##### Table of Contents



United States
Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the securities
exchange act of 1934
 For the quarterly period ended June 30, 2008
 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
  Oklahoma
    
    34-1991436(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Number)
 7633 East 63rd Place, Suite 230
    
    Tulsa, Oklahoma
    
    74133
  (Issuers telephone number)
 þ o
  Large accelerated filer: o
    
    Accelerated filer: o
    
    Non-accelerated filer: o
    
    Smaller reporting company: þ
 o þ
 5,805,000
shares




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##### 



INDEX TO FORM 10-Q
 Page NumberPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at
June 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations
for the three months ended June 30, 2008 and 2007 (Unaudited) and
for the six months ended June 30, 2008 and 2007 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2008 and 2007 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    10Item 4T. Controls and Procedures
    
    
    17Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18Signatures
    
    
    19Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



Item 1. Financial Statements
  
  June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsInvestmentsAvailable-for-sale fixed maturities at fair value
(amortized cost: $626,436 and $627,167 at June 30, 2008 and
December 31, 2007, respectively)
    
    $
    629,859
    
    
    $
    628,570Total investments
    
    
    629,859
    
    
    
    628,570Cash and cash equivalents
    
    
    7,912,444
    
    
    
    9,021,411Accrued investment income
    
    
    5,808
    
    
    
    7,776Premiums receivable
    
    
    48,743
    
    
    
    17,508Advances to agents
    
    
    24,011
    
    
    
    10,720Reinsurance recoverable
    
    
    17,392
    
    
    
    12,020Deferred policy acquisition costs
    
    
    680,286
    
    
    
    459,515Office furniture and equipment
(net of accumulated depreciation: $23,478 and $18,349
at June 30, 2008 and December 31, 2007, respectively)
    
    
    56,870
    
    
    
    55,229Loans from premium financing
    
    
    3,447,445
    
    
    
    2,298,835Other assets
    
    
    6,812
    
    
    
    16,654Total assets
    
    $
    12,829,670
    
    
    $
    12,528,238Liabilities and Shareholders EquityPolicy liabilitiesBenefit reserves
    
    $
    898,985
    
    
    $
    533,048Liability for deposit type contracts
    
    
    191,887
    
    
    
    Policy claims
    
    
    33,903
    
    
    
    19,010Advance premiums
    
    
    550
    
    
    
    Deposits on pending policy applications
    
    
    145,846
    
    
    
    69,848Total policy liabilities
    
    
    1,271,171
    
    
    
    621,906Federal income tax deferred
    
    
    1,164
    
    
    
    1,309Accrued expenses and other liabilities
    
    
    73,798
    
    
    
    125,208Total liabilities
    
    
    1,346,133
    
    
    
    748,423Shareholders equityCommon stock, par value $.01 per share
8,000,000 shares authorized, 5,805,000 issued and
outstanding at June 30, 2008 and December 31, 2007
    
    
    58,050
    
    
    
    58,050Additional paid-in capital
    
    
    13,806,503
    
    
    
    13,806,503Accumulated other comprehensive income
    
    
    2,259
    
    
    
    926Accumulated deficit
    
    
    (2,383,275
    )
    
    
    (2,085,664
    )Total shareholders equity
    
    
    11,483,537
    
    
    
    11,779,815Total liabilities and shareholders equity
    
    $
    12,829,670
    
    
    $
    12,528,238
 See notes to consolidated financial statements.
  3




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesPremium income
    
    $
    456,894
    
    
    $
    332,758
    
    
    $
    791,833
    
    
    $
    332,758Income from premium financing
    
    
    107,983
    
    
    
    37,865
    
    
    
    193,888
    
    
    
    49,454Net investment income
    
    
    42,742
    
    
    
    130,002
    
    
    
    113,857
    
    
    
    262,219Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Total revenues
    
    
    607,619
    
    
    
    500,625
    
    
    
    1,099,578
    
    
    
    647,431ExpensesDeath benefits
    
    
    4,661
    
    
    
    56,951
    
    
    
    8,315
    
    
    
    56,951Increase in benefit reserves
    
    
    167,850
    
    
    
    188,693
    
    
    
    367,143
    
    
    
    188,693Acquisition costs deferred
    
    
    (146,241
    )
    
    
    (209,096
    )
    
    
    (273,852
    )
    
    
    (209,096
    )Amortization of deferred acquisition costs
    
    
    41,316
    
    
    
    52,641
    
    
    
    53,081
    
    
    
    52,641Interest credited on deposit type funds
    
    
    1,797
    
    
    
    
    
