after the surrender charge period.

Amortization of Value of Insurance Business Acquired

The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $92,211 and $58,211 for the three months ended September 30, 2012 and 2011, respectively. The $34,000 increase in the 2012 amortization of value of insurance business acquired primarily relates to the $56,277 amortization of value of insurance business acquired related to the acquisition of Family Benefit Life on December 28, 2011.

Commissions

Our commissions for the three months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,				Increase (Decrease)			Percentage Change
	2012		2011		2012 less 2011			2012 to 2011
Family Benefit Life	$	8,339	$	-	$	8,339			-
Annuity		38,625		104,044		(65,419	)		-62.9	%
Whole life and term first year		73,313		18,352		54,961			299.5	%
Whole life and term renewal		23,742		18,069		5,673			31.4	%
Final expense first year		321,833		334,996		(13,163	)		-3.9	%
Final expense renewal		79,296		62,645		16,651			26.6	%
Total commissions	$	545,148	$	538,106	$	7,042			1.3	%

The $1,297 decrease in commissions for the three months ended September 30, 2012, excluding Family Benefit Life commissions, is primarily due to:

$65,419 decrease in annuity first year, single and renewal commissions that corresponds to $2,007,252 of decreased third quarter annuity considerations deposited.

$13,163 decrease in final expense first year commissions that corresponds to $12,947 of decreased final expense first year premiums.

$5,673 increase in renewal whole life and term commissions that corresponds to $2,639 of increased renewal 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 ended on April 30, 2012 and not on whole life and term product sales during 2011 and 2012.

$16,651 increase in final expense renewal commissions that corresponds to $148,209 of increased final expense renewal premiums.

$54,961 increase in first year whole life and term commissions that corresponds to $96,625 of increased first year whole life and term premiums. The captive agents were focused on the public stock offering that began on June 29, 2010 and ended on April 30, 2012. During those 22 months, the captive agents were not actively marketing whole life and term products. These agents are now focused on whole life and term sales. Therefore, commissions from these products should increase during the remainder of 2012.

Other Underwriting, Insurance and Acquisition Expenses

The $43,737 decrease in other underwriting, insurance and acquisition expenses for the three months ended September 30, 2012, excluding Family Benefit Life expenses, is primarily attributed to third party legal, accounting, actuarial and other costs incurred in 2011 associated with the acquisition of Family Benefit Life. The 2012 costs paid to third parties related to the synergy and conversion of Family Benefit Life into our operations are being accumulated in Family Benefit Life and for the three months ended September 30, 2012 are approximately $108,000.

Federal Income Taxes

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

For the three months ended September 30, 2012 and 2011, deferred income tax expense was $11,960 and $56,676, respectively. Current income tax expense was $53,365 and $29,607 for the three months ended September 30, 2012 and 2011, respectively.

Net Income Per Common Share Basic and Diluted

Net income was $472,077 ($0.06 per common share basic and diluted) and $648,267 ($0.09 per common share basic and diluted) for the three months ended September 30, 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 September 30, 2012 and 2011 were 7,888,074 and 7,485,038, respectively. These weighted average shares reflect the retrospective adjustment for the impact of the 5% stock dividend declared by the Company on January 11, 2012 and issued to holders of shares of the Company as of March 10, 2012.

Business Segments

The revenues and income (loss) before federal income taxes from our business segments for the three months ended September 30, 2012 and 2011 are summarized as follows:

	Three Months Ended September 30,						Increase (Decrease)			Percentage Change
	2012			2011			2012 to 2011			2012 to 2011
Revenues:
Life and annuity insurance operations	$	3,521,425		$	2,713,398		$	808,027			29.8	%
Premium finance operations		20,717			55,014			(34,297	)		-62.3	%
Corporate operations		369,153			20,235			348,918			1724.3	%
Total	$	3,911,295		$	2,788,647		$	1,122,648			40.3	%

Income (loss) before income taxes:
Life and annuity insurance operations	$	398,533		$	877,183		$	(478,650	)		-54.6	%
Premium finance operations		(78,135	)		(54,840	)		(23,295	)		42.5	%
Corporate operations		217,004			(87,793	)		304,797			-347.2	%
Total	$	537,402		$	734,550		$	(197,148	)		-26.8	%

Life and Annuity Insurance Operations

The $808,027 increase in revenues from Life and Annuity Insurance Operations for the three months ended September 30, 2012 is primarily due to the following:

$795,262 of revenues due to the acquisition of Family Benefit Life on December 28, 2011

$326,433 increase in net investment income

$234,526 increase in premiums

$545,445 decrease in net realized investment gains.

