UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterquarterly period ended September 30, 2017, 2020

or


[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Periodtransition period from _____ to ________


Commission file number: File Number:000-09341


SECURITY NATIONAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


UTAH

87-0345941

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

5300 South 360

121 West Election Road, Suite 250, Salt Lake City,100, Draper, Utah

84123

84020

(Address of principal executive offices)

(Zip Code)

(801) 264-1060

(Registrant'sRegistrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Class A Common Stock

SNFCA

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 [X] No [  ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes [X] No [  ]


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


Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)Smaller reporting company [X]

Large accelerated filer [  ]   Accelerated filer [  ]    

Non-accelerated filer [  ] (Do not check if a smaller reporting company)Smaller reporting company [X] 

Emerging growth company [  ] 

If an emerging growth company, indicate by check mark if the 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 in Rule 12b-2 of the Exchange Act).  

Yes [  ] No[X]


Indicate

As of November 10, 2020, the numberregistrant had 16,573,341 shares of Class A Common Stock, $2.00 par value, outstanding and 2,589,783 shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class A Common Stock, $2.00 par value
13,820,079
Title of ClassNumber of Shares Outstanding as of November 14, 2017
Class C Common Stock, $2.00 par value
2,005,026
Title of ClassNumber of Shares Outstanding as of November 14, 2017

Class C Common Stock, $2.00 par value, outstanding. 

===================================================================================


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q


QUARTER ENDED SEPTEMBER 30, 2017


2020

Table of Contents



Page No.

Part I  - Financial Information

Item 1.

Financial Statements

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 20172020 (unaudited) and December 31, 2016 (unaudited)2019

3-4

Condensed Consolidated Statements of Earnings for the Threethree and Nine Months Endednine months
ended September 30, 20172020 and 20162019 (unaudited)

5

Condensed Consolidated Statements of Comprehensive Income for the Threethree and Nine Months Endednine months ended September 30, 20172020 and 20162019 (unaudited)

6

Condensed Consolidated Statements of Stockholders' Equity as of September 30, 20172020 and September 30, 20162019 (unaudited)

7

7-8

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended Septemernine months ended September 30, 20172020 and 20162019 (unaudited)

8

9-10

Notes to Condensed Consolidated Financial Statements (unaudited)

9

11

Item 2.

Management's

Management’s Discussion and Analysis of Financial Condition and Results of Operations

46

57

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

52

64

Item 4.

Controls and Procedures

52

64

Part II - Other Information

Item 1.

Legal Proceedings

65

Item 1.1A.

Legal Proceedings

Risk Factors

52

65

Item 1A.Risk Factors52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

65

Item 3.

Defaults Upon Senior Securities

53

66

Item 4.

Mine Safety Disclosures

53

66

Item 5.

Other Information

66

Item 5.6.

Other Information

Exhibits

53

66

Item 6.Exhibits54

Signature Page

56

68




2

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


Part I - Financial Information


Item 1.Financial Statements.


Assets 
September 30
2017
(Unaudited)
  
December 31
2016
(As Restated)
 
Investments:      
Fixed maturity securities, held to maturity, at amortized cost $230,811,272  $184,979,644 
Equity securities, available for sale, at estimated fair value  5,957,488   9,911,256 
Mortgage loans held for investment (net of allowances for loan losses of $2,051,818 and $1,748,783 for 2017 and 2016)  147,300,691   148,990,732 
Real estate held for investment (net of accumulated depreciation of $17,919,427 and $16,138,439 for 2017 and 2016)  150,568,998   145,165,921 
Policy loans and other investments (net of allowances for doubtful accounts of $1,142,257 and $1,119,630 for 2017 and 2016)  42,489,149   41,599,246 
Short-term investments  17,830,990   27,560,040 
Accrued investment income  3,391,688   2,972,596 
Total investments  598,350,276   561,179,435 
Cash and cash equivalents  38,593,462   38,987,430 
Loans held for sale (including $166,990,187 for 2017 and $-0- for 2016 at estimated fair value)  201,895,906   189,139,832 
Receivables (net of allowances for doubtful accounts of $2,758,394 and $2,355,482 for 2017 and 2016)  8,613,364   8,410,546 
Restricted assets  10,815,726   10,391,394 
Cemetery perpetual care trust investments  4,438,788   4,131,885 
Receivable from reinsurers  13,394,586   13,079,668 
Cemetery land and improvements  10,581,368   10,672,836 
Deferred policy and pre-need contract acquisition costs  78,049,594   69,118,745 
Mortgage servicing rights, net  20,396,568   18,872,362 
Property and equipment, net  7,560,662   8,791,522 
Value of business acquired  6,831,777   7,570,300 
Goodwill  2,765,570   2,765,570 
Other  5,616,664   9,310,040 
         
