424(b)(3)


		Filed Pursuant to Rule 424(b)(3)
		Registration Statement No. 333-163901

FIRST TRINITY FINANCIAL CORPORATION

PROSPECTUS SUPPLEMENT NO. 3

(to Prospectus Dated June 29, 2010)

We are supplementing our Prospectus dated June 29, 2010 filed as part of our Registration Statement on Form S-1 (Reg. No. 333-136901) with the Securities and Exchange Commission (the “Commission”) on December 21, 2009, as supplemented from time to time, related to the offering of up to 1,466,667 shares of our Common Stock including 133,334 shares for over subscriptions (the “Prospectus”). This supplement is to provide information contained in our Quarterly Report on Form 10-Q filed with the Commission on November 12, 2010 for the three month period ended September 30, 2010. A copy is attached hereto (without exhibits) and incorporated herein by reference. On August 6, 2010 and August 12, 2010, respectively, we filed Prospectus Supplements to supplement the Prospectus (Prospectus Supplement No. 1 and Prospectus Supplement No. 2).

The information contained herein, including the information attached hereto, supplements and supersedes, in part, the information contained in the Prospectus and Prospectus Supplement No. 1 and Prospectus Supplement No. 2. This Prospectus Supplement No. 3 should be read in conjunction with the Prospectus and Prospectus Supplement No. 1 and Prospectus Supplement No. 2 and is qualified by reference to the Prospectus and Prospectus Supplement No. 1 and Prospectus Supplement No. 2 except to the extent that the information in this Prospectus Supplement No. 3 supersedes the information contained in the Prospectus and Prospectus Supplement No. 1 and Prospectus Supplement No. 2.

ANY POTENTIAL INVESTORS IN OUR COMMON STOCK ARE URGED TO READ IN THEIR ENTIRETY THE PROSPECTUS, PROSPECTUS SUPPLEMENT NO. 1, PROSPECTUS SUPPLEMENT NO. 2 AND THIS PROSPECTUS SUPPLEMENT NO. 3 CAREFULLY BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE OFFERING.

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING ON PAGE 5 OF THE PROSPECTUS FOR THE RISKS ASSOCIATED WITH OUR BUSINESS.

Our Quarterly Report on Form 10-Q

On November 12, 2010, we filed with the Commission the attached quarterly report on Form 10-Q for the three month period ended September 30, 2010.

Neither the Commission nor the Oklahoma Department of Securities has approved or disapproved of these securities or determined if this Prospectus Supplement No. 3 is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this Prospectus Supplement is November 12, 2010.

United States
Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2010


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

For the transition period From to .

Commission file number: 000-52613

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 o 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: o		Accelerated filer: o		Non-accelerated filer: o		Smaller reporting company: þ

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). 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 5, 2010: 6,151,163 shares

Item 1. Consolidated Financial Statements

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position


	September 30, 2010			December 31, 2009
	(Unaudited)
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $23,213,629 and $19,772,497 as of September 30, 2010 and December 31, 2009, respectively)	$	27,601,246		$	22,510,660
Available-for-sale equity securities at fair value (cost: $392,818 and $350,318 as of September 30, 2010 and December 31, 2009, respectively)		569,044			448,484
Mortgage loans on real estate		1,174,142			1,365,953
Investment real estate		3,093,517			3,146,944
Policy loans		355,320			335,022
Other long-term investments		6,495,459			4,975,188

Total investments		39,288,728			32,782,251
Cash and cash equivalents ($325,000 is restricted as to withdrawal as of December 31, 2009)		10,016,408			7,080,692
Certificate of deposit (restricted)		102,273			102,273
Accrued investment income		401,958			340,384
Recoverable from reinsurers		988,527			870,294
Accounts receivable		356,321			273,843
Loans from premium financing		1,274,433			2,749,830
Deferred policy acquisition costs		2,749,157			1,918,994
Value of insurance business acquired		2,568,489			2,778,723
Property and equipment		222,301			82,349
Other assets		1,042,718			837,210

Total assets	$	59,011,313		$	49,816,843


Liabilities and Shareholders’ Equity
Policy liabilities
Policyholders’ account balances	$	28,829,577			24,417,483
Future policy benefits		12,839,741			11,349,640
Policy claims		379,449			289,273
Other policyholder funds		45,530			18,941

Total policy liabilities		42,094,297			36,075,337
Deferred federal income taxes		537,894			159,315
Other liabilities		398,025			331,501

Total liabilities		43,030,216			36,566,153


Shareholders’ Equity
Common stock subscribed, par value $.01 per share, 281,878 shares		2,819			—
Common stock, par value $.01 per share, 20,000,000 shares authorized, 5,805,000 issued and outstanding		58,050			58,050
Additional paid-in capital		15,619,992			13,806,503
Accumulated other comprehensive income		4,275,683			2,867,044
Accumulated deficit		(3,975,447	)		(3,480,907	)

Total shareholders’ equity		15,981,097			13,250,690

Total liabilities and shareholders’ equity	$	59,011,313		$	49,816,843

See notes to consolidated financial statements.

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended September 30,
	2010			2009
Revenues
Premiums	$	1,434,189		$	1,440,654
Income from premium financing		65,132			169,885
Net investment income		596,840			358,920
Net realized investment losses
Total other-than-temporary impairment losses		—			(146,644	)
Other net realized investment losses		—			(32,246	)

Net realized investment losses		—			(178,890	)
Other income		2,721			8,884

Total revenues		2,098,882			1,799,453


Benefits, Claims and Expenses
Benefits and claims		1,251,444			711,574
Acquisition costs deferred		(364,826	)		(281,727	)
Amortization of deferred acquisition costs		85,251			31,923
Amortization of value of insurance business acquired		71,953			67,239
Commissions		384,979			364,552
Other underwriting, insurance and acquisition expense		784,549			729,934

Total benefits, claims and expenses		2,213,350			1,623,495


Income (loss) before income tax expense (benefit)		(114,468	)		175,958

Provision for federal income taxes
Current		—			(26,127	)
Deferred		24,884			(15,700	)

Total federal income tax expense (benefit)		24,884			(41,827	)


Net income (loss)	$	(139,352	)	$	217,785


Net income (loss) per common share basic and diluted	$	(0.02	)	$	0.04

See notes to consolidated financial statements.