    
    
    2,738
    
    
    
    Commissions
    
    
    166,149
    
    
    
    185,389
    
    
    
    308,931
    
    
    
    185,389Loan fees
    
    
    14,599
    
    
    
    
    
    
    
    31,811
    
    
    
    Employee wages and benefits
    
    
    226,763
    
    
    
    158,675
    
    
    
    440,488
    
    
    
    380,112Third party administration fees
    
    
    40,800
    
    
    
    30,000
    
    
    
    88,025
    
    
    
    50,000Other insurance and administrative expenses
    
    
    225,036
    
    
    
    172,040
    
    
    
    371,341
    
    
    
    256,535Total expenses
    
    
    742,730
    
    
    
    635,293
    
    
    
    1,398,021
    
    
    
    961,225Loss before federal income taxes
    
    
    (135,111
    )
    
    
    (134,668
    )
    
    
    (298,443
    )
    
    
    (313,794
    )Provision for federal income taxesDeferred
    
    
    
    
    
    
    
    
    
    
    (832
    )
    
    
    Net loss
    
    $
    (135,111
    )
    
    $
    (134,668
    )
    
    $
    (297,611
    )
    
    $
    (313,794
    )Net loss per common share basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
 See notes to consolidated financial statements.
  4




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##### Table of Contents



Six Months EndedJune 30,2008
    
    
    2007Net cash used in operating activities
    
    $
    (142,670
    )
    
    $
    (141,500
    )Investing activitiesLoans for premiums financed
    
    
    (1,148,610
    )
    
    
    (1,468,108
    )Purchases of furniture and equipment
    
    
    (6,769
    )
    
    
    (8,095
    )Net cash used in investing activities
    
    
    (1,155,379
    )
    
    
    (1,476,203
    )Financing activitiesProceeds from public stock offering
    
    
    
    
    
    
    1,495,480Cost of stock offering
    
    
    
    
    
    
    (184,877
    )Deposit type contracts, net
    
    
    189,082
    
    
    
    Net cash provided by financing activities
    
    
    189,082
    
    
    
    1,310,603Decrease in cash
    
    
    (1,108,967
    )
    
    
    (307,100
    )Cash and cash equivalents, beginning of period
    
    
    9,021,411
    
    
    
    10,677,554Cash and cash equivalents, end of period
    
    $
    7,912,444
    
    
    $
    10,370,454
 See notes to consolidated financial statements.
  5




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##### Table of Contents



1.
    
    Organization and Accounting PoliciesNature of OperationsFirst 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 intra-state 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 Company has two wholly owned subsidiaries domiciled in Oklahoma, First Trinity Capital
Corporation (FTCC) and Trinity Life Insurance Company (TLIC). FTCC was incorporated on
March 9, 2006 and began operations in January 2007. FTCC provides financing for casualty
insurance premiums and is licensed in the states of Alabama, Arkansas, Louisiana, Mississippi
and Oklahoma. TLIC was incorporated on June 22, 2006 and commenced the sale of life insurance
in March 2007. TLIC was formed to be a life insurance company and operates in the state of
Oklahoma.Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of
regulation S-X. Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America (GAAP) for
complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the results for the
interim periods have been included. The results of operations for the three and six months
ended June 30, 2008 are not necessarily indicative of the results to be expected for the year
ended December 31, 2008 or for any other interim period or for any other future year.Certain financial information which is normally included in financial statements prepared in
accordance with GAAP, but which is not required for interim reporting purposes, has been
condensed or omitted. The accompanying condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in the Companys
report on Form 10-KSB and amendment thereto for the fiscal year ended December 31, 2007.Principles of ConsolidationThe accompanying condensed consolidated financial statements include the accounts and
operations of the Company, FTCC and TLIC. All intercompany accounts and transactions are
eliminated in consolidation.ReclassificationsCertain 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 EstimatesThe preparation of financial statements in conformity with GAAP requires management to make
estimates and
assumptions that affect the amounts reported in the financial statements and accompanying
notes. Although these estimates are based on managements knowledge of current events and
actions it may undertake in the future, they may ultimately differ from actual results.
  6




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##### Table of Contents



2.
    
    Earnings per ShareNet loss per common share is calculated using the weighted average number of common shares
outstanding during the year. Shares sold during the public stock offering were treated as
outstanding and used in the computation of earnings per share, although certificates for the
 shares were not issued until after the offering was complete in February 2007. There were no
contingencies after October 2005 that prevented the shares from being issued. All shares sold
during the periods are considered to be outstanding for one half of the month in which they
were sold. The weighted average outstanding common shares for the three months ended June 30,
2008 and 2007 were 5,805,000. The weighted average outstanding common shares for the six
months ended June 30, 2008 and 2007 were 5,805,000 and 5,751,697, respectively.3.
    
