First Trinity Financial CORP - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - First Trinity Financial CORP	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - First Trinity Financial CORP	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - First Trinity Financial CORP	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - First Trinity Financial CORP	ex31-1.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ]

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

For the quarterly period ended June 30, 2017

[ ]	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 74133-1246

(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 ☑ No ☐

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 ☑ No ☐

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

Large accelerated filer: ☐	Accelerated filer: ☐	Non-accelerated filer: ☐	Smaller reporting company: ☑
Emerging growth company: ☐

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☑

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 August 7, 2017: 7,802,593 shares

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED JUNE 30, 2017

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	Page Number

Item 1. Consolidated Financial Statements

Consolidated Statements of Financial Position as of June 30, 2017 (Unaudited) and December 31, 2016		3

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)		4

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)		5

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2017 and 2016 (Unaudited)		6

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited)		7

Notes to Consolidated Financial Statements (Unaudited)		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35

Item 4. Controls and Procedures		65

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		65

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		68

Item 3. Defaults upon Senior Securities		68

Item 4. Mine Safety Disclosures		68

Item 5. Other Information		68

Item 6. Exhibits		68

Signatures		69

Exhibit No. 31.1

Exhibit No. 31.2

Exhibit No. 32.1

Exhibit No. 32.2

Exhibit No. 101.INS

Exhibit No. 101.SCH

Exhibit No. 101.CAL

Exhibit No. 101.DEF

Exhibit No. 101.LAB

Exhibit No. 101.PRE

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

	(Unaudited)
	June 30, 2017			December 31, 2016
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $146,815,391 and $128,310,265 as of June 30, 2017 and December 31, 2016, respectively)	$	151,551,123		$	129,311,155
Available-for-sale equity securities at fair value (cost: $601,207 and $599,400 as of June 30, 2017 and December 31, 2016, respectively)		658,952			638,407
Mortgage loans on real estate		100,337,059			74,371,286
Investment real estate		2,248,228			2,506,673
Policy loans		1,604,260			1,598,116
Other long-term investments		57,895,580			46,788,873
Total investments		314,295,202			255,214,510
Cash and cash equivalents		17,541,778			34,223,945
Accrued investment income		2,517,930			2,176,770
Recoverable from reinsurers		1,230,910			1,258,938
Agents' balances and due premiums		1,643,690			1,419,250
Deferred policy acquisition costs		21,695,607			18,191,990
Value of insurance business acquired		5,699,371			5,908,835
Other assets		13,628,298			14,858,375
Total assets	$	378,252,786		$	333,252,613
Liabilities and Shareholders' Equity
Policy liabilities
Policyholders' account balances	$	285,235,552		$	245,346,489
Future policy benefits		46,708,192			44,266,227
Policy claims		915,170			997,814
Other policy liabilities		77,758			69,854
Total policy liabilities		332,936,672			290,680,384
Deferred federal income taxes		1,637,491			693,470
Other liabilities		3,639,385			5,598,484
Total liabilities		338,213,548			296,972,338
Shareholders' equity
Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of June 30, 2017 and December 31, 2016 and 7,802,593 outstanding as of June 30, 2017 and December 31, 2016)		80,502			80,502
Additional paid-in capital		28,684,598			28,684,598
Treasury stock, at cost (247,580 shares as of June 30, 2017 and December 31, 2016)		(893,947	)		(893,947	)
Accumulated other comprehensive income		3,766,117			818,676
Accumulated earnings		8,401,968			7,590,446
Total shareholders' equity		40,039,238			36,280,275
Total liabilities and shareholders' equity	$	378,252,786		$	333,252,613

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues
Premiums	$	3,880,345		$	3,037,033		$	7,502,035		$	6,229,575
Net investment income		3,995,064			3,258,634			7,664,935			6,618,837
Net realized investment gains		91,088			166,093			257,594			146,942
Loss on other-than-temporary impairments		(224,250	)		-			(224,250	)		-
Other income		17,235			7,893			67,127			15,206
Total revenues		7,759,482			6,469,653			15,267,441			13,010,560
Benefits, Claims and Expenses
Benefits and claims
Increase in future policy benefits		1,482,159			1,279,874			2,441,964			2,638,018
Death benefits		887,745			1,034,230			2,433,581			1,986,288
Surrenders		248,212			198,643			531,588			336,369
Interest credited to policyholders		2,201,930			1,681,501			4,236,984			3,335,221
Dividend, endowment and supplementary life contract benefits		64,795			67,454			131,768			133,512
Total benefits and claims		4,884,841			4,261,702			9,775,885			8,429,408
Policy acquisition costs deferred		(2,586,318	)		(1,542,926	)		(5,001,037	)		(3,119,135	)
Amortization of deferred policy acquisition costs		747,306			355,491			1,428,142			1,052,037
Amortization of value of insurance business acquired		107,296			99,078			209,464			189,210
Commissions		2,345,063			1,548,635			4,589,973			2,828,721
Other underwriting, insurance and acquisition expenses		1,572,220			1,345,086			3,226,423			2,879,526
Total expenses		2,185,567			1,805,364			4,452,965			3,830,359
Total benefits, claims and expenses		7,070,408			6,067,066			14,228,850			12,259,767
Income before total federal income tax expense		689,074			402,587			1,038,591			750,793
Current federal income tax expense		19,909			34,212			19,909			37,510
Deferred federal income tax expense		119,121			30,276			207,160			79,871
Total federal income tax expense		139,030			64,488			227,069			117,381
Net income	$	550,044		$	338,099		$	811,522		$	633,412
Net income per common share basic and diluted	$	0.07		$	0.04		$	0.10		$	0.08

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Net income	$	550,044		$	338,099	$	811,522		$	633,412
Other comprehensive income
Total net unrealized investment gains arising during the period		2,477,183			4,602,854		3,720,267			8,382,376
Less net realized investment gains (losses)		(197,332	)		151,677		(33,313	)		128,951
Net unrealized investment gains		2,674,515			4,451,177		3,753,580			8,253,425
Less adjustment to deferred acquisition costs		49,778			67,083		69,278			127,213
Other comprehensive income before federal income tax expense		2,624,737			4,384,094		3,684,302			8,126,212
Federal income tax expense		524,948			876,817		736,861			1,625,240
Total other comprehensive income		2,099,789			3,507,277		2,947,441			6,500,972
Total comprehensive income	$	2,649,833		$	3,845,376	$	3,758,963		$	7,134,384

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Six Months Ended June 30, 2017 and 2016

(Unaudited)