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)


	Nine Months Ended September 30,
	2010			2009
Revenues
Premiums	$	4,418,752		$	4,303,746
Income from premium financing		258,636			485,323
Net investment income		1,655,723			1,494,531
Net realized investment gains (losses)
Total other-than-temporary impairment losses		—			(155,923	)
Other net realized investment gains (losses)		48,675			(32,246	)

Net realized investment gains (losses)		48,675			(188,169	)
Other income		25,035			8,884

Total revenues		6,406,821			6,104,315


Benefits, Claims and Expenses
Benefits and claims		3,702,816			2,965,661
Acquisition costs deferred		(1,209,827	)		(857,883	)
Amortization of deferred acquisition costs		379,340			179,834
Amortization of value of insurance business acquired		210,234			201,718
Commissions		1,247,511			1,031,379
Other underwriting, insurance and acquisition expense		2,512,118			2,746,208

Total benefits, claims and expenses		6,842,192			6,266,917


Loss before income tax expense		(435,371	)		(162,602	)

Provision for federal income taxes
Current		—			—
Deferred		59,169			143,339

Total federal income tax expense		59,169			143,339


Net loss	$	(494,540	)	$	(305,941	)


Net loss per common share basic and diluted	$	(0.08	)	$	(0.05	)

See notes to consolidated financial statements.

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
	2010			2009
Operating activities
Net loss	$	(494,540	)	$	(305,941	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for depreciation		62,006			59,557
Accretion of discount on investments		(491,133	)		(412,262	)
Realized investment (gains) losses		(48,675	)		188,169
Amortization of policy acquisition cost		379,340			179,834
Policy acquisition cost deferred		(1,209,827	)		(857,883	)
Amortization of value of business acquired		210,234			201,718
Provision for deferred federal income tax		59,169			143,339
Interest credited on policyholder deposits		895,535			757,815
Change in assets and liabilities
Accrued investment income		(61,574	)		(7,681	)
Policy loans		(20,298	)		(59,996	)
Allowance for loan losses		103,601			263,941
Recoverable from reinsurers		(118,233	)		8,915
Accounts receivable		(82,478	)		(59,437	)
Other assets		(205,508	)		(586,070	)
Future policy benefits		1,490,101			1,031,247
Policy claims		90,176			58,524
Other policyholder funds		26,589			48,362
Other liabilities		66,524			(731,706	)

Net cash provided by (used in) operating activities		651,009			(79,555	)

Investing activities
Purchase of fixed maturity securities		(4,060,409	)		(2,083,832	)
Sales and maturity of fixed maturity securities		881,055			1,483,567
Purchase of equity securities		(42,500	)		(35,000	)
Purchase of mortgage loan		—			(110,000	)
Reduction in mortgage loans		193,673			40,319
Purchase of real estate		(117,873	)		(49,400	)
Sale of real estate		123,500			—
Purchase of other long term investments		(1,889,000	)		—
Payments on other long term investments		645,758			600,590
Loans made for premiums financed		(3,184,063	)		(8,615,093	)
Loans repaid for premiums financed		4,555,859			9,354,104
Purchases of furniture and equipment		(154,160	)		(78,122	)

Net cash provided by (used in) investing activities		(3,048,160	)		507,133

Financing activities
Policyholder account deposits		4,890,708			2,866,570
Policyholder account withdrawals		(1,374,149	)		(1,203,486	)
Proceeds from public stock offering		1,816,308			—

Net cash provided by financing activities		5,332,867			1,663,084


Increase in cash		2,935,716			2,090,662

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

Cash and cash equivalents, end of period	$	10,016,408		$	7,760,457

See notes to consolidated financial statements.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

1. Organization and Significant Accounting Policies

Nature of Operations

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

The offering will end on June 28, 2011, unless all the Company’s shares are sold before then or the offering is extended. As of September 30, 2010, the Company has received gross proceeds of $2,114,085 from the sale of 281,878 shares of its common stock in this offering and incurred $297,777 in offering costs. The proceeds were originally deposited in an escrow account that was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000 in gross proceeds. These proceeds are now available to the Company. Future proceeds from the sale of shares of the Company’s common stock in this public offering will be available to the Company without being held in escrow.

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 has two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma. FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums.

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

The Company’s operations, prior to the acquisition of FLAC, involved the sale of a modified premium whole life insurance policy with a flexible premium deferred annuity rider through its subsidiary Old TLIC in the state of Oklahoma. FTCC provides financing for casualty insurance premiums for individuals and companies and is licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. The Company owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company, that operates a property and casualty insurance agency. FTCC is the sole member of SIS.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the three months ended September 30, 2010 and 2009 and for the nine months ended September 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the year ended December 31, 2010 or for any other interim period or for any other future year.

Certain financial information which is normally included in 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, 2009.

Principles of Consolidation

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

Reclassifications

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

Use of Estimates

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

Investments

Fixed maturity securities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable deferred taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturity securities is adjusted for amortization of premium and accretion of discount to maturity. Interest income, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method.

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

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

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

If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortizes the reduced book value back to the security’s expected recovery value over the remaining term of the bond. The Company continues to review the security for further impairment that would prompt another write-down in the value.

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

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

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

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

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

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

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

Deferred Policy Acquisition Costs

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Deferred acquisition costs for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.

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

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

Loans from Premium Financing

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

Allowance for Loan Losses from Premium Financing

The allowance for possible loan losses from financing casualty insurance premiums is a reserve established through a provision for possible loan losses charged to expense which represents, in management’s judgment, the known and inherent credit losses existing in the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio and reduces the carrying value of the loans from premium financing to the estimated net realizable value on the statement of financial position.

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

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Property and Equipment

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

Reinsurance

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

Value of Insurance Business Acquired

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

Other Assets and Other Liabilities

Other assets consist primarily of agents’ balances, prepaid expenses and recoverable federal and state income taxes. Other liabilities consist primarily of accrued expenses and payables.

Policyholders’ Account Balances

The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.75% to 6.75%. Interest crediting rates for premium deposit funds range from 3% to 4%.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Future Policy Benefits

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

Policy Claims

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

Common Stock

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

Federal Income Taxes

The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined using tax bases. A valuation allowance is established for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits.

Revenues and Expenses

Revenues on traditional life insurance products consist of direct premiums reported as earned when due. Liabilities for future policy benefits are provided and acquisition costs are amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. Acquisition costs for traditional life insurance contracts are deferred to the extent deemed recoverable and are amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities. Traditional life insurance products are treated as long-duration contracts since they are ordinary whole life insurance products, which generally remain in force for the lifetime of the insured.

Deferred acquisition costs related to annuities 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 are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. These annuities are treated as long-duration insurance contracts since the Company is subject to risk from policyholder mortality and morbidity over an extended period.

Income from premium financing includes cancellation and late fees.

Net Income (Loss) per Common Share

Net income (loss) 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, 2010 and 2009 were 5,973,331 and 5,805,000, respectively. The weighted average outstanding and subscribed common shares basic and diluted for the nine months ended September 30, 2010 and 2009 were 5,861,110 and 5,805,000.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Accumulated Other Comprehensive Income

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

In addition, deferred acquisition costs related to limited-payment long-duration annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains and (losses) from available-for-sale securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income” in the shareholders’ equity section of the statement of financial position.