The $478,650 decreased profitability from Life and Annuity Insurance Operations for the three months ended September 30, 2012 is primarily due to the following:

$545,455 decrease in net realized investment gains

$426,495 increase in benefits and claims

$89,633 of Family Benefit Life losses before income taxes

$75,717 decrease in policy acquisition costs deferred net of amortization

$326,433 increase in net investment income

$234,526 increase in premiums

$76,855 decrease in other underwriting, insurance and acquisition expenses

$22,277 decrease in amortization of value of insurance business acquired

Premium Finance Operations

The $34,297 decrease in revenues from Premium Finance Operations for the three months ended September 30, 2012 is due to decreased fee income as we discontinued offering premium finance contracts on July 1, 2012.

The $23,295 increased loss from Premium Finance Operations for the three months ended September 30, 2012 is primarily due to a $34,297 decrease in revenues and an $11,000 decrease in operating expenses in 2012.

Corporate Operations

The $348,918 increase in revenues from Corporate Operations for the three months ended September 30, 2012 is primarily due to $350,000 of net realized investment gains from the sale of an equity security.

The $304,797 increased profitability from Corporate Operations for the three months ended September 30, 2012 is primarily due primarily due to $348,918 of increased revenues discussed above. This increase in revenues was partially offset by $44,000 of increased other underwriting, insurance and acquisition expenses.

Results of Operations – Nine Months Ended September 30, 2012 and 2011

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. The impact on total revenues of Family Benefit Life total revenues, acquired on December 28, 2011, for the nine months ended September 30, 2012 is summarized in the tables below.

Our revenues for the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Nine Months Ended September 30,				Total Increase (Decrease)			Percentage Change			Family Benefit Life		Net Increase (Decrease)
	2012		2011		2012 less 2011			2012 to 2011			2012 Results		2012 less 2011
Premiums	$	5,806,616	$	4,576,930	$	1,229,686			26.9	%	$	704,339	$	525,347
Income from premium financing		97,282		127,754		(30,472	)		-23.9	%		-		(30,472	)
Net investment income		4,303,960		1,788,875		2,515,085			140.6	%		1,817,680		697,405
Net realized investment gains		471,189		599,173		(127,984	)		-21.4	%		-		(127,984	)
Other income		15,354		7,916		7,438			94.0	%		4,702		2,736
Total revenues	$	10,694,401	$	7,100,648	$	3,593,753			50.6	%	$	2,526,721	$	1,067,032

The increase of $1,067,032 in total revenues for the nine months ended September 30, 2012, excluding Family Benefit Life revenues, is discussed below.

Premiums

Our premiums for the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Nine Months Ended September 30,				Increase (Decrease)			Percentage Change
	2012		2011		2012 less 2011			2012 to 2011
Family Benefit Life	$	704,339	$	-	$	704,339			-
Whole life and term first year		178,533		62,725		115,808			184.6	%
Whole life and term renewal		1,676,088		1,725,319		(49,231	)		-2.9	%
Final expense first year		811,249		830,264		(19,015	)		-2.3	%
Final expense renewal		2,436,407		1,958,622		477,785			24.4	%
Total premiums	$	5,806,616	$	4,576,930	$	1,229,686			26.9	%

The $525,347 increase in premiums for the nine months ended September 30, 2012, excluding Family Benefit Life premiums, is primarily due to a $477,785 increase in final expense renewal premiums. Premiums from whole life and term products should continue to increase during the remainder of 2012. The captive agents were focused on a public stock offering that began on June 29, 2010 and ended on April 30, 2012. During those 22 months, the captive agents were not actively marketing whole life and term products. These agents are now focused on whole life and term product sales.

Income from Premium Financing

The income from premium financing has steadily decreased during the past two years. There was a decrease of $30,472 for the nine months ended September 30, 2012.