								Accumulated
	Common		Additional					Other					Total
	Stock		Paid-in		Treasury			Comprehensive			Accumulated		Shareholders'
	$.01 Par Value		Capital		Stock			Income (Loss)			Earnings		Equity
Balance as of January 1, 2016	$	80,502	$	28,684,598	$	(893,947	)	$	(2,655,817	)	$	4,999,707	$	30,215,043
Comprehensive income:
Net income		-		-		-			-			633,412		633,412
Other comprehensive income		-		-		-			6,500,972			-		6,500,972
Balance as of June 30, 2016	$	80,502	$	28,684,598	$	(893,947	)	$	3,845,155		$	5,633,119	$	37,349,427

Balance as of January 1, 2017	$	80,502	$	28,684,598	$	(893,947	)	$	818,676		$	7,590,446	$	36,280,275
Comprehensive income:
Net income		-		-		-			-			811,522		811,522
Other comprehensive income		-		-		-			2,947,441			-		2,947,441
Balance as of June 30, 2017	$	80,502	$	28,684,598	$	(893,947	)	$	3,766,117		$	8,401,968	$	40,039,238

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2017			2016
Operating activities
Net income	$	811,522		$	633,412
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation		73,063			73,060
Accretion of discount on investments		(1,386,429	)		(797,906	)
Net realized investment gains		(257,594	)		(146,942	)
Loss on other-than-temporary impairment		224,250			-
Amortization of policy acquisition cost		1,428,142			1,052,037
Policy acquisition cost deferred		(5,001,037	)		(3,119,135	)
Mortgage loan origination fees deferred		-			(4,531	)
Amortization of loan origination fees		23,408			22,784
Amortization of value of insurance business acquired		209,464			189,210
Allowance for mortgage loan losses		101,031			14,516
Provision for deferred federal income tax expense		207,160			79,871
Interest credited to policyholders		4,236,984			3,335,221
Change in assets and liabilities:
Accrued investment income		(341,160	)		23,481
Policy loans		(6,144	)		(35,875	)
Short-term investments		-			549,822
Recoverable from reinsurers		28,028			(18,218	)
Agents' balances and due premiums		(224,440	)		(193,879	)
Other assets (excludes depreciation of $320 in 2017 and change in receivable for securities sold of $609,014 and ($2,588,281) in 2017 and 2016, respectively).		620,743			(1,811,870	)
Future policy benefits		2,441,965			2,645,718
Policy claims		(82,644	)		144,812
Other policy liabilities		7,904			(7,869	)
Other liabilities (excludes change in payable for securities purchased of ($80,176) and $499 in 2017 and 2016, respectively).		(1,878,923	)		2,156,346
Net cash provided by operating activities		1,235,293			4,784,065

Investing activities
Purchases of fixed maturity securities		(32,301,685	)		(3,936,924	)
Maturities of fixed maturity securities		4,868,000			3,554,000
Sales of fixed maturity securities		7,735,249			3,940,211
Purchases of equity securities		(1,807	)		(8,990	)
Sales of equity securities		-			128,010
Purchases of mortgage loans		(36,741,329	)		(9,362,778	)
Payments on mortgage loans		10,724,113			3,661,522
Purchases of other long-term investments		(13,362,692	)		(7,101,665	)
Payments on other long-term investments		3,999,678			1,948,073
Sale on other long-term investments		792,012			-
Purchase of real estate		-			(198,622	)
Sale of real estate		190,084			-
Net change in receivable and payable for securities sold and purchased		528,838			(2,587,782	)
Net cash used in investing activities		(53,569,539	)		(9,964,945	)

Financing activities
Policyholders' account deposits		45,682,170			14,145,326
Policyholders' account withdrawals		(10,030,091	)		(7,205,527	)
Net cash provided by financing activities		35,652,079			6,939,799

Increase (decrease) in cash		(16,682,167	)		1,758,919
Cash and cash equivalents, beginning of period		34,223,945			9,047,586
Cash and cash equivalents, end of period	$	17,541,778		$	10,806,505

See notes to consolidated financial statements (unaudited).

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Supplemental Disclosure – Cash and Non-Cash Impact on Investing Activities

(Unaudited)

During 2017 the Company reclassified an available-for-sale fixed maturity security totaling $729,737 to other long-term investments as recent third party information indicated the security does not qualify for available-for-sale treatment.

In conjunction with this transfer, the non-cash impact on investing activities is summarized as follows:

	Six Months Ended
	June 30, 2017
Reduction in available-for-securities fixed maturity securities	$	729,737
Other long-term invesments		(729,737	)
Net cash provided (used) in investing activities	$	-

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

1. Organization and Significant Accounting Policies

Nature of Operations

First Trinity Financial Corporation (the “Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) and First Trinity Capital Corporation (“FTCC”). The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.

The Company owns 100% of TLIC. TLIC owns 100% of FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals. TLIC’s and FBLIC’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 TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.

The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012.

Company Capitalization

The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012 and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.

The Company has also purchased 247,580 shares of treasury stock at a cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

Acquisitions

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was $2,695,234 including direct cost associated with the acquisition of $195,234. The acquisition of FLAC was financed with the working capital of FTFC.

On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.

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 TLIC.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

On December 28, 2011, TLIC acquired 100% of the outstanding common stock of FBLIC from FBLIC’s shareholders. The acquisition of FBLIC was accounted for as a purchase. The aggregate purchase price for the acquisition of FBLIC was $13,855,129. The acquisition of FBLIC was financed with the working capital of TLIC.

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.

The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 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 consolidated financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2016.

Principles of Consolidation

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

Reclassifications

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

Use of Estimates

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

Common Stock

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

Treasury Stock

Treasury stock, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Subsequent Events

Management has evaluated all events subsequent to June 30, 2017 through the date that these financial statements have been issued.

Recent Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018. The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.

If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity since there are no uncertainties about the Company’s ability to continue as a going concern.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss). The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods, the existence of a deferred tax asset related to available-for-sale securities in future periods and the economic conditions at the time of that future adoption.

Leases

In February 2016, the FASB issued updated guidance regarding leases that generally requires the lessee and lessor to recognize lease assets and lease liabilities on the statement of financial position. A lessee should recognize on the statement of financial position a liability to make lease payments and an asset representing its right-to-use the underlying assets for the lease term. Optional payments to extend the lease or purchase the underlying leased asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise the option(s).

If the lease has a term of 12 months or less, a lessee can make an election to recognize lease expenses for such leases on a straight-line basis over the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right-to-use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities.

The accounting applied by the lessor is largely unchanged from that applied under previous U.S. GAAP. Key aspects of the lessor accounting model, however, were aligned with the revenue recognition guidance of Codification Topic 606. The previous accounting model for leverage leases continues to apply only to those leveraged leases that commenced before the effective date of Codification Update 2016-02 Leases (Topic 842).