Total Assets $1,007,904,311  $952,421,565 

Assets

September 30
2020
(Unaudited)

 

December 31
2019

Investments:

 

 

 

Fixed maturity securities, available for sale, at estimated fair value

$       344,917,387

 

$   355,977,820

Equity securities at estimated fair value

           11,215,606

 

         7,271,165

Mortgage loans held for investment (net of allowances for loan losses of $2,046,481 and $1,453,037 for 2020 and 2019)

         245,609,527

 

     236,694,546

Real estate held for investment (net of accumulated depreciation of $13,497,759 and $12,788,739 for 2020 and 2019)

         123,002,683

 

     102,756,946

Real estate held for sale

             7,990,181

 

       14,097,627

Other investments and policy loans (net of allowances for doubtful accounts of $1,602,483 and $1,448,026 for 2020 and 2019)

           68,008,150

 

       60,245,269

Accrued investment income

             5,712,998

 

         4,833,232

Total investments

         806,456,532

 

     781,876,605

Cash and cash equivalents

         151,686,960

 

     127,754,719

Loans held for sale at estimated fair value

         445,878,979

 

     213,457,632

Receivables (net of allowances for doubtful accounts of $1,698,836
and $1,724,156 for 2020 and 2019)

           10,423,683

 

         9,236,330

Restricted assets (including $3,663,945 and $2,985,347 for 2020 and 2019 at estimated fair value)

           16,242,387

 

       13,935,317

Cemetery perpetual care trust investments (including $2,408,995 and $2,581,124 for 2020 and 2019 at estimated fair value)

             5,387,732

 

         4,411,864

Receivable from reinsurers

           15,849,961

 

       15,747,768

Cemetery land and improvements

             9,117,882

 

         9,519,950

Deferred policy and pre-need contract acquisition costs

           98,432,491

 

       94,701,920

Mortgage servicing rights, net

           28,387,476

 

       17,155,529

Property and equipment, net

           12,636,951

 

       14,600,394

Value of business acquired

             9,188,492

 

         9,876,647

Goodwill

             3,519,588

 

         3,519,588

Other

           33,988,873

 

       18,649,812

 

 

 

 

Total Assets

$     1,647,197,987

 

$ 1,334,444,075

See accompanying notes to condensed consolidated financial statements (unaudited).



3

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)


  
September 30
2017
(Unaudited)
  
December 31
2016
(As Restated)
 
Liabilities and Stockholders' Equity      
Liabilities      
Future policy benefits and unpaid claims $600,643,308  $584,067,692 
Unearned premium reserve  4,290,164   4,469,771 
Bank and other loans payable  182,769,669   152,140,679 
Deferred pre-need cemetery and mortuary contract revenues  12,716,761   12,360,249 
Cemetery perpetual care obligation  3,679,925   3,598,580 
Accounts payable  3,279,790   4,213,109 
Other liabilities and accrued expenses  33,448,055   34,693,485 
Income taxes  27,732,758   24,318,869 
Total liabilities  868,560,430   819,862,434 
         