Net Investment Income

The major components of our net investment income for the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Nine Months Ended September 30,						Total Increase (Decrease)			Percentage Change			Family Benefit Life			Net Increase (Decrease)
	2012			2011			2012 less 2011			2012 to 2011			2012 Results			2012 less 2011
Fixed maturity securities	$	3,900,111		$	1,735,605		$	2,164,506			124.7	%	$	1,808,694		$	355,812
Equity securities		39,243			50,892			(11,649	)		-22.9	%		14,202			(25,851	)
Mortgage loans		365,975			83,516			282,459			338.2	%		4,232			278,227
Real estate		280,635			267,407			13,228			4.9	%		11,250			1,978
Policy loans		76,615			26,744			49,871			186.5	%		49,003			868
Short-term and other investments		17,471			8,681			8,790			101.3	%		5,299			3,491
Gross investment income		4,680,050			2,172,845			2,507,205			115.4	%		1,892,680			614,525
Investment expenses		(376,090	)		(383,970	)		(7,880	)		2.1	%		(75,000	)		(82,880	)
Net investment income	$	4,303,960		$	1,788,875		$	2,515,085			140.6	%	$	1,817,680		$	697,405

The $614,525 increase in gross investment income for the nine months ended September 30, 2012, excluding Family Benefit Life gross investment income, is due to the 2012 investment of excess cash primarily in fixed maturity securities, lottery receivables (included in gross investment income from fixed maturity securities) and mortgage loans.

The $82,880 decrease in investment expenses for the nine months ended September 30, 2012, excluding Family Benefit Life investment expenses, is due to a $79,000 decrease in fees for investment advisory management services.

Net Realized Investment Gains

There was a $127,984 decrease in net realized investment gains for the nine months ended September 30, 2012.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $109,725 for the nine months ended September 30, 2012 resulted from proceeds of $6,349,785 for these securities that had carrying values of $6,240,060 at the 2012 disposal dates.

The net realized investment gains from the sales of equity securities available-for-sale of $361,464 for the nine months ended September 30, 2012 resulted from proceeds of $891,480 for these securities that had carrying values of $530,016 at the 2012 disposal dates.

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $599,173 for the nine months ended September 30, 2011 resulted from proceeds of $4,022,767 for these securities that had carrying values of $3,423,594 at the 2011 disposal dates.

There were no sales of equity securities available-for-sale for the nine months ended September 30, 2011.

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

Other Income

The $2,736 increase in other income for the nine months ended September 30, 2012, excluding Family Benefit Life other income, is primarily due an 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. The impact on total benefits, claims and expenses of Family Benefit Life total benefits, claims and expenses, acquired on December 28, 2011, for the nine months ended September 30, 2012 is summarized in the tables below.

Our benefits, claims and expenses for the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Nine Months Ended September 30,						Total Increase(Decrease)			Percentage Change			Family Benefit Life			Net Increase (Decrease)
	2012			2011			2012 less 2011			2012 to 2011			2012 Results			2012 less 2011
Benefits and claims
Increase (decrease) in future policy benefits	$	1,645,523		$	1,408,649		$	236,874			16.8	%	$	(150,123	)	$	386,997
Death benefits		1,891,630			1,134,920			756,710			66.7	%		377,653			379,057
Surrenders		430,212			247,605			182,607			73.7	%		244,199			(61,592	)
Interest credited to policyholders		2,505,815			1,087,522			1,418,293			130.4	%		959,410			458,883
Dividend and accumulation benefits		274,674			-			274,674			-			274,674			-
Total benefits and claims		6,747,854			3,878,696			2,869,158			74.0	%		1,705,813			1,163,345
Expenses
Policy acquisition costs deferred		(1,885,010	)		(1,575,579	)		(309,431	)		19.6	%		-			(309,431	)
Amortization of deferred policy acquisition costs		437,537			206,594			230,943			111.8	%		-			230,943
Amortization of value of insurance business acquired		307,877			172,688			135,189			78.3	%		168,830			(33,641	)
Commissions		1,835,323			1,547,115			288,208			18.6	%		28,994			259,214
Other underwriting, insurance and acquisition expenses		2,754,979			2,099,985			654,994			31.2	%		677,798			(22,804	)
Total expenses		3,450,706			2,450,803			999,903			40.8	%		875,622			124,281
Total benefits, claims and expenses	$	10,198,560		$	6,329,499		$	3,869,061			61.1	%	$	2,581,435		$	1,287,626

The increase of $1,287,626 in total benefits, claims and expenses for the nine months ended September 30, 2012, excluding Family Benefit Life benefits, claims and expenses, is discussed below.