Entities will generally continue to account for leases that commenced before the effective date of this update in accordance with previous U.S. GAAP unless the lease is modified. Lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP. The updated guidance is to be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Investments — Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting

In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence. If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings. The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument is contingently exercisable, the event that triggers the ability to exercise the option is considered to be clearly and closely related to the debt instrument (i.e., the economic characteristics and risks of the option are related to interest rates or credit risks) and the entity does not have to assess whether the option should be accounted for separately. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued updated guidance for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance amounts recoverable) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued specific guidance to reduce the existing diversity in practice in how eight specific cash flow issues of certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Consolidation – Interests Held through Related Parties that Are Under Common Control

In October 2016, the FASB issued further guidance that makes targeted amendments to consolidation accounting. This update changes how a reporting entity that is the primary beneficiary of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The updated guidance is effective for annual and interim periods beginning after December 15, 2016, and is to be applied retrospectively. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

1. Organization and Significant Accounting Policies (continued)

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Business Combinations – Clarifying the Definition of a Business

In January 2017, the FASB issued guidance to clarify the definition of a business to assist reporting entities in evaluating whether transactions should be accounted for as an acquisition or disposal of assets or businesses. This update provides a screen to determine when an integrated set of assets or activities is not a business and the requirements to be met to be considered a business.

The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted in certain situations. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Intangibles – Goodwill and Other - Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Compensation — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic post retirement cost (net benefit costs). Net benefit costs comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. The update requires that the employer service cost component be reported in the same lines as other employee compensation cost and that the other components (non-service costs) be presented separately from the service cost and outside of a subtotal of income from operations if one is presented. The update also allows only the service cost component to be eligible for capitalization in assets when applicable.

The updated guidance is effective for reporting periods beginning after December 15, 2017. The update is to be applied retrospectively with respect to the presentation of service cost and non-service cost and prospectively with respect to applying the service cost only eligible for capitalization in assets guidance. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements. This pronouncement will not impact the Company since it does not have any pension or postretirement benefit plans and has no intention to adopt such plans.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

2. Investments

Fixed Maturity and Equity Securities Available-For-Sale

Investments in fixed maturity and equity securities available-for-sale as of June 30, 2017 and December 31, 2016 are summarized as follows:

			Gross		Gross
	Amortized Cost		Unrealized		Unrealized		Fair
	or Cost		Gains		Losses		Value
	June 30, 2017 (Unaudited)
Fixed maturity securities
U.S. government and U.S. government agencies	$	3,513,372	$	76,996	$	57,654	$	3,532,714
States and political subdivisions		9,403,827		268,163		33,354		9,638,636
Residential mortgage-backed securities		32,278		39,442		-		71,720
Corporate bonds		112,783,805		4,279,059		712,679		116,350,185
Foreign bonds		21,082,109		986,298		110,539		21,957,868

Total fixed maturity securities		146,815,391		5,649,958		914,226		151,551,123

Equity securities
Mutual funds		346,284		1,044		-		347,328
Corporate preferred stock		99,945		2,033		40		101,938
Corporate common stock		154,978		54,708		-		209,686

Total equity securities		601,207		57,785		40		658,952

Total fixed maturity and equity securities	$	147,416,598	$	5,707,743	$	914,266	$	152,210,075

	December 31, 2016
Fixed maturity securities
U.S. government and U.S. government agencies	$	3,157,889	$	99,086	$	71,592	$	3,185,383
States and political subdivisions		9,172,533		144,947		66,584		9,250,896
Residential mortgage-backed securities		33,970		36,757		-		70,727
Corporate bonds		100,268,424		2,324,712		1,613,095		100,980,041
Foreign bonds		15,677,449		394,742		248,083		15,824,108

Total fixed maturity securities		128,310,265		3,000,244		1,999,354		129,311,155

Equity securities
Mutual funds		344,783		-		2,869		341,914
Corporate preferred stock		99,945		-		3,585		96,360
Corporate common stock		154,672		45,461		-		200,133

Total equity securities		599,400		45,461		6,454		638,407

Total fixed maturity and equity securities	$	128,909,665	$	3,045,705	$	2,005,808	$	129,949,562

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(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 June 30, 2017 and December 31, 2016 are summarized as follows:

			Unrealized		Number of
	Fair Value		Loss		Securities
	June 30, 2017 (Unaudited)
Fixed maturity securities
Less than 12 months
U.S. government and U.S. government agencies	$	1,887,412	$	42,684		7
States and political subdivisions		1,970,827		33,354		11
Corporate bonds		6,613,829		104,812		22
Foreign bonds		1,104,060		34,248		5
Total less than 12 months		11,576,128		215,098		45
More than 12 months
U.S. government and U.S. government agencies		335,031		14,970		1
Corporate bonds		5,925,592		607,867		27
Foreign bonds		502,375		76,291		3
Total more than 12 months		6,762,998		699,128		31

Total fixed maturity securities in an unrealized loss position		18,339,126		914,226		76
Equity securities
Less than 12 months
Corporate preferred stock		49,960		40		1
Total less than 12 months		49,960		40		1

Total equity securities in an unrealized loss position		49,960		40		1

Total fixed maturity and equity securities in an unrealized loss position	$	18,389,086	$	914,266		77

	December 31, 2016
Fixed maturity securities
Less than 12 months
U.S. government and U.S. government agencies	$	1,878,308	$	71,592		6
States and political subdivisions		2,532,653		66,584		14
Corporate bonds		23,721,217		696,066		92
Foreign bonds		5,087,133		155,833		16
Total less than 12 months		33,219,311		990,075		128
More than 12 months
Corporate bonds		8,004,923		917,029		36
Foreign bonds		1,024,548		92,250		6
Total more than 12 months		9,029,471		1,009,279		42
Total fixed maturity securities in an unrealized loss position		42,248,782		1,999,354		170

Equity securities
Less than 12 months
Corporate preferred stock		96,360		3,585		2
Total less than 12 months		96,360		3,585		2
More than 12 months
Mutual funds		89,113		2,869		1

Total more than 12 months		89,113		2,869		1

Total equity securities in an unrealized loss position		185,473		6,454		3
Total fixed maturity and equity securities in an unrealized loss position	$	42,434,255	$	2,005,808		173

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

2. Investments (continued)

As of June 30, 2017, the Company held 76 available-for-sale fixed maturity securities with an unrealized loss of $914,226, fair value of $18,339,126 and amortized cost of $19,253,352. These unrealized losses were primarily due to market interest rate movements in the bond market as of June 30, 2017. The ratio of the fair value to the amortized cost of these 76 securities is 95%.