Subsequent Events

Management has evaluated all events subsequent to September 30, 2010 through the date that these financial statements have been issued.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). The new guidance requires entities to separately disclose information relative to transfers in and out of Levels 1 and 2 in the fair value hierarchy. In addition, ASU 2010-06 requires separate presentation of transfers in, transfers out, purchases, sales, issuances and settlements of Level 3 investments in the tabular reconciliation of Level 3 activity. ASU 2010-06 also clarifies the level of disaggregation for which fair value measurements should be disclosed and requires that information about input and valuation techniques be disclosed for Level 2 and Level 3 assets and liabilities. The Company adopted this guidance effective for the first quarter of 2010.

In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”). The new guidance requires that an insurance entity capitalize only the following as acquisition costs related directly to the successful acquisition of new or renewal insurance contracts:

Incremental direct costs of contract acquisition.

The portion of an employee’s total compensation and payroll-related fringe benefits related directly to acquisition activities for time spent performing underwriting, policy issuance, policy processing, medical, inspection and sales force contract selling for a contract that has actually been acquired.

Other cost related directly to the acquisition activities described in point 2 above that would not have been incurred by the insurance entity had the acquisition contract transaction not occurred.

Advertising cost that meet the capitalization criteria of Subtopic 340-20.

All other acquisition costs should be charged to expense as incurred. In addition, administrative costs, rent, depreciation, occupancy, equipment and all other general overhead costs are considered indirect costs and should be charged to expense as incurred. ASU 2010-26 is effective for interim and annual reporting periods beginning after December 15, 2011. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company will likely adopt ASU 2010-26 in first quarter 2012. The Company has assessed the guidance and has determined that it will not have a significant financial impact since the Company utilizes a dynamic model whereby deferred acquisition costs on the statement of financial position only include policies currently in force. This dynamic model results in immediate amortization of all deferred acquisition costs on the statement of operations where the policy is no longer in force.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

2. Investments

Investments in available-for sale fixed maturity and equity securities as of September 30, 2010 and December 31, 2009 are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2010	Cost		Gains		Losses		Value

Fixed maturity securities
U.S. government agency	$	1,921,126	$	43,997	$	—	$	1,965,123
Residential mortgage-backed securities		161,141		13,979		—		175,120
Corporate bonds		20,922,686		4,316,751		—		25,239,437
Foreign bonds		208,676		12,890		—		221,566

Total fixed maturity securities		23,213,629		4,387,617		—		27,601,246
Mutual funds		52,000		38,800		—		90,800
Corporate common stock		340,818		137,426		—		478,244

Total equity securities		392,818		176,226		—		569,044


Total fixed maturity and equity securities	$	23,606,447	$	4,563,843	$	—	$	28,170,290


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2009	Cost		Gains		Losses		Value

Fixed maturity securities
U.S. government agency	$	1,921,463	$	7,955	$	51,235	$	1,878,183
Residential mortgage-backed securities		182,835		22,403		—		205,238
Corporate bonds		17,668,199		2,796,431		37,391		20,427,239

Total fixed maturity securities		19,772,497		2,826,789		88,626		22,510,660
Mutual funds		52,000		28,150		—		80,150
Corporate common stock		298,318		70,016		—		368,334

Total equity securities		350,318		98,166		—		448,484


Total fixed maturity and equity securities	$	20,122,815	$	2,924,955	$	88,626	$	22,959,144

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(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 December 31, 2009 are summarized as follows:


	Less than 12 Months
			Unrealized		Number of
December 31, 2009	Fair Value		Loss		Securities

Fixed maturity securities
Less than 12 months
U.S. Government agency	$	1,676,246	$	51,235		6
Corporate bonds		742,087		37,391		5


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

As of December 31, 2009, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86%. As of September 30, 2010 and December 31, 2009, fixed maturity securities were 86% and 87% investment grade, respectively, as rated by Standard & Poor’s.

There were no fixed maturity securities in an unrealized loss position as of September 30, 2010.

There were no equity securities in an unrealized loss position as of September 30, 2010 and December 31, 2009.

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

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

2. Investments (continued)

Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the nine months ended September 30, 2010 and recorded two other-than-temporary impairments during the first nine months of 2009. The Company impaired its $200,000 par value General Motors (“GM”) bond as a result of a bankruptcy filing by GM. The Company impaired its approximate $710,000 par value investment in Cit Group (“CIT”) bonds as a result of a bankruptcy filing by CIT. These impairments were considered fully credit-related, resulting in a charge to the statement of operations before taxes of $155,923 for the nine months ended September 30, 2009. This charge represented the difference between the amortized cost basis of the securities and fair value.

Net unrealized gains 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, 2010 and December 31, 2009 are summarized as follows:


	September 30, 2010			December 31, 2009

Unrealized appreciation on available-for-sale securities	$	4,563,843		$	2,836,329
Adjustment to deferred acquisition cost		(4,607	)		(4,284	)
Deferred income taxes		(283,553	)		34,999


Net unrealized appreciation on available-for-sale securities	$	4,275,683		$	2,867,044

The amortized cost and fair value of fixed maturity available-for-sale securities as of September 30, 2010, by contractual maturity, are summarized as follows:


	Available-for-Sale
	Amortized Cost		Fair Value

Due in one year or less	$	722,551	$	776,014
Due in one year through five years		7,152,678		8,361,966
Due after five years through ten years		9,998,104		11,827,781
Due after ten years		5,179,155		6,460,365
Due at multiple maturity dates		161,141		175,120


	$	23,213,629	$	27,601,246

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

2. Investments (continued)

Proceeds and gross realized gains (losses) from the sales, calls and impairments of fixed maturity available-for-sale securities for the three and nine months ended September 30, 2010 and 2009 are summarized as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010			2009

Proceeds	$	505,198	$	359,215		$	881,055		$	1,483,567

Gross realized gains		—		3,670			49,112			3,670

Gross realized losses		—		(35,916	)		(437	)		(35,916	)

Other than temporary impairments		—		(146,644	)		—			(155,923	)

There were no proceeds or gross realized gains (losses) from the sales or impairments of equity securities available-for-sale for the three and nine months ended September 30, 2010 and 2009.