Stockholders' Equity        
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding  -   - 
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 13,820,079 shares in 2017 and 13,819,006 shares in 2016  27,640,158   27,638,012 
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding  -   - 
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,005,026 shares in 2017 and 1,902,229 shares in 2016  4,010,052   3,804,458 
Additional paid-in capital  35,490,027   34,813,246 
Accumulated other comprehensive income, net of taxes  336,631   264,822 
Retained earnings  72,848,622   67,409,204 
Treasury stock at cost - 559,605 Class A shares in 2017 and 704,122 Class A shares in 2016  (981,609)  (1,370,611)
         
Total stockholders' equity  139,343,881   132,559,131 
         
Total Liabilities and Stockholders' Equity $1,007,904,311  $952,421,565 

 

September 30
2020
(Unaudited)

 

December 31
2019

Liabilities and Stockholders' Equity

 

 

 

Liabilities

 

 

 

Future policy benefits and unpaid claims

$   840,604,906

 

$   825,600,918

Unearned premium reserve

         3,404,592

 

         3,621,697

Bank and other loans payable

     424,932,007

 

     217,572,612

Deferred pre-need cemetery and mortuary contract revenues

       13,045,307

 

       12,607,978

Cemetery perpetual care obligation

         4,038,169

 

         3,933,719

Accounts payable

         5,185,265

 

         5,056,983

Other liabilities and accrued expenses

       68,639,787

 

       50,652,591

Income taxes

       31,301,997

 

       18,686,972

Total liabilities

   1,391,152,030

 

   1,137,733,470

 

 

 

 

Stockholders' Equity

 

 

 

Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding

                     -

 

                     -

Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 16,559,987 shares in 2020 and 16,107,779 shares in 2019

       33,119,974

 

       32,215,558

Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding

                     -

 

                     -

Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,549,383 shares in 2020 and 2,500,887 shares in 2019

         5,098,766

 

         5,001,774

Additional paid-in capital

       49,355,124

 

       46,091,112

Accumulated other comprehensive income, net of taxes

       19,909,604

 

       13,726,514

Retained earnings

     149,428,819

 

     101,256,229

Treasury stock at cost - 189,390 Class A shares in 2020 and 490,823 Class A shares in 2019

          (866,330)

 

       (1,580,582)

 

 

 

 

Total stockholders' equity

     256,045,957

 

     196,710,605

 

 

 

 

Total Liabilities and Stockholders' Equity

$ 1,647,197,987

 

$ 1,334,444,075

See accompanying notes to condensed consolidated financial statements (unaudited).



4

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


  
Three Months Ended
 September 30
  
Nine Months Ended
September 30
 
  2017  2016  2017  2016 
Revenues:            
Insurance premiums and other considerations $17,489,560  $17,157,319  $52,345,184  $47,508,420 
Net investment income  8,361,466   8,089,857   25,559,113   23,484,280 
Net mortuary and cemetery sales  2,717,311   2,776,023   9,356,659   9,541,950 
Realized gains (losses) on investments and other assets  (319,666)  (39,169)  713,066   179,296 
Other than temporary impairments on investments  (163,375)  (30,000)  (481,741)  (133,630)
Mortgage fee income  41,597,573   53,195,763   122,086,734   146,967,246 
Other  2,288,982   1,798,864   6,393,691   4,944,670 
Total revenues  71,971,851   82,948,657   215,972,706   232,492,232 
                 