As of December 31, 2016, the Company held 170 available-for-sale fixed maturity securities with an unrealized loss of $1,999,354, fair value of $42,248,782 and amortized cost of $44,248,136. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2016. The ratio of the fair value to the amortized cost of these 170 securities is 95%.

As of June 30, 2017, the Company had one available-for-sale equity security with an unrealized loss of $40, fair value of $49,960 and cost of $50,000. The ratio of fair value to cost of this security is 99.9%.

As of December 31, 2016, the Company had three available-for-sale equity securities with an unrealized loss of $6,454, fair value of $185,473 and cost of $191,927. The ratio of fair value to cost of these securities is 97%.

Fixed maturity securities were 93% and 92% investment grade as rated by Standard & Poor’s as of June 30, 2017 and December 31, 2016, respectively.

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

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

The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities for the three and six months ended June 30, 2017 and the year ended December 31, 2016.

Management believes that the Company will fully recover its cost basis in the securities held as of June 30, 2017, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

2. Investments (continued)

Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of June 30, 2017 and December 31, 2016, are summarized as follows:

	(Unaudited)
	June 30, 2017			December 31, 2016
Unrealized appreciation on available-for-sale securities	$	4,793,477		$	1,039,897
Adjustment to deferred acquisition costs		(85,831	)		(16,553	)
Deferred income taxes		(941,529	)		(204,668	)
Net unrealized appreciation on available-for-sale securities	$	3,766,117		$	818,676

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $57,895,580 and $46,788,873 as of June 30, 2017 and December 31, 2016, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of June 30, 2017, by contractual maturity, are summarized as follows:

	June 30, 2017 (Unaudited)
	Fixed Maturity Available-For-Sale Securities				Other Long-Term Investments
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	9,129,356	$	9,228,487	$	8,369,492	$	8,501,590
Due after one year through five years		30,195,177		31,184,027		23,279,727		25,343,966
Due after five years through ten years		40,929,284		42,130,385		16,234,072		19,781,009
Due after ten years		66,529,296		68,936,504		10,012,289		15,992,575
Due at multiple maturity dates		32,278		71,720		-		-

	$	146,815,391	$	151,551,123	$	57,895,580	$	69,619,140

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

June 30, 2017

(Unaudited)

2. Investments (continued)

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate, investment real estate and other long-term investments for the three and six months ended June 30, 2017 and 2016 are summarized as follows:

	Three Months Ended June 30, (Unaudited)
	Fixed Maturity Securities						Equity Securities				Mortgage Loans on Real Estate				Investment Real Estate
	2017			2016			2017		2016		2017		2016		2017			2016
Proceeds	$	8,154,018		$	5,219,798		$	-	$	19,210	$	5,598,724	$	2,089,278	$	82,917		$	-
Gross realized gains		356,147			155,956			-		8,711		-		14,416		3,563			-
Gross realized losses		(329,229	)		(12,990	)		-		-		-		-		(1,668	)		-
Loss on other-than-temporary impairment		(224,250	)		-			-		-		-		-		-			-

	Three Months Ended June 30, (Unaudited)
	Other Long-Term Investments
	2017		2016
Proceeds	$	792,012	$	-
Gross realized gains		62,275		-
Gross realized losses		-		-
Loss on other-than-temporary impairment		-		-

	Six Months Ended June 30, (Unaudited)
	Fixed Maturity Securities						Equity Securities					Mortgage Loans on Real Estate				Investment Real Estate
	2017			2016			2017		2016			2017		2016		2017			2016
Proceeds	$	12,603,249		$	7,494,211		$	-	$	128,010		$	10,724,113	$	3,661,522	$	190,084		$	-
Gross realized gains		527,252			163,050			-		8,711			-		17,991		6,050			-
Gross realized losses		(336,315	)		(41,342	)		-		(1,468	)		-		-		(1,668	)		-
Loss on other-than-temporary impairment		(224,250	)		-			-		-			-		-		-			-

	Six Months Ended June 30, (Unaudited)
	Other Long-Term Investments
	2017		2016
Proceeds	$	792,012	$	-
Gross realized gains		62,275		-
Gross realized losses		-		-
Loss on other-than-temporary impairment		-		-

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

2. Investments (continued)

The accumulated change in net unrealized investment gains (losses) for fixed maturity and equity securities available-for-sale for the three and six months ended June 30, 2017 and 2016 and the amount of realized investment gains on fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate, investment real estate and other long-term investments for the three and six months ended June 30, 2017 and 2016 are summarized as follows:

	Three Months Ended June 30, (Unaudited)					Six Months Ended June 30, (Unaudited)
	2017		2016			2017		2016
Change in unrealized investment gains (losses):

Available-for-sale securities:
Fixed maturity securities	$	2,673,801	$	4,452,781		$	3,734,842	$	8,260,179
Equity securities		714		(1,604	)		18,738		(6,754	)
Net realized investment gains:
Available-for-sale securities:
Fixed maturity securities		26,918		142,966			190,937		121,708
Equity securities		-		8,711			-		7,243
Mortgage loans on real estate		-		14,416			-		17,991
Investment real estate		1,895		-			4,382		-
Other long-term investments		62,275		-			62,275		-

Major categories of net investment income for the three and six months ended June 30, 2017 and 2016 are summarized as follows:

	Three Months Ended June 30, (Unaudited)						Six Months Ended June 30, (Unaudited)
	2017			2016			2017			2016
Fixed maturity securities	$	1,665,525		$	1,533,301		$	3,155,895		$	3,100,519
Equity securities		5,086			6,658			10,158			13,840
Other long-term investments		882,009			622,502			1,739,479			1,170,324
Mortgage loans		1,876,637			1,328,427			3,544,031			2,681,498
Policy loans		28,453			26,491			56,017			52,589
Real estate		93,712			91,968			187,423			183,936
Short-term and other investments		112,798			69,874			223,084			142,144
Gross investment income		4,664,220			3,679,221			8,916,087			7,344,850
Investment expenses		(669,156	)		(420,587	)		(1,251,152	)		(726,013	)
Net investment income	$	3,995,064		$	3,258,634		$	7,664,935		$	6,618,837

TLIC and FBLIC are required to hold assets on deposit with various state insurance departments for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of June 30, 2017 and December 31, 2016, these required deposits, included in investment assets, had amortized costs that totaled $4,117,454 and $4,099,405, respectively. As of June 30, 2017 and December 31, 2016, these required deposits had fair values that totaled $4,155,323 and $4,125,116, respectively.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

2. Investments (continued)

The Company’s mortgage loans by property type as of June 30, 2017 and December 31, 2016 are summarized as follows:

	(Unaudited)
	June 30, 2017		December 31, 2016
Commercial and industrial mortgage loans

Retail stores	$	1,271,853	$	1,075,324
Office buildings		139,198		179,484
Industrial		435,200		-

Total commercial and industrial mortgage loans		1,846,251		1,254,808

Residential mortgage loans		98,490,808		73,116,478

Total mortgage loans	$	100,337,059	$	74,371,286

The Company’s investment real estate as of June 30, 2017 and December 31, 2016 is summarized as follows:

	(Unaudited)
	June 30, 2017			December 31, 2016
Land - held for the production of income	$	213,160		$	213,160
Land - held for investment		745,155			745,155
Total land		958,315			958,315
Building - held for the production of income		2,267,557			2,267,557
Less - accumulated depreciation		(1,122,439	)		(1,049,695	)
Buildings net of accumulated depreciation		1,145,118			1,217,862
Residential real estate - held for sale		144,795			330,496
Total residential real estate		144,795			330,496
Investment real estate, net of accumulated depreciation	$	2,248,228		$	2,506,673

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-fourth of this land. This building and land on one of the four lots is held for the production of income. The other three lots of land owned in Topeka, Kansas are held for investment. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. During fourth quarter 2016 management impaired the undeveloped land by $4,892 from its carrying value to its net realizable value expected at the time of ultimate resale.

During 2017, the Company sold investment real estate property with an aggregate carrying value of $185,702. The Company recorded a gross realized investment gain on sale of $4,382 based on an aggregate sales price of $190,084.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

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

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

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

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

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

3. Fair Value Measurements (continued)

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 is summarized as follows:

	Level 1		Level 2		Level 3		Total
	June 30, 2017 (Unaudited)
Fixed maturity securities, available-for-sale
U.S. government and U.S. government agencies	$	-	$	3,532,714	$	-	$	3,532,714
States and political subdivisions		-		9,638,636		-		9,638,636
Residential mortgage-backed securities		-		71,720		-		71,720
Corporate bonds		-		116,350,185		-		116,350,185
Foreign bonds		-		21,957,868		-		21,957,868

Total fixed maturity securities	$	-	$	151,551,123	$	-	$	151,551,123

Equity securities, available-for-sale
Mutual funds	$	-	$	347,328	$	-	$	347,328
Corporate preferred stock		101,938		-		-		101,938
Corporate common stock		148,186		-		61,500		209,686
Total equity securities	$	250,124	$	347,328	$	61,500	$	658,952

	December 31, 2016
Fixed maturity securities, available-for-sale
U.S. government and U.S. government agencies	$	-	$	3,185,383	$	-	$	3,185,383
States and political subdivisions		-		9,250,896		-		9,250,896
Residential mortgage-backed securities		-		70,727		-		70,727
Corporate bonds		-		100,980,041		-		100,980,041
Foreign bonds		-		15,824,108		-		15,824,108
Total fixed maturity securities	$	-	$	129,311,155	$	-	$	129,311,155

Equity securities, available-for-sale
Mutual funds	$	-	$	341,914	$	-	$	341,914
Corporate preferred stock		96,360		-		-		96,360
Corporate common stock		138,633		-		61,500		200,133
Total equity securities	$	234,993	$	341,914	$	61,500	$	638,407

As of June 30, 2017 and December 31, 2016, Level 3 financial instruments consisted of two private placement common stocks that have no active trading.

These private placement stocks represent investments in small 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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

3. Fair Value Measurements (continued)

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

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

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

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

3. Fair Value Measurements (continued)

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of June 30, 2017 and December 31, 2016, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

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

	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	June 30, 2017 (Unaudited)
Financial assets
Mortgage loans on real estate
Commercial and industrial	$	1,846,251	$	1,850,988	$	-	$	-	$	1,850,988
Residential		98,490,808		101,495,994		-		-		101,495,994
Policy loans		1,604,260		1,604,260		-		-		1,604,260
Other long-term investments		57,895,580		69,619,140		-		-		69,619,140
Cash and cash equivalents		17,541,778		17,541,778		17,541,778		-		-
Accrued investment income		2,517,930		2,517,930		-		-		2,517,930
Total financial assets	$	179,896,607	$	194,630,090	$	17,541,778	$	-	$	177,088,312

Financial liabilities
Policyholders' account balances	$	285,235,552	$	245,080,798	$	-	$	-	$	245,080,798
Policy claims		915,170		915,170		-		-		915,170
Total financial liabilities	$	286,150,722	$	245,995,968	$	-	$	-	$	245,995,968

	December 31, 2016
Financial assets
Mortgage loans on real estate
Commercial	$	1,254,808	$	1,268,140	$	-	$	-	$	1,268,140
Residential		73,116,478		70,383,661		-		-		70,383,661
Policy loans		1,598,116		1,598,116		-		-		1,598,116
Other long-term investments		46,788,873		55,890,429		-		-		55,890,429
Cash and cash equivalents		34,223,945		34,223,945		34,223,945		-		-
Accrued investment income		2,176,770		2,176,770		-		-		2,176,770
Total financial assets	$	159,158,990	$	165,541,061	$	34,223,945	$	-	$	131,317,116

Financial liabilities
Policyholders' account balances	$	245,346,489	$	206,541,702	$	-	$	-	$	206,541,702
Policy claims		997,814		997,814		-		-		997,814
Total financial liabilities	$	246,344,303	$	207,539,516	$	-	$	-	$	207,539,516

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

3. Fair Value Measurements (continued)

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

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

Fixed Maturity Securities and Equity Securities

The fair value of fixed maturity securities 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. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread. For commercial mortgage loans, the discount rate used was assumed to be the interest rate on the last commercial mortgage acquired by the Company.

Cash and Cash Equivalents, Accrued Investment Income and Policy Loans

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

Other Long-Term Investments

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

Investment Contracts – Policyholders’ Account Balances

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

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

Policy Claims

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

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

4. Segment Data

The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of June 30, 2017 and December 31, 2016 and for the three and six months ended June 30, 2017 and 2016 are summarized as follows:

	Three Months Ended June 30, (Unaudited)				Six Months Ended June 30, (Unaudited)
	2017		2016		2017		2016
Revenues:
Life insurance operations	$	4,413,296	$	3,602,546	$	8,597,949	$	7,347,790
Annuity operations		3,285,595		2,718,287		6,474,566		5,355,711
Corporate operations		60,591		148,820		194,926		307,059

Total	$	7,759,482	$	6,469,653	$	15,267,441	$	13,010,560

Income before income taxes:
Life insurance operations	$	436,176	$	22,562	$	554,026	$	52,515
Annuity operations		186,941		350,169		347,356		578,425
Corporate operations		65,957		29,856		137,209		119,853

Total	$	689,074	$	402,587	$	1,038,591	$	750,793

Depreciation and amortization expense:
Life insurance operations	$	556,637	$	324,040	$	970,921	$	998,587
Annuity operations		343,108		182,591		763,156		338,503
Corporate operations		-		-		-		-

Total	$	899,745	$	506,631	$	1,734,077	$	1,337,090

	(Unaudited)
	June 30, 2017		December 31, 2016
Assets:
Life insurance operations	$	52,871,600	$	50,577,282
Annuity operations		318,272,021		275,745,766
Corporate operations		7,109,165		6,929,565
Total	$	378,252,786	$	333,252,613

5. Federal Income Taxes

The provision for federal income taxes is based on the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the cumulative temporary differences between balances of assets and liabilities determined under GAAP and the balances using tax bases.