    Segment DataThe Company operates in three segments as shown in the following table. Given the limited
nature of each subsidiarys operations, the Company has a life insurance segment, consisting of
the operations of TLIC, and a premium financing segment, consisting of the operations of FTCC.
Results for the parent company, after elimination of intercompany amounts, are allocated to the
Corporate segment.
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenues:Life and annuity insurance operations
    
    $
    469,945
    
    
    $
    355,613
    
    
    $
    821,155
    
    
    $
    378,009Premium finance operations
    
    
    108,300
    
    
    
    42,962
    
    
    
    195,546
    
    
    
    59,453Corporate operations
    
    
    29,374
    
    
    
    102,050
    
    
    
    82,877
    
    
    
    209,969Total
    
    $
    607,619
    
    
    $
    500,625
    
    
    $
    1,099,578
    
    
    $
    647,431Income (loss) from operations before federal
income taxes:Life and annuity insurance operations
    
    $
    (45,223
    )
    
    $
    11,367
    
    
    $
    (109,410
    )
    
    $
    (18,558
    )Premium finance operations
    
    
    10,623
    
    
    
    11,821
    
    
    
    24,805
    
    
    
    6,423Corporate operations
    
    
    (100,511
    )
    
    
    (157,856
    )
    
    
    (213,838
    )
    
    
    (301,659
    )Total
    
    $
    (135,111
    )
    
    $
    (134,668
    )
    
    $
    (298,443
    )
    
    $
    (313,794
    )
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Segment asset information as of:Assets:Life and annuity insurance operations
    
    $
    4,111,271
    
    
    $
    3,216,658Premium finance operations
    
    
    3,500,842
    
    
    
    2,527,162Corporate operations
    
    
    5,217,557
    
    
    
    6,784,418Total
    
    $
    12,829,670
    
    
    $
    12,528,238
 4.
    
    ReinsuranceTLIC retains up to $55,000 on each insured and cedes any excess risk beyond the amount retained
among a combination of two reinsurance companies. TLIC remains contingently liable on all
ceded insurance should any reinsurer be unable to meet their obligations.
  7




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##### Table of Contents



5.
    
    Federal Income TaxesThe 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 2004 through 2007 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.6.
    
    Comprehensive LossThe components of comprehensive loss, net of related federal income taxes, are as follows:
 Three months ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (135,111
    )
    
    $
    (134,668
    )
    
    $
    (297,611
    )
    
    $
    (313,794
    )Unrealized gains (losses) on available-for-sale
securities, net of
federal income taxes of
($1,453) and $307 for
the three months ended
June 30, 2008 and 2007,
respectively and net of
federal income taxes of
$687 and $604 at June
30, 2008 and 2007,
respectively
    
    
    (2,822
    )
    
    
    596
    
    
    
    1,333
    
    
    
    1,172Other comprehensive income
    
    $
    (137,933
    )
    
    $
    (134,072
    )
    
    $
    (296,278
    )
    
    $
    (312,622
    )
 7.
    
    Fair Values of Financial InstrumentsEffective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value
and enhances disclosures about fair value measurements. Fair value is defined under SFAS No.
157 as the price that would be received to sell an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. The Company
experienced no material financial impact as a result of the adoption of SFAS No. 157.The Company holds fixed maturities that are measured and reported at fair market value on the
balance sheet. The Company determines the fair market values of its financial instruments
based on the fair value hierarchy
established in SFAS No. 157 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. Level 1
assets and liabilities include debt 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.
  8




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##### Table of Contents



7.
    
    Fair Values of Financial Instruments (continued)Level 2  Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities. Level 2 assets and liabilities include debt 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. 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.In accordance with SFAS No. 157, the Company has categorized its financial instruments, based
on the priority of the inputs to the valuation technique, into the three-level fair value
hierarchy. If the inputs used to measure the financial instruments fall within different
levels of the hierarchy, the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument. A review of fair value hierarchy
classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their
ability to be observed, may result in a reclassification for certain financial assets or
liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as
transfers in/out of the Level 3 category as of the beginning of the quarter in which the
reclassifications occur.The following table presents the Companys fair value hierarchy for those financial instruments
measured at fair value on a recurring basis as of June 30, 2008.
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsFixed maturities
    
    $
    
    
    
    $
    629,859
    
    
    $
    
    
    
    $
    629,859
 8.
    