Benefits and expenses:                
Death benefits  8,772,153   7,250,100   26,113,770   22,410,230 
Surrenders and other policy benefits  547,648   630,735   2,085,296   1,709,915 
Increase in future policy benefits  6,735,141   6,382,949   17,669,279   15,777,008 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired  2,238,955   2,301,107   6,271,763   6,221,495 
Selling, general and administrative expenses:                
Commissions  18,999,583   24,395,173   53,877,389   68,214,894 
Personnel  17,200,315   17,755,070   53,754,920   52,535,277 
Advertising  1,611,599   2,006,013   4,407,877   5,053,968 
Rent and rent related  2,257,259   2,122,708   6,693,292   6,235,430 
Depreciation on property and equipment  517,041   528,051   1,723,879   1,585,995 
Provision for loan loss reserve  -   600,000   -   600,000 
Costs related to funding mortgage loans  2,809,471   2,365,395   7,315,227   6,956,774 
Other  7,035,570   8,075,906   22,227,370   21,388,693 
Interest expense  1,655,870   1,476,137   4,295,263   3,775,483 
Cost of goods and services sold-mortuaries and cemeteries  453,229   485,783   1,507,295   1,396,574 
Total benefits and expenses  70,833,834   76,375,127   207,942,620   213,861,736 
                 
Earnings before income taxes  1,138,017   6,573,530   8,030,086   18,630,496 
Income tax expense  (41,179)  (2,390,525)  (2,587,384)  (6,892,544)
                 
Net earnings $1,096,838  $4,183,005  $5,442,702  $11,737,952 
                 
Net earnings per Class A Equivalent common share (1) $0.07  $0.28  $0.36  $0.80 
                 
Net earnings per Class A Equivalent common share-assuming dilution (1) $0.07  $0.27  $0.35  $0.77 
                 
Weighted-average Class A equivalent common share outstanding (1)  15,256,857   14,830,078   15,159,569   14,744,779 
                 
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)  15,542,660   15,269,613   15,474,826   15,166,045 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

2020

 

2019

 

2020

 

2019

Revenues:

 

 

 

 

 

 

 

Insurance premiums and other considerations

$      23,766,576

 

$      19,832,492

 

$    68,982,561

 

$      58,504,712

Net investment income

        14,709,142

 

        10,478,566

 

      41,072,386

 

        31,061,069

Net mortuary and cemetery sales

         5,371,715

 

         3,526,416

 

      14,530,584

 

        11,205,774

Gains (losses) on investments and other assets

            800,507

 

          (519,673)

 

         (173,461)

 

            261,095

Mortgage fee income

        98,559,624

 

        39,735,752

 

    212,209,718

 

        97,161,190

Other

         2,997,001

 

         2,326,106

 

        7,853,468

 

          7,124,836

Total revenues

146,204,565

 

75,379,659

 

344,475,256

 

205,318,676

 

 

 

 

 

 

 

 

Benefits and expenses:

 

 

 

 

 

 

 

Death benefits

        16,026,897

 

         9,937,711

 

      43,021,247

 

        29,264,410

Surrenders and other policy benefits

         1,056,318

 

            636,366

 

        2,964,984

 

          2,266,275

Increase in future policy benefits

         4,892,972

 

         5,980,721

 

      18,534,848

 

        17,407,962

Amortization of deferred policy and pre-need acquisition costs and value of business acquired

         4,239,935

 

         3,477,160

 

      10,781,658

 

          9,678,912

Selling, general and administrative expenses:

 

 

 

 

 

 

 

Commissions

        37,761,992

 

        16,714,061

 

      81,555,823

 

        40,243,042

Personnel

        21,700,446

 

        16,287,957

 

      60,959,099

 

        47,018,553

Advertising

         1,607,138

 

         1,361,745

 

        3,842,296

 

          3,566,823

Rent and rent related

         1,797,161

 

         1,749,402

 

        5,074,755

 

          5,377,869

Depreciation on property and equipment

            516,243

 

            421,970

 

        1,550,526

 

          1,294,576

Costs related to funding mortgage loans

         3,057,276

 

         1,917,390

 

        7,392,373

 

          4,831,604

Other

        11,701,986

 

         9,355,218

 

      33,080,916

 

        25,154,712

Interest expense

         2,363,169

 

         2,078,733

 

        6,063,218

 

          5,353,177

Cost of goods and services sold-mortuaries and cemeteries

            899,101

 

            701,403

 