Benefits and Claims

The $1,163,345 increase in benefits and claims for the nine months ended September 30, 2012, excluding Family Benefit Life benefits and claims, is primarily due to the following:

$458,883 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).

$386,997 increase in the change in future policy benefits primarily relates to an increase in the number of final expense and ordinary policies in force.

$379,057 increase in death benefits is primarily due to an increase in the number of final expense claims incurred. There was a 1,003 increase in the number of final expense policies in force from 7,827 policies as of September 30, 2011 to 8,830 policies as of September 30, 2012. Correspondingly, there was a $9,067,109 increase in the amount of final expense insurance policies in force from $65,682,218 as of September 30, 2011 to $74,749,327 as of September 30, 2012. This final expense policy expansion has increased our mortality exposure.

$61,592 decrease in surrenders reflects an improvement in persistency.

Deferral and Amortization of Deferred Acquisition Costs

For the nine months ended September 30, 2012 and 2011, capitalized costs were $1,885,010 and $1,575,579, respectively. Amortization of deferred policy acquisition costs for the nine months ended September 30, 2012 and 2011 were $437,537 and $206,594, respectively.

Family Benefit Life had little impact on the deferral or amortization of deferred acquisition costs since its 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 beginning in 2013.

The $309,431 increase in the acquisition costs deferred primarily relates to increased production of ordinary policies that exceeded a decline in final expense policy production in 2012. The $230,943 increase in the 2012 amortization of deferred acquisition costs primarily reflects the increase in final expense claims incurred and the increased annuity lapses after the surrender charge period.

Amortization of Value of Insurance Business Acquired

The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $307,877 and $172,688 for the nine months ended September 30, 2012 and 2011, respectively. The $135,189 increase in the 2012 amortization of value of insurance business acquired primarily relates to the $168,830 amortization of value of insurance business acquired related to the acquisition of Family Benefit Life on December 28, 2011.

Commissions

Our commissions for the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Nine Months Ended September 30,				Increase (Decrease)			Percentage Change
	2012		2011		2012 less 2011			2012 to 2011
Family Benefit Life	$	28,994	$	-	$	28,994			-
Annuity		406,115		260,165		145,950			56.1	%
Whole life and term first year		125,875		50,267		75,608			150.4	%
Whole life and term renewal		69,303		72,475		(3,172	)		-4.4	%
Final expense first year		977,485		991,205		(13,720	)		-1.4	%
Final expense renewal		227,551		173,003		54,548			31.5	%
Total commissions	$	1,835,323	$	1,547,115	$	288,208			18.6	%

The $259,214 increase in commissions for the nine months ended September 30, 2012, excluding Family Benefit Life commissions, is primarily due to:

$145,950 increase in annuity first year, single and renewal commissions that corresponds to $3,309,911 of increased annuity considerations deposited.

$75,608 increase in first year whole life and term commissions that corresponds to $115,808 of increased first year whole life and term premiums. The captive agents were focused on the public stock offering that began on June 29, 2010 and ended on April 30, 2012. During those 22 months, the captive agents were not actively marketing whole life and term products. These agents are now focused on whole life and term sales. Therefore, commissions from these products should increase during the remainder of 2012.

$54,548 increase in final expense renewal commissions that corresponds to $477,785 of increased final expense renewal premiums.

$3,172 decrease in renewal whole life and term commissions that corresponds to a $49,231 decrease in renewal 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 ended on April 30, 2012 and not on life insurance production during all of 2011 and most of 2012.

$13,720 decrease in final expense first year commissions that correspond to the $19,015 decrease in final expense first year premiums.