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, 2010 and 2009 and the amount of realized investment gains (losses) on fixed maturity and equity securities for the three and nine months ended September 30, 2010 and 2009 are summarized as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009

Change in unrealized investment gains
Available-for-sale securities

Fixed maturity securities	$	801,957	$	1,536,965		$	1,649,454	$	2,679,404

Equity securities		59,222		48,779			78,060		60,589

Realized investment gains (losses)

Fixed maturity securities		—		(178,890	)		48,675		(188,169	)

Equity securities		—		—			—		—

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

2. Investments (continued)

Major categories of net investment income for the three and nine months ended September 30, 2010 and 2009 are summarized as follows:


	Three Months Ended Sepember 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Fixed maturity securities	$	529,005		$	405,375		$	1,536,087		$	1,367,481
Equity securities		4,064			3,779			10,232			11,630
Mortgage loans		23,149			49,456			70,557			99,998
Real estate		83,218			60,428			261,236			181,611
Short-term and other investments		22,101			26,447			50,018			26,447


Gross investment income		661,537			545,485			1,928,130			1,687,167
Investment expenses		(64,697	)		(186,565	)		(272,407	)		(192,636	)


Net investment income	$	596,840		$	358,920		$	1,655,723		$	1,494,531

3. Fair Value Measurements

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

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

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

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

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

3. Fair Value Measurements (continued)

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

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 is summarized as follows:


September 30, 2010	Level 1		Level 2		Level 3		Total

Fixed maturity securities, available-for-sale
U.S. government agency	$	—	$	1,965,123	$	—	$	1,965,123
Residential mortgage-backed securities		—		175,120		—		175,120
Corporate bonds		—		25,239,437		—		25,239,437
Foreign bonds		—		221,566		—		221,566


Total fixed maturity securities	$	—	$	27,601,246	$	—	$	27,601,246


Equity securities, available-for-sale
Mutual funds	$	90,800	$	—	$	—	$	90,800
Corporate common stock		400,744		—		77,500		478,244


Total equity securities	$	491,544	$	—	$	77,500	$	569,044


December 31, 2009	Level 1		Level 2		Level 3		Total

Fixed maturity securities, available-for-sale
U.S. government agency	$	—	$	1,878,183	$	—	$	1,878,183
Residential mortgage-backed securities		—		205,238		—		205,238
Corporate bonds		—		20,427,239		—		20,427,239


Total fixed maturity securities	$	—	$	22,510,660	$	—	$	22,510,660


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


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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

3. Fair Value Measurements (continued)

At September 30, 2010 and December 31, 2009, 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 custodian bank. The custodian bank utilizes a third party pricing service to provide quoted prices in the market which use observable inputs in developing such rates.

The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the custodian bank and the third party pricing service prepare 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 the private placement common stock discussed above and 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. 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, 2010 is summarized as follows:


	Three Months Ended September 30, 2010		Nine Months Ended September 30, 2010

Beginning balance	$	35,000	$	35,000

Purchase		42,500		42,500


Ending balance	$	77,500	$	77,500

There were no transfers of securities between Level 1 and Level 2 during the three and nine months ended September 30, 2010 and 2009.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

3. Fair Value Measurements (continued)

The estimated fair values of financial instruments, as of September 30, 2010 and December 31, 2009 are summarized as follows:


	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Assets
Fixed maturity securities	$	27,601,246	$	27,601,246	$	22,510,660	$	22,510,660
Equity securities		569,044		569,044		448,484		448,484
Mortgage loans on real estate
Residential		—		—		110,000		110,000
Commercial		1,174,142		1,211,390		1,255,953		1,298,765
Policy loans		355,320		355,320		335,022		335,022
Other long-term investments		6,495,459		6,922,560		4,975,188		5,086,736
Cash and cash equivalents		10,118,681		10,118,681		7,080,692		7,080,692
Loans from premium financing		1,274,433		1,274,433		2,749,830		2,749,830

Liabilities
Policyholders' account balances	$	28,829,577		29,280,782	$	24,417,483		22,822,580
Policy claims		379,449		379,449		289,273		289,273

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

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

Fixed Maturity and Equity Securities

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

Mortgage Loans on Real Estate

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

Cash and Cash Equivalents and Policy loans

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

Other Long-Term Investments

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

3. Fair Value Measurements (continued)

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 $422,427 and $318,826 at September 30, 2010 and December 31, 2009, respectively.

Investment Contracts — Policyholders’ Account Balances

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

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

Policy Claims

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

4. Segment Data

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

The Company’s three operating segments for the three and nine months ended September 30, 2010 and 2009 are summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues:
Life and annuity insurance operations	$	2,030,789		$	1,623,620		$	6,124,085		$	5,612,353
Premium finance operations		66,813			175,832			281,426			491,270
Corporate operations		1,280			1			1,310			692


Total	$	2,098,882		$	1,799,453		$	6,406,821		$	6,104,315


Income (loss) before income taxes:
Life and annuity insurance operations	$	111,351		$	233,576		$	264,770		$	349,506
Premium finance operations		(114,556	)		12,224			(357,912	)		(160,667	)
Corporate operations		(111,263	)		(69,842	)		(342,229	)		(351,441	)


Total	$	(114,468	)	$	175,958		$	(435,371	)	$	(162,602	)

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(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, 2010 and 2009 is summarized as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009

Allowance at beginning of period	$	393,446	$	191,067		$	318,826	$	21,305
Additions charged to operations		28,981		(119,328	)		103,601		33,786
Direct write downs		—		213,507			—		230,155


Allowance at end of period	$	422,427	$	285,246		$	422,427	$	285,246

6. Federal Income Taxes

The provision (benefit) for federal income taxes is based on the estimated effective annual tax rate. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance has been established due to the uncertainty of loss carryforwards and unrealized investment losses.

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2007 through 2009 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.

7. Comprehensive Income

The components of comprehensive income, net of related federal income taxes and adjustments to deferred acquisition costs, for the three and nine months ended September 30, 2010 and 2009 are summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Net loss	$	(139,352	)	$	217,785		$	(494,540	)	$	(305,941	)

Total net unrealized gains arising during the period		671,479			1,090,195			1,457,314			2,004,406
Less: Net realized investment gains (losses)		—			(178,890	)		48,675			(188,169	)


Net unrealized gains		671,479			1,269,085			1,408,639			2,192,575


Total comprehensive income	$	532,127		$	1,486,870		$	914,099		$	1,886,634

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

8. Revolving Line of Credit

On April 30, 2009, FTCC renewed and modified its loan agreement with the First National Bank of Muskogee, to increase the revolving loan amount to $3,600,000. The loan bore interest on the outstanding principal amount for each interest period at a rate per annum equal to the sum of the J.P. Morgan Chase Prime Rate at all times in effect plus the Prime Rate Margin of .25 of one percent. The rate had a floor of no less than 5% at any time. FTFC was a guarantor on the loan. The loan matured May 31, 2010 and was not renewed at the election of FTFC. The maximum amount that was borrowed when the revolving loan was effective was $100,000.

9. Contingent Liabilities

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

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

Overview

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

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

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

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

Recent Acquisitions

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

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 our ability to compete in that sector, maintain low administrative costs and minimize losses.

Critical Accounting Policies and Estimates

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

Investments

Fixed maturity securities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturity securities is adjusted for amortization of premium and accretion of discount to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in net investment income under the effective yield method.

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

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

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future. Likewise, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the value.

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

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

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

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

Certificates of deposit are carried at cost. We limit our investment in certificates of deposit to accounts that are federally insured.

Deferred Policy Acquisition Costs

Commissions and other acquisition costs which vary with and are primarily related to the production of new business are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. Deferred acquisition costs for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.