        2,401,592

 

          2,044,937

Total benefits and expenses

107,620,634

 

70,619,837

 

277,223,335

 

193,502,852

 

 

 

 

 

 

 

 

Earnings before income taxes

        38,583,931

 

         4,759,822

 

      67,251,921

 

        11,815,824

Income tax expense

        (9,279,162)

 

        (1,142,408)

 

    (15,965,656)

 

        (2,788,038)

 

 

 

 

 

 

 

 

Net earnings

$      29,304,769

 

$        3,617,414

 

$    51,286,265

 

$        9,027,786

 

 

 

 

 

 

 

 

Net earnings per Class A Equivalent common share (1)

$1.55

 

$0.19

 

$2.73

 

$0.49

 

 

 

 

 

 

 

 

Net earnings per Class A Equivalent common share-assuming dilution (1)

$1.51

 

$0.19

 

$2.68

 

$0.48

 

 

 

 

 

 

 

 

Weighted-average Class A equivalent common share outstanding (1)

18,873,886

 

18,551,116

 

18,760,884

 

18,560,874

 

 

 

 

 

 

 

 

Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)

19,433,619

 

18,755,091

 

19,164,890

 

18,769,435

(1) Net earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.


See accompanying notes to condensed consolidated financial statements (unaudited).



5

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
  2017  2016  2017  2016 
Net earnings $1,096,838  $4,183,005  $5,442,702  $11,737,952 
Other comprehensive income:                
Unrealized gains on available for sale securities  144,381   212,413   106,543   684,002 
Unrealized gains on derivative instruments  554   -   3,170   5,541 
Other comprehensive income, before income tax  144,935   212,413   109,713   689,543 
Income tax expense  (50,517)  (74,383)  (37,904)  (239,339)
Other comprehensive income, net of income tax  94,418   138,030   71,809   450,204 
Comprehensive income $1,191,256  $4,321,035  $5,514,511  $12,188,156 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

2020

 

2019

 

2020

 

2019

Net earnings

$      29,304,769

 

$        3,617,414

 

$     51,286,265

 

$       9,027,786

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized gains on fixed maturity securities available for sale

$        3,810,906

 

                      -

 

        7,810,537

 

                     -

Unrealized gains on restricted assets

              23,323

 

                      -

 

             28,309

 

                     -

Unrealized losses on cemetery perpetual care trust investments

             (16,883)

 

                      -

 

           (11,114)

 

                     -

Foreign currency translation adjustments

                    84

 

                 (340)

 

               (196)

 

              1,707

Other comprehensive income, before income tax

          3,817,430

 

                 (340)

 

        7,827,536

 

              1,707

Income tax benefit (expense)

           (801,915)

 

                    85

 

       (1,644,446)

 

               (426)

Other comprehensive income, net of income tax

          3,015,515

 

                 (255)

 

        6,183,090

 

              1,281

Comprehensive income

$      32,320,284

 

$        3,617,159

 

$     57,469,355

 

$       9,029,067

See accompanying notes to condensed consolidated financial statements (unaudited).



6

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

Nine Months Ended September 30, 2020

 

 

Class A Common Stock

 

Class C Common Stock

 

Additional Paid-in Capital

 

Accumulated Other Comprehensive Income

 

Retained Earnings

 

Treasury Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2020

 

$  32,215,558

 

$ 5,001,774

 

$      46,091,112

 

$          13,726,514

 

$  101,256,229

 

$ (1,580,582)

 

$  196,710,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                     -

 

                  -

 

                          -

 

                              -

 

          1,424,449

 

                     -

 

          1,424,449

Other comprehensive loss

 

                      -

 

                   -

 

                          -

 

             (8,852,313)

 

                         -

 

                     -

 

        (8,852,313)

Stock-based compensation expense

 

                     -

 

                   -

 

               65,877

 

                              -

 

                         -

 

                     -

 

                65,877

Exercise of stock options

 

          44,822

 