    Subsequent EventsOn July 18, 2008, the Company entered into a stock purchase agreement to purchase all the
outstanding stock of First Life America Corporation (FLAC), Topeka, KS from Brooke Capital
Corporation. The purchase price is adjusted statutory capital and surplus plus $4,750,000, but
not to exceed, in the aggregate, a total purchase price of $8,000,000. The sale is subject to
regulatory approval by the Kansas Insurance Department. FLAC is a life insurance and annuity
company headquartered in Topeka, Kansas, offering life insurance and annuity products to the
citizens of Kansas, Illinois, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.
  9




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
      Critical Accounting Policies and Significant Judgments and Estimate
   10




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##### Table of Contents



Investments in Fixed Maturities
   Loans from Premium Financing
    Allowance for Loan Losses
     11




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Deferred Acquisition Costs
  Policy Liabilities
  Income Taxes
  New Accounting Pronouncements
     12




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##### Table of Contents



Consolidated Financial Condition
    June 30,
    
    
    December 31,2008
    
    
    2007Balance, beginning of year
    
    $
    2,366,165
    
    
    $
    Loans financed
    
    
    4,145,687
    
    
    
    4,556,216Unearned interest added to loans
    
    
    210,625
    
    
    
    234,744Payment of loans and unearned interest
    
    
    (3,168,378
    )
    
    
    (2,424,795
    )Ending loan balance including unearned interest
    
    
    3,554,099
    
    
    
    2,366,165Unearned interest included in ending loan balances
    
    
    (99,654
    )
    
    
    (63,830
    )Loan balance net of unearned interest
    
    
    3,454,445
    
    
    
    2,302,335Less:Allowance for loan loss
    
    
    (7,000
    )
    
    
    (3,500
    )Loan balance net of unearned interest and
allowance for loan losses at the end of the year
    
    $
    3,447,445
    
    
    $
    2,298,835
    Results of Operations
  Revenues
   13




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Expenses
       14




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##### Table of Contents



Business Segments
 Disclosures about Segments of an Enterprise and Related Information,
 
    
    Life and annuity insurance operations, consisting of the operations of TLIC;
    
    Premium finance operations, consisting of the operations of FTCC; and
    
    Corporate operations, which includes the results of the parent company after the
elimination of intercompany amounts.
  Liquidity and Capital Resources
 The Holding Company
  Cash Flows
      15




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Future liquidity and capital needs
      Off-Balance Sheet Arrangements
  Forward Looking Information
   16




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Item 4T. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
   17




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Directors
    
    For
    
    
    WithheldGregg E. Zahn
    
    
    2,934,850
    
    
    
    11,800Scott J. Engebritson
    
    
    2,932,550
    
    
    
    14,100William S. Lay
    
    
    2,936,350
    
    
    
    10,300H. Bryan Chrisman
    
    
    2,936,850
    
    
    
    9,800Bill H. Hill
    
    
    2,936,250
    
    
    
    10,400Charles Wayne Owens
    
    
    2,933,650
    
    
    
    13,000Loren Everett Owens
    
    
    2,936,350
    
    
    
    10,300George E. Peintner
    
    
    2,936,850
    
    
    
    9,800John R. Perkins
    
    
    2,936,850
    
    
    
    9,800G. Wayne Pettigrew
    
    
    2,936,250
    
    
    
    10,400Gary L Sherrer
    
    
    2,936,450
    
    
    
    10,200
   Votes
    
    For
    
    
    Against
    
    
    Abstain2,724,296
    
    
    
    146,754
    
    
    
    75,600
  Votes
    
    For
    
    
    Against
    
    
    Abstain2,926,050
    
    
    
    10,600
    
    
    
    10,000
 
 Item 5. Other Information
  Item 6. Exhibits
 
 31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer32.1
    
    
    Section 1350 Certification of Principal Executive Officer32.2
    
    
    Section 1350 Certification of Principal Financial Officer
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##### Table of Contents



FIRST TRINITY FINANCIAL CORPORATION
an Oklahoma corporationAugust 13, 2008
    By:
    /s/ Gregg ZahnGregg Zahn, President and Chief Executive OfficerAugust 13, 2008
    By:
    /s/ William LayWilliam Lay, Secretary, Treasurer andChief Financial Officer  19




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##### Table of Contents



Exhibit No.
    
    Description31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer32.1
    
    
    Section 1350 Certification of Principal Executive Officer32.2
    
    
    Section 1350 Certification of Principal Financial Officer
  20