Other Underwriting, Insurance and Acquisition Expenses

The $22,804 decrease in other underwriting, insurance and acquisition expenses for the nine months ended September 30, 2012, excluding Family Benefit Life expenses, is primarily attributed to third party legal, accounting, actuarial and other costs incurred in 2011 associated with the acquisition of Family Benefit Life. The 2012 costs paid to third parties related to the synergy and conversion of Family Benefit Life into our operations are being accumulated in Family Benefit Life and for the nine months ended September 30, 2012 are approximately $128,000.

Federal Income Taxes

For the nine months ended September 30, 2012 and 2011, deferred income tax expense (benefit) was ($44,054) and $88,342, respectively. Current income tax expense was $120,145 and $33,270 for the nine months ended September 30, 2012 and 2011, respectively.

Net Income Per Common Share Basic and Diluted

Net income was $419,750 ($0.05 per common share basic and diluted) and $649,537 ($0.09 per common share basic and diluted) for the nine months ended September 30, 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 nine months ended September 30, 2012 and 2011 were 7,900,326 and 7,249,870, 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 issued to holders of shares of the Company as of March 10, 2011 and March 10, 2012.

Business Segments

The revenues and income (loss) before federal income taxes from our business segments for the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Nine Months Ended June 30,						Increase (Decrease)			Percentage Change
	2012			2011			2012 to 2011			2012 to 2011
Revenues:
Life and annuity insurance operations	$	10,189,056		$	6,951,075		$	3,237,981			46.6	%
Premium finance operations		97,525			126,201			(28,676	)		-22.7	%
Corporate operations		407,820			23,372			384,448			1644.9	%
Total	$	10,694,401		$	7,100,648		$	3,593,753			50.6	%
Income (loss) before income taxes:
Life and annuity insurance operations	$	734,680		$	1,200,390		$	(465,710	)		-38.8	%
Premium finance operations		(182,290	)		(129,682	)		(52,608	)		40.6	%
Corporate operations		(56,549	)		(299,559	)		243,010			-81.1	%
Total	$	495,841		$	771,149		$	(275,308	)		-35.7	%

Life and Annuity Insurance Operations

The $3,237,981 increase in revenues from Life and Annuity Insurance Operations for the nine months ended September 30, 2012 is primarily due to the following:

$2,526,721 of revenues due to the acquisition of Family Benefit Life on December 28, 2011

$662,331 increase in net investment income

$525,347 increase in premiums

$477,984 decrease in net realized investment gains.

The $465,710 decreased profitability from Life and Annuity Insurance Operations for the nine months ended September 30, 2012 is primarily due to the following:

$1,163,345 increase in benefits and claims

$477,984 decrease in net realized investment gains

$259,214 increase in commissions

$54,714 of Family Benefit Life losses before income taxes

$662,331 increase in net investment income

$525,347 increase in premiums

$188,175 decrease in other underwriting, insurance and acquisition expenses

$78,488 increase in policy acquisition costs deferred net of amortization

$33,641 decrease in amortization of value of insurance business acquired

Premium Finance Operations

The $28,676 decrease in revenues from Premium Finance Operations for the nine months ended September 30, 2012 is due to decreased fee income as we discontinued offering premium finance contracts on July 1, 2012.

The $52,608 decreased profitability from Premium Finance Operations for the nine months ended September 30, 2012 is primarily due to $28,676 of decreased fee income and $24,000 of increased operating expenses.

Corporate Operations

The $384,448 increase in revenues from Corporate Operations for the nine months ended September 30, 2012 is primarily due to a $350,000 realized investment gain from the sale of equity securities available-for-sale and $34,448 of increased net investment income.

The $243,010 increased Corporate Operations profitability for the nine months ended September 30, 2012 is primarily due to the $384,448 increase in revenues discussed above. This increase in revenues was partially offset by a $141,438 increase in other underwriting, insurance and acquisition expenses primarily related to increased staffing in 2012.