Loans from Premium Financing

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

Allowance for Loan Losses from Premium Financing

The allowance for possible loan losses from financing casualty insurance premiums is a reserve established through a provision for possible loan losses charged to expense which represents, in management’s judgment, the known and inherent credit losses existing in the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio and reduces the carrying value of loans from premium financing to the estimated net realizable value on the statement of financial position.

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

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

Value of Insurance Business Acquired

As a result of our purchase of FLAC, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force. The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under Financial Accounting Standards Board (“FASB”) guidance. The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. For the amortization of the value of acquired insurance in force, we periodically review our estimates of gross profits. The most significant assumptions involved in the estimation of gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, mortality, morbidity, expenses and the impact of realized investment gains and losses.

In the event actual experience differs significantly from assumptions or assumptions are significantly revised, we are required to record a charge or credit to amortization expense for the period in which an adjustment is made.

Policyholders’ Account Balances

Our liability for policyholders’ account balances represents the contract values that have accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.75% to 6.75%. Interest crediting rates for premium deposit funds range from 3% to 4%.

Future Policy Benefits

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

Federal Income Taxes

We use the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined using tax bases. A valuation allowance is established for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits.

Recent Accounting Pronouncements

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

Incremental direct costs of contract acquisition.

Other cost related directly to the acquisition activities described in point 2 above that would not have been incurred by the insurance entity had the acquisition contract transaction not occurred.

Advertising cost that meet the capitalization criteria of Subtopic 340-20.

All other acquisition costs should be charged to expense as incurred. In addition, administrative costs, rent, depreciation, occupancy, equipment and all other general overhead costs are considered indirect costs and should be charged to expense as incurred. ASU 2010-26 is effective for interim and annual reporting periods beginning after December 15, 2011. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. We will likely adopt ASU 2010-26 in first quarter 2012. We have assessed the guidance and have determined that it will not have a significant financial impact since we utilize a dynamic model whereby deferred acquisition costs on the statement of financial position only include policies currently in force. This dynamic model results in immediate amortization of all deferred acquisition costs on the statement of operations where the policy is no longer in force.

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:

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

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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 Note 4 to the Consolidated Financial Statements for additional information regarding segment information.

Results of Operations

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

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

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

Comparison — Three Months Ended September 30, 2010 and 2009

Revenues

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

Total Revenues

Total consolidated revenues increased 16.6% to $2,098,882 for the three months ended September 30, 2010, an increase of $299,429 from $1,799,453 for the three months ended September 30, 2009. The increase is primarily attributable to a $237,920 increase in net investment income, a $178,890 decrease in net realized investment losses and a $104,753 decrease in income from premium financing.

The increase in net investment income primarily relates to increased total investments in the consolidated statement of financial position. The decrease in net realized investment losses primarily relates to the impairments recognized in 2009. The decrease in income from premium financing relates to a decrease in 2010 production of loan agreements and the fraudulent transactions in 2009 by an independent insurance agency.

Premiums

Premiums decreased slightly to $1,434,189 for the three months ended September 30, 2010, a decrease of $6,465 from $1,440,654 for the three months ended September 30, 2009. The results are comparable between periods.

Income from Premium Financing

Income from premium financing decreased 61.7% to $65,132 for the three months ended September 30, 2010, a decrease of $104,753 from $169,885 for the three months ended September 30, 2009. The decrease in income from premium financing relates to a decrease in production of loan agreements and fraudulent transactions in 2009 by an independent insurance agency.

Net Investment Income

Net investment income increased 66.3% to $596,840 for the three months ended September 30, 2010, an increase of $237,920 from $358,920 for the three months ended September 30, 2009. The increase primarily relates to increased total investments in the consolidated statement of financial position from September 30, 2009 to September 30, 2010.

Net Realized Investment Losses

There were no net realized investment losses for the three months ended September 30, 2010 and $178,890 for the three months ended September 30, 2009. We recognized $32,246 of realized losses on sales of investments and recorded one other-than-temporary impairment during the third quarter of 2009. The Company impaired its approximate $710,000 par value investment in Cit Group (“CIT”) bonds as a result of a bankruptcy filing by CIT. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before taxes of $146,644 for the three months ended September 30, 2009. This charge represented the difference between the amortized cost basis of the securities and fair value.

Other Income

Other income of $2,721 for the three months ended September 30, 2010 and $8,884 for the three months ended September 30, 2009 is primarily related to service fee income.

Total Benefits, Claims and Expenses

Our benefits, claims and expenses are primarily generated from benefit payments, change in reserves, commissions and operating expenses. Benefit payments can significantly impact expenses from period to period.

Total consolidated benefits, claims and expenses increased 36.3% to $2,213,350 for the three months ended September 30, 2010, an increase of $589,855 from $1,623,495 for the three months ended September 30, 2009. The increase is primarily attributable to a $539,870 increase in benefits and claims.

Benefits and Claims

Benefits and claims increased 75.9% to $1,251,444 for the three months ended September 30, 2010, an increase of $539,870 from $711,574 for the three months ended September 30, 2009. The increase is primarily due to a $364,788 increase in the change in reserves as the policies age, a $144,809 increase in death claims due to increased mortality and a $44,467 increase in the interest credited on annuities related to increased deposits. These increases are partially offset by a $14,194 decline in surrenders related to improved persistency.

Deferral and Amortization of Deferred Acquisition Costs

Certain costs related to the acquisition of life insurance policies are capitalized and amortized over the premium-paying period of the policies. These costs, which are referred to as deferred policy acquisition costs, include commissions and other costs of acquiring life insurance, which vary with, and are primarily related to, the production of new insurance contracts. These capitalized acquisition costs are amortized in a systematic manner based on the related contract revenues or gross profits as appropriate.

For the three months ended September 30, 2010 and 2009, capitalized costs were $364,826 and $281,727, respectively. Amortization of deferred policy acquisition costs for the three months ended September 30, 2010 and 2009 was $85,251 and $31,923, respectively. The $83,099 increase in the acquisition costs deferred relates to increased new business production primarily in the final expense product. The $53,328 increase in the amortization of deferred acquisition costs primarily relates to the growing final expense deferred acquisition costs. As the number of final expense policies in force increases, there are more costs to amortize over the premium paying period of the policy.

Amortization of Value of Insurance Business Acquired

The cost of acquiring insurance business is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of value of insurance business acquired increased 7.0% to $71,953 for the three months ended September 30, 2010 from $67,239 for the three months ended September 30, 2009, an increase of $4,714. The slight increase in the amortization of value of insurance business acquired of $4,714 is comparable with the decreasing emerging profits as the number of acquired policies in force gradually lapse and terminate.

Commissions

Commissions increased 5.6% to $384,979 for the three months ended September 30, 2010, an increase of $20,427 compared to $364,552 of commissions for the three months ended September 30, 2009. The increase is due to increased new business production of final expense business.