                  -

 

            (33,930)

 

                              -

 

                         -

 

                     -

 

                 10,892

Sale of treasury stock

 

                       -

 

                   -

 

            218,280

 

                              -

 

                         -

 

         264,081

 

              482,361

Purchase of treasury stock

 

                       -

 

                   -

 

                          -

 

                              -

 

                         -

 

      (129,608)

 

            (129,608)

Stock dividends

 

            2,322

 

        (1,020)

 

                 2,292

 

                              -

 

             (3,594)

 

                     -

 

                           -

Conversion Class C to Class A

 

          22,324

 

     (22,324)

 

                          -

 

                              -

 

                         -

 

                     -

 

                              -

March 31, 2020

 

$ 32,285,026

 

$4,978,430

 

$    46,343,631

 

$            4,874,201

 

$ 102,677,084

 

$  (1,446,109)

 

$  189,712,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                       -

 

                   -

 

                          -

 

                              -

 

      20,557,047

 

                     -

 

      20,557,047

Other comprehensive income

 

                       -

 

                   -

 

                          -

 

             12,019,888

 

                         -

 

                     -

 

        12,019,888

Stock-based compensation expense

 

                     -

 

                   -

 

             101,520

 

                              -

 

                         -

 

                     -

 

               101,520

Exercise of stock options

 

           22,726

 

                   -

 

            (22,726)

 

                              -

 

                         -

 

                     -

 

                           -

Sale of treasury stock

 

                      -

 

                   -

 

            319,676

 

                              -

 

                         -

 

          664,546

 

             984,222

Purchase of treasury stock

 

                      -

 

                   -

 

                          -

 

                              -

 

                         -

 

      (760,713)

 

            (760,713)

Stock dividends

 

           807,356

 

      124,460

 

          2,175,790

 

                              -

 

     (3,107,607)

 

                     -

 

                        (1)

Conversion Class C to Class A

 

                      -

 

                   -

 

                          -

 

                              -

 

                         -

 

                     -

 

                              -

June 30, 2020

 

$    33,115,108

 

$ 5,102,890

 

$     48,917,891

 

$         16,894,089

 

$  120,126,524

 

$ (1,542,276)

 

$ 222,614,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                     -

 

                   -

 

                          -

 

                              -

 

      29,304,769

 

                     -

 

      29,304,769

Other comprehensive income

 

                     -

 

                   -

 

                          -

 

                3,015,515

 

                         -

 

                     -

 

           3,015,515

Stock-based compensation expense

 

                      -

 

                   -

 

            104,562

 

                              -

 

                         -

 

                     -

 

              104,562

Sale of treasury stock

 

                     -

 

                   -

 

              330,939

 

                              -

 

                         -

 

          886,452

 

            1,217,391

Purchase of treasury stock

 

                       -

 

                   -

 

                          -

 

                              -

 

                         -

 

       (210,506)

 

            (210,506)

Stock dividends

 

                742

 

                   -

 

                 1,732

 

                              -

 

             (2,474)

 

                     -

 

                           -

Conversion Class C to Class A

 

             4,124

 

        (4,124)

 

                          -

 

                              -

 

                        -

 

                     -

 

                              -

September 30, 2020

 

$   33,119,974

 

$5,098,766

 

$    49,355,124

 

$         19,909,604

 

$  149,428,819

 

$     (866,330)

 

$256,045,957



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY

(Unaudited)


  
Class A
 Common Stock
  
Class C
Common Stock
  
Additional
Paid-in
Capital
  
Accumulated
 Other Comprehensive Income
  
Retained
 Earnings
  
Treasury
Stock
  Total 
                      
Balance at December 31, 2015 $26,218,200  $3,419,280  $30,232,582  $(499,358) $60,525,404  $(2,179,429) $117,716,679 
                             