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2013 through 2016 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.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

6. Legal Matters and Contingent Liabilities

A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, against former Company Board of Directors member Wayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma (Case No. CJ-2013-03385). In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties.

The jury concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and awarded it $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew.

Mr. Pettigrew can appeal this decision by the jury that will require him to post a bond in the amount of the total judgment of $4,300,000. Should Mr. Pettigrew fail to post such a bond, the Company and Mr. Zahn will be permitted to execute on Mr. Pettigrew's assets. To date, Mr. Pettigrew has failed to post this bond and, as a consequence, the Company and Mr. Zahn are in the process of executing on the judgments against Mr. Pettigrew’s assets. While the Company and Mr. Zahn will continue to execute on the judgments, any money or property collected during the execution of the judgments would have to be returned to Mr. Pettigrew in the event the judgments are reversed by the appellate courts.

In addition to the damages awarded by the jury, the Company and Mr. Zahn have initiated steps to aggressively communicate the correction of the untrue statements to outside parties.

Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for the Decreasing Term to 95 policies. On November 22, 2013, three individuals who owned Decreasing Term to 95 policies filed a Petition in the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to FBLIC’s decision to not provide a dividend under the Decreasing Term to 95 policies.

On June 18, 2015, plaintiffs filed an amended petition. Like the original Petition, the amended Petition asserts claims for breach of contract and anticipatory breach of contract, and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. It also asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act (“MMPA”). It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.

The main difference between the original Petition and the amended Petition is that the amended Petition also seeks equitable relief based on two new theories: that the Decreasing Term to 95 policies should be reformed so that they will provide a level death benefit for a level premium payment until the policyholder reaches 95 years of age; and alternatively, Count VIII of the amended Petition asks the Court to (1) find that the dividend provisions in the Decreasing Term to 95 policies violate Missouri law, specifically, § 376.360 RSMo.; (2) order that the policies are void ab initio; and (3) order that FBLIC return all premiums collected under these policies. In addition, as part of the MMPA claim, plaintiffs are now alleging that FBLIC undertook a fraudulent scheme to sell the Decreasing Term to 95 policies as a level premium for level benefit even though FBLIC never intended to pay dividends for the life of the policies and that part of this alleged fraudulent scheme included having a dividend option which is not allowed under Missouri law. FBLIC denies the allegations in the amended Petition and will continue to defend against them.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

6. Legal Matters and Contingent Liabilities (continued)

On February 1, 2016, the plaintiffs asked that the Court certify the case as a class action. With their motion, Plaintiffs filed an affidavit from an actuary stating the opinion that FBLIC has collected at least $2,548,939 in premiums on the Decreasing Term to 95 policies. This presumably is the amount that Plaintiffs will seek to be refunded to policyholders if the policies are declared void. FBLIC opposed the request for class certification. On July 21, 2016, the Court certified three classes to maintain the claims for breach of contract, anticipatory breach of contract, violation of the MMPA, reformation, and to void the Decreasing Term to 95 policies.

On August 1, 2016, FBLIC filed a Petition for Leave to Appeal with the Missouri Court of Appeals, Southern District asking for permission to appeal the Court’s class certification. The Petition for Leave to Appeal was denied. FBLIC intends to defend vigorously against the class and individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action. The trial in this case will be before a judge and is scheduled to begin on November 27, 2017.

On May 13, 2015, FBLIC filed a Counterclaim against Doyle Nimmo seeking indemnity and seeking damages for breach of fiduciary duty in the event FBLIC is liable under Plaintiffs’ underlying claims. In addition, on April 29, 2015, TLIC filed a lawsuit against Doyle Nimmo and Michael Teel alleging that they were liable for violations of federal and state securities laws for failing to disclose information relating to the Decreasing Term to 95 policies. This lawsuit is currently pending in the District Court for the Western District of Missouri (hereinafter the “Federal Lawsuit”). No claims have been made against TLIC in the Federal Lawsuit. The Federal Lawsuit has been stayed pending resolution of the lawsuit against FBLIC in the Circuit Court of Greene County, Missouri.

On September 28, 2015, Doyle Nimmo filed a Third-Party Petition for Declaratory Judgment (and Other Relief) against FBLIC. In this Third-Party Petition, Doyle Nimmo, a former director for FBLIC, seeks a declaratory judgment that the corporate by-laws of FBLIC require FBLIC to indemnify him for attorney’s fees, judgments, costs, fines, and amounts paid in defense of both the Counterclaim and the Federal Lawsuit and seeks a monetary judgment for the amounts expended by Doyle Nimmo in such defense. Prior to Doyle Nimmo’s filing of the Third-Party Petition, FBLIC’s Board of Directors executed a Unanimous Written Consent in Lieu of a Special Meeting in which it denied Doyle Nimmo’s tender of defense and request for indemnification finding Mr. Nimmo did not meet the applicable standard of conduct for indemnification under Missouri law.

Doyle Nimmo subsequently submitted a claim and tendered the defense of these claims to Utica Mutual Insurance Company under a policy providing Insurance Agents and Brokers Errors and Omissions Liability coverage. On November 4, 2015, Utica Mutual Insurance Company filed a lawsuit against Doyle Nimmo and other interested parties, including FBLIC and TLIC. The lawsuit was pending in the District Court for the Western District of Missouri and asked the Court to determine whether the Errors and Omissions policy provides coverage for the lawsuits filed against Doyle Nimmo. Utica Mutual Insurance Company did not seek a monetary judgment against FBLIC or TLIC.