Consolidated Financial Condition

Our invested assets as of September 30, 2012 (unaudited) and December 31, 2011 are summarized as follows:

	September 30, 2012		December 31, 2011		Increase (Decrease) 2012 to 2011			Percentage Change 2012 to 2011
	(Unaudited)
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $89,836,280 and $78,128,103 as of September 30, 2012 and September 30, 2012 and December 31, 2011, respectively)	$	96,981,267	$	81,051,207	$	15,930,060			19.7	%
Available-for-sale equity securities at fair value (cost: $725,492 and $750,941 as of September 30, 2012 and December 31, 2011, respectively)		946,562		898,893		47,669			5.3	%
Mortgage loans on real estate		8,662,046		1,985,394		6,676,652			336.3	%
Investment real estate		3,335,720		3,466,581		(130,861	)		-3.8	%
Policy loans		1,474,373		1,472,666		1,707			0.1	%
Other long-term investments		18,534,991		9,875,675		8,659,316			87.7	%
Total investments	$	129,934,959	$	98,750,416	$	31,184,543			31.6	%

The $15,930,060 increase in available for sale fixed maturity securities for the nine months ended September 30, 2012 is primarily due to purchases of $18,477,000 in excess of sales and maturities of $6,350,000, net realized investment gains of $110,000, $4,222,000 increase in unrealized appreciation and premium amortization of $529,000. This portfolio is reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies and U. S. government and foreign securities.

As of September 30, 2012, we held 26 available-for-sale fixed maturity securities with an unrealized loss of $235,298, fair value of $8,704,738 and amortized cost of $8,940,036.

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. Since the Family Benefit Life available-for-sale fixed maturity securities were acquired on December 28, 2011, the amortized cost equaled the fair value as of December 31, 2011.

The $47,669 increase in available-for-sale equity securities for the nine months ended September 30, 2012 is primarily due to purchases of $505,000, sales of $891,000, net realized investment gains of $361,000 and a $73,000 increase in unrealized appreciation of available-for-sale equity securities. This portfolio is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale equity securities portfolio is invested in a variety of companies.

As of both September 30, 2012 and December 31, 2011 there were no available-for-sale equity securities in an unrealized loss position. Since the Family Benefit Life available-for-sale equity securities were acquired on December 28, 2011, the amortized cost equaled the fair value as of December 31, 2011.

The $6,676,652 increase in mortgage loans for the nine months ended September 30, 2012 is primarily due to the origination of $7,342,000 of mortgage loans, $150,000 capitalization of loan origination fees less principal payments of $833,000 and amortization of $19,000.

The $8,659,316 increase in other long-term investments (comprised of lottery receivables) for the nine months ended September 30, 2012 is primarily due to the purchases of $9,574,000, $630,000 of accretion of discount less principal payments of $1,545,000.

Our assets other than invested assets as of September 30, 2012 (unaudited) and December 31, 2011 are summarized as follows:

	September 30, 2012		December 31, 2011		Increase (Decrease) 2012 to 2011			Percentage Change 2012 to 2011
	(Unaudited)
Cash and cash equivalents	$	12,881,116	$	27,705,711	$	(14,824,595	)		-53.5	%
Accrued investment income		1,438,636		1,122,574		316,062			28.2	%
Recoverable from reinsurers		1,170,390		1,132,121		38,269			3.4	%
Agents' balances and due premiums		374,853		381,901		(7,048	)		-1.8	%
Loans from premium financing, net		485,620		1,022,416		(536,796	)		-52.5	%
Deferred policy acquisition costs		6,686,074		5,251,999		1,434,075			27.3	%
Value of insurance business acquired		7,604,592		7,912,469		(307,877	)		-3.9	%
Property and equipment, net		135,749		170,843		(35,094	)		-20.5	%
Other assets		1,724,781		1,297,205		427,576			33.0	%
Assets other than investment assets	$	32,501,811	$	45,997,239	$	(13,495,428	)		-29.3	%

The $14,824,595 decrease in cash is primarily due to the company investing these funds in fixed maturity securities, mortgage loans and other long-term investments (i.e., lottery receivables).

The $536,796 decrease in loans from premium financing is related to normal loan collections and our decision to discontinue offering premium finance contracts on July 1, 2012.

Other assets include federal and state incomes taxes recoverable, prepaid expenses, notes receivable and customer account balances receivable. The increase in other assets is primarily due to a $325,000 increase in recoverable federal and state income taxes.