Other Underwriting, Insurance and Acquisition Expenses

Other underwriting, insurance and acquisition expenses increased 7.5% to $784,549 for the three months ended September 30, 2010, an increase of $54,615 compared to $729,934 for the three months ended September 30, 2009. The increase is primarily due to an increase in underwriting and new business issuance costs related to increased new production of final expense business.

Federal Income Taxes

FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC. TLIC is taxed as a life insurance company under the provisions of the Internal Revenue Code and must file a separate tax return until they have been a member of the consolidated filing group for five years. Certain items included in income reported for financial statements are not included in taxable income for the current period, resulting in deferred income taxes. For the three months ended September 30, 2010, the deferred income tax expense was $24,884 with no current income tax expense and for the three months ended September 30, 2009 the deferred income tax benefit was $15,700 and current income tax benefit was $26,127. The 2009 third quarter current tax benefit was the reversal of the current tax expense recorded in second quarter 2009. This was recorded in 2009 when we recognized that the net operating loss carryforwards would exceed any current taxable income.

Net Income (Loss) and Net Income (Loss) per Common Share Basic and Diluted

For the three months ended September 30, 2010 there were net losses of $139,352 compared to net income of $217,785 for the three months ended September 30, 2009. The net income (loss) per common share basic and diluted for the three months ended September 30, 2010 and 2009 was $(0.02) and $0.04, respectively, based upon 5,973,331 and 5,805,000 weighted average common shares basic and diluted outstanding and subscribed for the three months ended September 30, 2010 and 2009, respectively.

Business Segments

Life and Annuity Insurance Operations

Revenues from Life and Annuity Insurance Operations increased 25.1% to $2,030,789 for the three months ended September 30, 2010, an increase of $407,169 from $1,623,620 for the three months ended September 30, 2009. The increase in revenue between third quarter 2010 and 2009 primarily relates to increased investment income and decreased realized and impairment losses.

The income before income taxes from Life and Annuity Insurance Operations was $111,351 and $233,576 for the three months ended September 30, 2010 and 2009, respectively. The $122,225 decreased income between third quarter 2010 and 2009 is primarily due to increased change in reserves and increased interest credited on annuity products that exceeded increased investment income and decreased realized and impairment losses.

Premium Finance Operations

Revenues from Premium Financing Operations decreased 62.0% to $66,813 for the three months ended September 30, 2010, a decrease of $109,019 from $175,832 for the three months ended September 30, 2009. The decrease in revenues from premium financing relates to a decrease in production of loan agreements and fraudulent transactions in 2009 by an independent insurance agency.

The loss before income taxes from Premium Finance Operations was $(114,556) for the three months ended September 30, 2010 and $12,224 of income before income taxes for the three months ended September 30, 2009. The $126,780 negative variance is primarily attributable to a decrease in production of loan agreements with no corresponding decrease in the costs associated with Premium Finance Operations.

Corporate Operations

Revenues from corporate operations were $1,280 and $1 for the three months ended September 30, 2010 and 2009, respectively. This $1,279 increase is primarily due to an increase in net investment income.

The loss before income taxes from Corporate Operations was $(111,263) and $(69,842) for the three months ended September 30, 2010 and 2009, respectively. The $41,421 increased loss is primarily attributable to an increase in professional fees and employee health benefits.

Comparison — Nine Months Ended September 30, 2010 and 2009

Revenues

Total Revenues

Total consolidated revenues increased 5.0% to $6,406,821 for the nine months ended September 30, 2010, an increase of $302,506 from $6,104,315 for the nine months ended September 30, 2009. The increase is primarily attributable to a $236,844 increase in net realized gains in excess of losses, $161,192 increase in net investment income, $115,006 increase in premiums and $16,151 increase in other income that exceeded a $226,687 decline in income from premium financing.

The increased realized gains in excess of losses represent the recording of impairments during the first nine months of 2009 and the differences in investment sales activity during the nine months ended September 30, 2009. The increased investment income primarily relates to increased total investments in the consolidated statement of financial position. The increase in premiums relates to increased new business production of final expense business and increased renewal premiums. The other income increase is primarily due to the sale of a fixed asset. The decrease in income from premium financing relates to a decrease in production and fraudulent transactions in 2009 by an independent insurance agency.

Premiums

Premiums increased 2.7% to $4,418,752 for the nine months ended September 30, 2010, an increase of $115,006 from $4,303,746 for the nine months ended September 30, 2009. The increase relates to increased new business production of final expense business and increased renewal premiums.

Income from Premium Financing

Income from premium financing decreased 46.7% to $258,636 for the nine months ended September 30, 2010, a decrease of $226,687 from $485,323 for the nine months ended September 30, 2009. The decrease in income from premium financing relates to a decrease in production of loan agreements and fraudulent transactions in 2009 by an independent insurance agency.

Net Investment Income

Net investment income increased 10.8% to $1,655,723 for the nine months ended September 30, 2010, an increase of $161,192 from $1,494,531 for the nine months ended September 30, 2009. The increase in net investment income primarily relates to increased total investments in the consolidated statement of financial position. However, as investments are called or matured, the proceeds are being invested at lower effective interest rates that continue to decrease yields.

Net Realized Investment Gains (Losses)

Net realized investment gains were $48,675 for the nine months ended September 30, 2010 and net realized losses of $188,169 for the nine months ended September 30, 2009. The increased gains in excess of losses represent the results of investment call activity during the first nine months of 2010 and 2009 and losses from investment impairments during the first nine months of 2009. We recorded $48,675 of realized gains during the first nine months of 2010 compared to net realized losses of $32,246 during the first nine months of 2009. We recorded two other-than-temporary impairments during the first nine months of 2009. The Company impaired its $200,000 par value General Motors (“GM”) bond as a result of a bankruptcy filing by GM and approximately $710,000 par value investment in Cit Group (“CIT”) bonds as a result of a bankruptcy filing by CIT. Both of these impairments were considered fully credit-related, resulting in a charge to the statement of operations before taxes of $155,923 for the nine months ended September 30, 2009. This charge represented the difference between the amortized cost basis of the securities and fair value.

Other Income

Other income of $25,035 for the nine months ended September 30, 2010 is primarily related to the approximate $17,000 gain on the sale of a fixed asset. Other income was $8,884 for the nine month ended September 30, 2009.

Total Benefits, Claims and Expenses

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

Total consolidated benefits, claims and expenses increased 9.2% to $6,842,192 for the nine months ended September 30, 2010, an increase of $575,275 from $6,266,917 for the nine months ended September 30, 2009. The increase is primarily attributable to a $737,155 increase in benefits and claims and a $216,132 increase in commissions that exceeded a $234,090 decrease in other underwriting, insurance and acquisition expenses and a $143,922 increase in net deferred acquisitions costs capitalized net of the amortization of deferred acquisition costs and the amortization of value of business acquired.