On June 14, 2017, FBLIC and Doyle Nimmo executed a settlement to dismiss with prejudice all claims, causes of action and demands between them arising out of or in any way relating to the transactions and occurrences connected to the legal proceedings described above. The settlement proceeds included payments of $90,000 to FBLIC by Utica Mutual Insurance Company and $10,000 to FBLIC by Doyle Nimmo. The settlement also included an agreement whereby FBLIC and Doyle Nimmo bore exclusive liability for payment of their respective attorneys’ fees, lawsuit expenses, expert consulting fees and taxable costs of court incurred in connection with prosecution and/or defense of the claims, causes of action and demands related to the legal proceedings described above.

Guaranty fund 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. In most states, guaranty fund assessments may be taken as a credit against premium taxes, typically over a five-year period.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

7. Other Comprehensive Income and Accumulated Other Comprehensive Income

The changes in the components of the Company’s accumulated other comprehensive income for the three and six months ended June 30, 2017 and 2016 are summarized as follows:

	Three Months Ended June 30, 2017 and 2016 (Unaudited)
	Unrealized						Accumulated
	Appreciation on			Adjustment to			Other
	Available-For-Sale			Deferred Acquisition			Comprehensive
	Securities			Costs			Income
Balance as of April 1, 2017	$	1,695,169		$	(28,841	)	$	1,666,328
Other comprehensive income before reclassifications, net of tax		1,981,747			(39,823	)		1,941,924
Less amounts reclassified from accumulated other comprehensive income, net of tax		(157,865	)		-			(157,865	)
Other comprehensive income		2,139,612			(39,823	)		2,099,789
Balance as of June 30, 2017	$	3,834,781		$	(68,664	)	$	3,766,117

Balance as of April 1, 2016	$	345,923		$	(8,045	)	$	337,878
Other comprehensive income before reclassifications, net of tax		3,682,284			(53,666	)		3,628,618
Less amounts reclassified from accumulated other comprehensive income, net of tax		121,341			-			121,341
Other comprehensive income		3,560,943			(53,666	)		3,507,277
Balance as of June 30, 2016	$	3,906,866		$	(61,711	)	$	3,845,155

	Six Months Ended June 30, 2017 and 2016 (Unaudited)
	Unrealized
	Appreciation						Accumulated
	(Depreciation) on			Adjustment to			Other
	Available-For-Sale			Deferred Acquisition			Comprehensive
	Securities			Costs			Income (Loss)
Balance as of January 1, 2017	$	831,917		$	(13,241	)	$	818,676
Other comprehensive income before reclassifications, net of tax		2,976,214			(55,423	)		2,920,791
Less amounts reclassified from accumulated other comprehensive income, net of tax		(26,650	)		-			(26,650	)
Other comprehensive income		3,002,864			(55,423	)		2,947,441
Balance as of June 30, 2017	$	3,834,781		$	(68,664	)	$	3,766,117

Balance as of January 1, 2016	$	(2,695,876	)	$	40,059		$	(2,655,817	)
Other comprehensive income before reclassifications, net of tax		6,705,902			(101,770	)		6,604,132
Less amounts reclassified from accumulated other comprehensive loss, net of tax		103,160			-			103,160
Other comprehensive income		6,602,742			(101,770	)		6,500,972
Balance as of June 30, 2016	$	3,906,866		$	(61,711	)	$	3,845,155

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

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

The pretax components of the Company’s other comprehensive income and the related income tax expense (benefit) for each component for the three and six months ended June 30, 2017 and 2016 are summarized as follows:

	Three Months Ended June 30, 2017 (Unaudited)

				Income Tax
	Pretax			Expense			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	2,477,183		$	495,436		$	1,981,747
Reclassification adjustment for net losses included in operations		(197,332	)		(39,467	)		(157,865	)
Net unrealized gains on investments		2,674,515			534,903			2,139,612
Adjustment to deferred acquisition costs		(49,778	)		(9,955	)		(39,823	)
Total other comprehensive income	$	2,624,737		$	524,948		$	2,099,789

	Three Months Ended June 30, 2016 (Unaudited)
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	4,602,854		$	920,570		$	3,682,284
Reclassification adjustment for net gains included in operations		151,677			30,336			121,341
Net unrealized gains on investments		4,451,177			890,234			3,560,943
Adjustment to deferred acquisition costs		(67,083	)		(13,417	)		(53,666	)
Total other comprehensive income	$	4,384,094		$	876,817		$	3,507,277

	Six Months Ended June 30, 2017 (Unaudited)

				Income Tax
	Pretax			Expense			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	3,720,267		$	744,053		$	2,976,214
Reclassification adjustment for net losses included in operations		(33,313	)		(6,663	)		(26,650	)
Net unrealized gains on investments		3,753,580			750,716			3,002,864
Adjustment to deferred acquisition costs		(69,278	)		(13,855	)		(55,423	)
Total other comprehensive income	$	3,684,302		$	736,861		$	2,947,441

	Six Months Ended June 30, 2016 (Unaudited)
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	8,382,376		$	1,676,474		$	6,705,902
Reclassification adjustment for net gains included in operations		128,951			25,791			103,160
Net unrealized gains on investments		8,253,425			1,650,683			6,602,742
Adjustment to deferred acquisition costs		(127,213	)		(25,443	)		(101,770	)
Total other comprehensive income	$	8,126,212		$	1,625,240		$	6,500,972

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

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

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

The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statement of operations for the three and six months ended June 30, 2017 and 2016 are summarized as follows:

	Three Months Ended June 30, (Unaudited)					Six Months Ended June 30, (Unaudited)
Reclassification Adjustments	2017			2016		2017			2016
Unrealized gains on available-for-sale securities:
Realized gains (losses) on sales of securities (a)	$	(197,332	)	$	151,677	$	(33,313	)	$	128,951
Income tax expense (benefit) (b)		(39,467	)		30,336		(6,663	)		25,791
Total reclassification adjustments	$	(157,865	)	$	121,341	$	(26,650	)	$	103,160

(a) These items appear within net realized investment gains (losses) and other-than-temporary impairments in the consolidated statements of operations.

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

8. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing

The allowance for possible loan losses from investments in mortgage loans on real estate and loans from premium financing is a reserve established through a provision for possible loan losses charged to expense which represents, in the Company’s judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan and premium financing loan portfolios. The allowance, in the judgment of the Company, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan and premium finance loan portfolios and reduces the carrying value of investments in mortgage loans on real estate and premium finance loans to the estimated net realizable value on the consolidated statement of financial position.

While the Company 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 residential and commercial and industrial mortgage loan and premium finance loan portfolios, the economy and changes in interest rates. The Company’s allowance for possible mortgage loan and premium finance 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.

Mortgage loans and premium finance loans are 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 mortgage loan or premium finance loan agreement. Factors considered by the Company in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan, and the probability of collecting scheduled principal and interest payments when due. Mortgage loans and premium finance loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan or premium finance 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.