The progression of the Company’s loans from premium financing for the nine months ended September 30, 2012 and year ended December 31, 2011 is summarized as follows:

	Nine Months Ended September 30, 2012			Year Ended December 31, 2011
Balance, beginning of year	$	1,274,707		$	1,622,567
Loans financed		843,925			2,341,126
Unearned interest		51,525			136,189
Capitalized fees and interest		11,810			52,155
Payment of loans and unearned interest		(1,455,667	)		(2,877,330	)
Ending loan balance including unearned interest		726,300			1,274,707
Unearned interest included in ending loan balances		(5,679	)		(23,287	)
Loan balance net of unearned interest		720,621			1,251,420
Less allowance for loan loss		(235,001	)		(229,004	)
Loan balance net of unearned interest and allowance for loan losses	$	485,620		$	1,022,416

Our liabilities as of September 30, 2012 (unaudited) and December 31, 2011 are summarized as follows:

	September 30, 2012		December 31, 2011		Increase (Decrease) 2012 to 2011			Percentage Change 2012 to 2011
	(Unaudited)
Policy liabilities
Policyholders' account balances	$	93,544,057	$	81,730,322	$	11,813,735			14.5	%
Future policy benefits		30,660,347		28,977,186		1,683,161			5.8	%
Policy claims		547,929		515,522		32,407			6.3	%
Premiums paid in advance		51,837		46,613		5,224			11.2	%
Total policy liabilities		124,804,170		111,269,643		13,534,527			12.2	%
Deferred federal income taxes		3,485,596		2,622,711		862,885			32.9	%
Other liabilities		688,444		2,457,188		(1,768,744	)		-72.0	%
Total liabilities	$	128,978,210	$	116,349,542	$	12,628,668			10.9	%

Other liabilities include deposits on pending policy applications, accrued expenses, accounts payable and unearned investment income.

The $13,534,527 increase in policy liabilities is primarily due to deposits on annuity and deposit-type contracts exceeding withdrawals by $9,308,000, $2,506,000 of interest credited to policyholder account deposits and a $1,683,000 increase in future policy benefit reserves. Policyholder account deposits on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2012 have been reduced by $1,467,000 to reflect decreases in deposits on pending applications included in other liabilities as of December 31, 2011.

The $862,885 increase in deferred federal income taxes during the nine months ended September 30, 2012 was due to deferred federal income taxes on the unrealized appreciation of available-for-sale fixed maturity and equity securities. This increase was partially offset by $44,054 of operating deferred tax benefits.

The $1,768,744 decrease in other liabilities is due to a $1,467,000 decrease in deposits on pending applications and a $400,000 reduction in accrued liabilities due to payment of and reduction in bonuses accrued as of December 31, 2011. This decrease is partially offset by a $100,000 increase in accrued expenses. Other liabilities on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2012 have been reduced by $1,467,000 to reflect decreases in deposits on pending applications included in other liabilities as of December 31, 2011.

Liquidity and Capital Resources

Our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through September 30, 2012, we have received $26,785,770 from the sale of our shares. Our operations have been profitable and have generated $4,390,172 of net income from operations since we were incorporated in 2004 as shown in the accumulated earnings balance in the September 30, 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 378,928 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 $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. The impact of these two stock dividend charges of $5,270,288 to accumulated earnings (deficit) decreased the balance of accumulated deficit as of September 30, 2012 to $880,116.

As of September 30, 2012, we had cash and cash equivalents totaling $12,881,116. As of September 30, 2012, cash and cash equivalents of $4,813,577 and $2,809,125, respectively, of the total $12,881,116 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.

Our unaudited cash flows for the nine months ended September 30, 2012 and 2011 are summarized as follows:

	Nine Months Ended September 30,						Increase (Decrease)			Percentage Change
	2012			2011			2012 to 2011			2012 to 2011
	(Unaudited)
Net cash provided by operating activities	$	1,814,530		$	1,220,665		$	593,865			48.7	%
Net cash used in investing activities		(25,742,631	)		(1,507,360	)		(24,235,271	)		1607.8	%
Net cash provided by financing activities		9,103,506			10,633,877			(1,530,371	)		-14.4	%
Increase (decrease) in cash		(14,824,595	)		10,347,182			(25,171,777	)		-243.3	%
Cash and cash equivalents, beginning of period		27,705,711			12,985,278			14,720,433			113.4	%
Cash and cash equivalents, end of period	$	12,881,116		$	23,332,460		$	(10,451,344	)		-44.8	%

The $593,865 increase in cash provided by operating activities during the nine months ended September 30, 2012 is primarily due to premiums and net investment income in excess of benefits, claims, commissions and other underwriting, insurance and acquisition expenses.