Benefits and Claims

Benefits and claims increased 24.9% to $3,702,816 for the nine months ended September 30, 2010, an increase of $737,155 from $2,965,661 for the nine months ended September 30, 2009. The increase is primarily due to a $449,551 increase in the change in reserves as the policies age, an $182,458 increase in death claims due to increased mortality and a $125,342 increase in the interest credited on annuities related to increased deposits. These increases are partially offset by a $20,196 decline in surrenders related to improved persistency.

Deferral and Amortization of Deferred Acquisition Costs

For the nine months ended September 30, 2010 and 2009, capitalized costs were $1,209,827 and $857,883, respectively. Amortization of deferred policy acquisition costs for the nine months ended September 30, 2010 and 2009 was $379,340 and $179,834, respectively. The $351,944 increase in the acquisition costs deferred relates to increased new business production primarily in the final expense business. The $199,506 increase in the amortization of deferred acquisition costs primarily relates to the growing final expense deferred acquisition costs. As the number of final expense policies in force increases, there are more costs to amortize over the premium paying period of the policy.

Amortization of Value of Insurance Business Acquired

The cost of acquiring insurance business is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $210,234 and $201,718 for the nine months ended September 30, 2010 and 2009, respectively. The slight increase in the amortization of value of insurance business acquired of $8,516 is comparable with the decreasing emerging profits as the number of acquired policies in force gradually lapse and terminate.

Commissions

Commissions increased 21.0% to $1,247,511 for the nine months ended September 30, 2010, an increase of $216,132 compared to $1,031,379 of commissions for the nine months ended September 30, 2009. The increase is due to increased new business production of final expense business.

Other Underwriting, Insurance and Acquisition Expenses

Other underwriting, insurance and acquisition expenses decreased 8.5% to $2,512,118 for the nine months ended September 30, 2010, a decrease of $234,090, compared to $2,746,208 for the nine months ended September 30, 2009. The decrease is primarily due to a decrease in loan losses and other operating expenses in the premium finance operations. In addition, in December 2009 there was a statement of financial position reclassification of the building from property and equipment to investment real estate. The expenses related to owning and administering the building are now recorded as investment expenses instead of being recorded as insurance expenses. Through 2009, the building served as the home office of FLAC.

Federal Income Taxes

For the nine months ended September 30, 2010, deferred income tax expense was $59,169 with no current income tax expense and for the nine months ended September 30, 2009 deferred income tax expense was $143,339 with no current income tax expense.

Net Loss and Net Loss per common share basic and diluted

For the nine months ended September 30, 2010 and 2009 there were net losses of $494,540 and $305,941, respectively. The net loss per common share basic and diluted for the nine months ended September 30, 2010 and 2009 was $0.08 and $0.05, respectively, based upon 5,861,110 and 5,805,000 weighted average common shares basic and diluted outstanding and subscribed for the nine months ended September 30, 2010 and 2009, respectively.

Business Segments

Life and Annuity Insurance Operations

Revenues from Life and Annuity Insurance Operations increased 9.1% to $6,124,085 for the nine months ended September 30, 2010, an increase of $511,732 from $5,612,353 for the nine months ended September 30, 2009. The increase in revenue between the first nine months of 2010 and 2009 primarily relates to increased investment income, decreased realized and impairment losses and increased new business production of final expense business and increased renewal premiums.

The income before income taxes from Life and Annuity Insurance Operations was $264,770 and $349,506 for the nine months ended September 30, 2010 and 2009, respectively. The $84,736 decreased income for the first nine months of 2010 compared to 2009 is primarily due to increased benefits, claims and expenses in excess of increased premiums, increased net investment income and increased net gains in excess of net investment losses.

Premium Finance Operations

Revenues from Premium Financing Operations decreased 42.7% to $281,426 for the nine months ended September 30, 2010, a decrease of $209,844 from $491,270 for the nine months ended September 30, 2009. The decrease in revenues from premium financing relates to a decrease in production of loan agreements and fraudulent transactions in 2009 by an independent insurance agency.

The loss before income taxes from Premium Finance Operations was $357,912 and $160,667 for the nine months ended September 30, 2010 and 2009, respectively. The $197,245 increased loss is primarily attributable to an increase in allowance for loan losses that occurred in first quarter 2010 and a decrease in production of loan agreements with no corresponding decrease in the costs associated with Premium Finance Operations.

Corporate Operations

Revenues from corporate operations were $1,310 and $692 for the nine months ended September 30, 2010 and 2009, respectively. This $618 increase is primarily due to an increase in net investment income.

The loss before income taxes from Corporate Operations was $342,229 and $351,441 for the nine months ended September 30, 2010 and 2009, respectively.

Consolidated Financial Condition

As of September 30, 2010, our available-for-sale fixed maturity securities had a fair value of $27,601,246 and amortized cost of $23,213,629 compared to a fair value of $22,510,660 and an amortized cost of $19,772,497 as of December, 31, 2009. 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 fixed maturity securities portfolio is invested in a variety of companies and U. S. Government sponsored agency securities.

As of September 30, 2010, our available-for-sale equity securities had a fair value of $569,044 compared to a fair value of $448,484 as of December 31, 2009. The cost of the equity securities were $392,818 and $350,318 as of September 30, 2010 and December 31, 2009, respectively. This portfolio is reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected within “Accumulated Other Comprehensive Income.” The equity securities portfolio is invested in a variety of companies.

As of September 30, 2010, we held the following additional invested assets: mortgage loans on real estate of $1,174,142; investment real estate of $3,093,517; policy loans of $355,320 and other long-term investments of $6,495,459. As of December 31, 2009, we held the following additional invested assets: mortgage loans on real estate of $1,365,953; investment real estate of $3,146,944; policy loans of $335,022 and other long-term investments of $4,975,188. In December 2009 there was a statement of financial position reclassification of the building from property and equipment to investment real estate. The other long-term investments are comprised of lottery prize receivables.

Total investments were $39,288,728 and $32,782,251 as of September 30, 2010 and December 31, 2009, respectively.

As of September 30, 2010 and December 31, 2009, the Company held loans from premium financing of $1,274,433 and $2,749,830, respectively. The loan balances as of September 30, 2010 and December 31, 2009 are net of unearned interest of $35,850 and $72,144, respectively, and allowance for loan losses as of September 30, 2010 and December 31, 2009 of $422,427 and $318,826, respectively.