As of June 30, 2017, $557,042 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company. As of June 30, 2017, $157,039 of that escrow amount is available to the Company for possible losses on its investment of $31,407,826 in residential mortgage loans on real estate with one loan originator.

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

8. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing

(continued)

In addition, the Company has an additional $345,458 allowance for possible loan losses in the remaining $68,929,233 of investments in mortgage loans on real estate as of June 30, 2017.

As of December 31, 2016, $525,063 of independent mortgage loan balances were held in escrow by a third party for the benefit of the Company related to its investment in $25,523,757 of mortgage loans on real estate with one loan originator. In addition, the Company had an additional $244,427 allowance for possible loan losses in the remaining $48,847,529 of investments in mortgage loans on real estate as of December 31, 2016.

Through June 30, 2012, FTCC financed amounts up to 80% of the premium on property and casualty insurance policies after a 20% or greater down payment was made by the policy owner. The premiums financed were collateralized by the amount of the unearned premium of the insurance policy. Policies that became delinquent were submitted for cancellation and recovery of the unearned premium, up to the amount of the loan balance, 25 days after a payment became delinquent. As of December 31, 2016 the Company established a full allowance for uncollectible receivables against the premium financing asset. In late December of 2016, the Company wrote off the asset by netting the allowance for uncollectible receivables against the premium financing asset. The Company has made no premium financing loans since June 30, 2012.

The balances of and changes in the Company’s credit losses related to mortgage loans on real estate and loans from premium financing as of and for the three and six months ended June 30, 2017 and 2016 are summarized as follows (excluding $31,407,826 and $24,629,791 of mortgage loans on real estate as of June 30, 2017 and 2016, respectively, with one loan originator where independent mortgage loan balances are held in escrow by a third party for the benefit of the Company):

	(Unaudited)
	As of and for the Three Months Ended June 30,
	Residential Mortgage Loans				Commercial Mortgage Loans					Premium Finance Loans				Total
	2017		2016		2017		2016			2017		2016		2017		2016
Allowance, beginning	$	280,284	$	182,472	$	6,197	$	7,245		$	-	$	192,690	$	286,481	$	382,407
Charge offs		-		-		-		-			-		-		-		-
Recoveries		-		-		-		-			-		-		-		-
Provision		55,896		8,860		3,081		(713	)		-		86,972		58,977		95,119
Allowance, ending	$	336,180	$	191,332	$	9,278	$	6,532		$	-	$	279,662	$	345,458	$	477,526

Allowance, ending:
Individually evaluated for impairment	$	-	$	-	$	-	$	-		$	-	$	279,662	$	-	$	279,662
Collectively evaluated for impairment	$	336,180	$	191,332	$	9,278	$	6,532		$	-	$	-	$	345,458	$	197,864

Carrying Values:
Individually evaluated for impairment	$	-	$	-	$	-	$	-		$	-	$	347,885	$	-	$	347,885
Collectively evaluated for impairment	$	67,082,982	$	38,594,991	$	1,846,251	$	1,300,009		$	-	$	-	$	68,929,233	$	39,895,000

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

8. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing

(continued)

	(Unaudited)
	As of and for the Six Months Ended June 30,
	Residential Mortgage Loans				Commercial Mortgage Loans					Premium Finance Loans				Total
	2017		2016		2017		2016			2017		2016		2017		2016
Allowance, beginning	$	238,121	$	175,988	$	6,306	$	7,360		$	-	$	197,172	$	244,427	$	380,520
Charge offs		-		-		-		-			-		-		-		-
Recoveries		-		-		-		-			-		-		-		-
Provision		98,059		15,344		2,972		(828	)		-		82,490		101,031		97,006
Allowance, ending	$	336,180	$	191,332	$	9,278	$	6,532		$	-	$	279,662	$	345,458	$	477,526

Allowance, ending:
Individually evaluated for impairment	$	-	$	-	$	-	$	-		$	-	$	279,662	$	-	$	279,662
Collectively evaluated for impairment	$	336,180	$	191,332	$	9,278	$	6,532		$	-	$	-	$	345,458	$	197,864

Carrying Values:
Individually evaluated for impairment	$	-	$	-	$	-	$	-		$	-	$	347,885	$	-	$	347,885
Collectively evaluated for impairment	$	67,082,982	$	38,594,991	$	1,846,251	$	1,300,009		$	-	$	-	$	68,929,233	$	39,895,000

The Company utilizes the ratio of the carrying value of individual residential and commercial mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s residential and commercial and industrial mortgage loans on real estate by credit quality using this ratio as of June 30, 2017 and December 31, 2016 are summarized as follows:

			Residential Mortgage Loans				Commercial and Industrial Mortgage Loans				Total Mortgage Loans
			(Unaudited)				(Unaudited)				(Unaudited)
Loan-To-Value Ratio			June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Over 70%	to	80%	$	19,892,112	$	14,559,541	$	-	$	-	$	19,892,112	$	14,559,541
Over 60%	to	70%		35,279,607		29,738,887		-		-		35,279,607		29,738,887
Over 50%	to	60%		23,532,033		15,440,364		853,650		1,051,155		24,385,683		16,491,519
Over 40%	to	50%		12,858,388		10,399,031		-		-		12,858,388		10,399,031
Over 30%	to	40%		4,085,833		2,184,351		665,508		203,653		4,751,341		2,388,004
Over 20%	to	30%		2,055,612		467,410		182,018		-		2,237,630		467,410
Over 10%	to	20%		729,887		317,936		145,075		-		874,962		317,936
10%	or	less		57,336		8,958		-		-		57,336		8,958
Total			$	98,490,808	$	73,116,478	$	1,846,251	$	1,254,808	$	100,337,059	$	74,371,286

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

Overview

First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products and annuity contracts in niche markets.

As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC and FBLIC 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 Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia 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.

Acquisitions

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance and annuity business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of FLAC for $2,500,000 and had additional acquisition related expenses of $195,234.

In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of FBLIC for $13,855,129.

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement and assumed liabilities of $3,055,916.

Our profitability in the life insurance and annuity segments is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired, administer life insurance company acquisitions at an expense level that validates the acquisition cost and invest the premiums and annuity considerations in assets that earn investment income with a positive spread.

Critical Accounting Policies and Estimates

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

For a description of the Company’s critical accounting policies and estimates, please refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company considers its most critical accounting estimates to be those applied to investments in fixed maturity and equity securities, mortgage loans on real estate, deferred policy acquisition costs, value of insurance business acquired and future policy benefits. There have been no material changes to the Company’s critical accounting policies and estimates since December 31, 2016.