The $24,235,271 of increased cash used for investing activities during the nine months ended September 30, 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 those investment types.

The $1,530,371 decrease in cash provided by financing activities for the nine months ended September 30, 2012 resulted from a decrease of $2,303,242 in the net proceeds from the public and private placement stock offerings and $485,058 purchase of treasury shares. This decrease was partially offset by a $1,257,929 net increase in policyholder account deposits.

Our shareholders’ equity as of September 30, 2012 (unaudited) and December 31, 2011 is summarized as follows:

	September 30, 2012			December 31, 2011		Increase (Decrease) 2012 to 2011			Percentage Change 2012 to 2011
	(Unaudited)
Common stock, par value $.01 per share, 20,000,000 shares authorized, 7,974,373 and 6,798,535 issued and 7,835,785 and 6,798,535 outstanding as of September 30, 2012 and December 31, 2011, respectively, and 36,560 and 566,404 subscribed as of September 30, 2012 and December 31, 2011, respectively	$	80,109		$	73,649	$	6,460			8.8	%
Additional paid-in capital		28,668,886			24,086,146		4,582,740			19.0	%
Treasury stock, at cost (138,588 shares as of September 30, 2012)		(485,058	)		-		(485,058	)		-
Accumulated other comprehensive income		6,074,739			2,696,224		3,378,515			125.3	%
Accumulated earnings (deficit)		(880,116	)		1,542,094		(2,422,210	)		-157.1	%
Total shareholders' equity	$	33,458,560		$	28,398,113	$	5,060,447			17.8	%

The increase in shareholders’ equity of $5,060,447 for the nine months ended September 30, 2012 is due to $1,747,240 of proceeds generated from the public stock offering (gross proceeds of $2,055,576 and offering expenses of $308,336), $3,378,515 of other comprehensive income, $419,750 of net income less $485,058 purchase of treasury stock.

Equity per common share outstanding increased 15.8% to $4.25 as of September 30, 2012 compared to $3.67 per share as of December 31, 2011, based upon 7,872,345 common shares outstanding and subscribed as of September 30, 2012 and 7,733,186 outstanding common shares as of December 31, 2011. The common shares outstanding and subscribed as of December 31, 2011 reflect the retrospective adjustment for the impact of the 2012 5% stock dividends declared by the Company on January 11, 2012 and issued to holders of shares of the Company as of 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. The Company issued 378,928 shares in connection with the 2012 stock dividend that resulted in accumulated deficit being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. The issuance of these stock dividends were non-cash investing and financing activities.

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 $7,366,057 and $3,071,056 as of September 30, 2012 and December 31, 2011, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. This $4,295,001 increase in unrealized gain for the nine months ended September 30, 2012 has been offset by the net realized investment gain of $471,189 due to the sale and call activity for available-for-sale fixed maturity securities and sale of available-for-sale equity securities during 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 our significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes. From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and Family Benefit Life’s annuity business is subject to variable interest rates. Life insurance company policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations.

We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies. We maintain conservative durations in our fixed maturity portfolio. As of September 30, 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 15.3% 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.

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. The offering was completed April 30, 2012. The Company raised $11,000,010 from this offering and incurred $1,650,001 in offering costs resulting in $9,350,009 in net proceeds.

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 September 30, 2012 will be sufficient to fund our anticipated operating expenses.

Off-Balance Sheet Arrangements

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

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes to Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 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

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

November 13, 2012	By:	/s/ Gregg E. Zahn
		Gregg E. Zahn, President and Chief Executive Officer


November 13, 2012	By:	/s/ Jeffrey J. Wood
		Jeffrey J. Wood, Chief Financial Officer