The progression of the Company’s loans from premium financing for the nine months ended September 30, 2010 and for the year ended December 31, 2009 is summarized as follows:


	September 30, 2010			December 31, 2009

Balance, beginning of year	$	3,140,800		$	4,848,845
Loans financed		3,030,839			9,313,585
Unearned interest added to loans		153,224			493,647
Capitalized fees and interest reversed		(61,532	)		(53,176	)
Payment of loans and unearned interest		(4,530,621	)		(11,462,101	)

Ending loan balance including unearned interest		1,732,710			3,140,800
Unearned interest included in ending loan balances		(35,850	)		(72,144	)

Loan balance net of unearned interest		1,696,860			3,068,656
Less allowance for loan loss		(422,427	)		(318,826	)

Loan balance net of unearned interest and allowance for loan losses at the end of the year	$	1,274,433		$	2,749,830

Deferred policy acquisition costs were $2,749,157 and $1,918,994 as of September 30, 2010 and December 31, 2009, respectively. Policy acquisition expenses related to new insurance sales were capitalized in the amount of $1,209,827 and $857,883 for the nine months ended September 30, 2010 and 2009, respectively. Amortization of deferred acquisition costs for the nine months ended September 30, 2010 and 2009 was $379,340 and $179,834, respectively.

The value of insurance business acquired was $2,568,489 and $2,778,723 as of September 30, 2010 and December 31, 2009, respectively. Amortization of value of insurance business acquired for the nine months ended September 30, 2010 and 2009 was $210,234 and $201,718, respectively.

Total policy liabilities as of September 30, 2010 and December 31, 2009 were $42,094,297 and $36,075,337, respectively. Approximately 99% of the 2010 and 2009 total consists of policyholders’ account balances and future policy benefit liabilities. Total liabilities as of September 30, 2010 and December 31, 2009 were $43,030,216 and $36,566,153, respectively.

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through September 30, 2010, we have received approximately $17,589,000 from the sale of our shares. Our operations have not been profitable and have generated more than $3,975,000 of operating losses since we were incorporated in 2004.

At September 30, 2010, we had cash and cash equivalents totaling $10,016,408. The majority of our excess funds have been invested in money market mutual funds. As of September 30, 2010, cash and cash equivalents of $6,520,440 of the total $10,016,408 are held by TLIC and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department of certain dividend or intercompany transactions to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is no capacity to pay a dividend in 2010 without prior approval. There were no dividends paid or a return of capital to the parent company in 2009 or so far in 2010.

Our cash balances at our primary depositories were significantly in excess of Federal Deposit Insurance Corporation coverage at September 30, 2010 and December 31, 2009. Management monitors the solvency of all financial institutions in which we have funds to minimize the exposure for loss. Management does not believe we are at significant risk for such a loss.

During the nine months ended September 30, 2010 and 2009, cash and cash equivalents increased $2,935,716 and $2,090,662, respectively. Our operating activities for the nine months ended September 30, 2010 provided $651,009 of cash compared to $79,555 of cash used in operations during the nine months ended September 30, 2009. The increase in cash provided by operations in 2010 can be primarily attributed to the increase in policy acquisition costs net of amortization and future policy benefits. Cash used in investing activities for the nine months ended September 30, 2010 was $3,048,160 and cash provided by investing activities was $507,133 for the nine months ended September 30, 2009. Net cash provided by financing activities for the nine months ended September 30, 2010 and 2009 was $5,332,867 and $1,663,084, respectively. The increase resulted from a net increase in policy deposits for the nine months ended September 30, 2010 and 2009 and net proceeds from the stock offering for the nine months ended September 30, 2010.

Shareholders’ equity at September 30, 2010 was $15,981,097 compared to $13,250,690 at December 31, 2009. The increase is due to an increase in fair value of fixed maturity and equity security investments, available-for-sale net of applicable income taxes and proceeds from the stock offering of $2,114,085 less $297,777 of offering costs. Equity per common share outstanding and subscribed increased 15.4% to $2.63 as of September 30, 2010 compared to $2.28 per share at December 31, 2009, based upon 6,086,878 common shares outstanding and subscribed as of September 30, 2010 and 5,805,000 outstanding common shares as of December 31, 2009.

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

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 insurance products. Our investment portfolio recovered from the disruptions in the capital markets and had net unrealized gains of $4,275,683 as of September 30, 2010 and $2,867,044 as of December 31, 2009.

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

On March 12, 2009, we entered into a senior revolving loan with a bank to loan up to $3,000,000 to provide working capital and funds for expansion. The loan was renewed on April 30, 2009 and modified to increase the revolving loan amount to $3,600,000. The loan agreement terminated on May 31, 2010 and was not renewed at our election. On July 21, 2009, FTCC borrowed $100,000 under the loan agreement and repaid $99,999 on November 4, 2009. The remaining $1 was repaid on May 31, 2010.

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 public offering is for 1,333,334 shares of the Company’s common stock for $7.50 per share. The Company will receive $8.5 million after reduction for offering expenses and sales commissions if all the shares are sold. The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions if any occur. The sale of all the additional shares would provide the Company with an additional $850,000 after reduction for offering expenses and sales commissions. The offering will end on June 28, 2011, unless all the Company’s shares are sold before then or the offering is extended. As of September 30, 2010, the Company has received gross proceeds of $2,114,085 from the sale of 281,878 shares of its common stock in this offering and incurred $297,777 in offering costs. The proceeds were originally deposited in an escrow account that was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000 in gross proceeds. These proceeds are now available to the Company. Future proceeds from the sale of shares of the Company’s common stock in this public offering will be available to the Company without being held in escrow.

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

We believe that our existing cash and cash equivalents at September 30, 2010 will be sufficient to fund our anticipated operating expenses. Loans outstanding from premium financing declined during 2009 and have continued to decline during the nine months ended September 30, 2010 as we have decreased production of premium financing contracts. The growth of the premium finance subsidiary is uncertain and will require additional capital if it grows. Funds will not be available to continue the expansion of the Company’s subsidiaries without borrowing funds or raising additional capital. As introduced above, we have begun a public offering to generate additional funding. We intend to use the proceeds to finance future acquisitions of life insurance companies or blocks of life insurance business, provide up to $2.0 million of capital and/or surplus to TLIC as needed to maintain adequate capital and increase working capital. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect.

Forward Looking Information

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

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

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes to Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Statements of Financial Position as of September 30, 2010 (Unaudited) and December 31, 2009		3

Consolidated Statements of Operations for the three months ended September 30, 2010 and 2009 (Unaudited)		4

Consolidated Statements of Operations for the nine months ended September 30, 2010 and 2009 (Unaudited)		5

Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (Unaudited)		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 4T. Controls and Procedures		39

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		40

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

Item 3. Defaults upon Senior Securities		40

Item 4. (Removed and Reserved)		40

Item 5. Other Information		40

Signatures		41


	FIRST TRINITY FINANCIAL CORPORATION
	an Oklahoma corporation

November 12, 2010	By:	/s/ Gregg E. Zahn Gregg E. Zahn, President and Chief Executive Officer

November 12, 2010	By:	/s/ Jeffrey J. Wood Jeffrey J. Wood, Chief Financial Officer and Chief Accounting Officer