Net earnings  -   -   -   -   11,737,952   -   11,737,952 
Other comprehensive income  -   -   -   450,204   -   -   450,204 
Grant of stock options  -   -   253,427   -   -   -   253,427 
Exercise of stock options  64,834   -   12,374   -   -   -   77,208 
Sale of treasury stock  -   -   440,420   -   -   634,268   1,074,688 
Stock dividends  274   12,768   30,779   -   (43,821)  -   - 
Conversion Class C to Class A  17,016   (17,016)                    
Balance at September 30, 2016 $26,300,324  $3,415,032  $30,969,582  $(49,154) $72,219,535  $(1,545,161) $131,310,158 
                             
Balance at December 31, 2016 $27,638,012  $3,804,458  $34,813,246  $264,822  $67,409,204  $(1,370,611) $132,559,131 
                             
Net earnings  -   -   -   -   5,442,702   -   5,442,702 
Other comprehensive income  -   -   -   71,809   -   -   71,809 
Grant of stock options  -   -   305,741   -   -   -   305,741 
Exercise of stock options  2   206,804   (206,806)  -   -   -   - 
Sale of treasury stock  -   -   575,496   -   -   574,472   1,149,968 
Purchase of treasury stock  -   -   -   -   -   (185,470)  (185,470)
Stock dividends  930   4   2,350   -   (3,284)  -   - 
Conversion Class C to Class A  1,214   (1,214)  -   -   -   -   - 
Balance at September 30, 2017 $27,640,158  $4,010,052  $35,490,027  $336,631  $72,848,622  $(981,609) $139,343,881 

(Continued)

 

 

Nine Months Ended September 30, 2019

 

 

Class A Common Stock

 

Class C Common Stock

 

Additional Paid-in Capital

 

Accumulated Other Comprehensive Income

 

Retained Earnings

 

Treasury Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019

 

$ 30,609,596

 

$  4,387,286

 

$  41,821,778

 

$              (2,823)

 

$  95,201,732

 

$  (206,396)

 

   171,811,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                   -

 

                 -

 

                   -

 

                      -

 

     1,930,318

 

                 -

 

     1,930,318

Other comprehensive income

 

                   -

 

                 -

 

                      -

 

                        820

 

                      -

 

                      -

 

                  820

Stock-based compensation expense

 

                   -

 

                 -

 

           64,704

 

                      -

 

                      -

 

                      -

 

            64,704

Exercise of stock options

 

              8,936

 

                 -

 

              8,444

 

                      -

 

                      -

 

                      -

 

             17,380

Sale of treasury stock

 

                   -

 

                 -

 

          295,153

 

                      -

 

                    -

 

       42,343

 

         337,496

Purchase of treasury stock

 

                   -

 

                 -

 

                      -

 

                      -

 

                      -

 

       (112,404)

 

        (112,404)

Stock dividends

 

               282

 

               (4)

 

                489

 

                      -

 

             (769)

 

                  -

 

                   (2)

Conversion Class C to Class A

 

              6,560

 

       (6,560)

 

                      -

 

                      -

 

                      -

 

                      -

 

                        -

March 31, 2019

 

$ 30,625,374

 

$  4,380,722

 

$  42,190,568

 

$              (2,003)

 

$  97,131,281

 

$  (276,457)

 

$ 174,049,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                   -

 

                 -

 

                   -

 

                      -

 

     3,480,054

 

                  -

 

      3,480,054

Other comprehensive income

 

                   -

 

                 -

 

                      -

 

                          716

 

 

 

                      -

 

                     716

Stock-based compensation expense

 

                   -

 

                 -

 

           65,037

 

                      -

 

                      -

 

                      -

 

                65,037

Exercise of stock options

 

          20,274

 

                 -

 

              9,519

 

                      -

 

                      -

 

                      -

 

                29,793

Sale of treasury stock

 

                 -

 

                 -

 

           92,605

 

                      -

 

                   -

 

       25,190

 

         117,795

Purchase of treasury stock

 

                 -

 

                 -

 

                     -

 

                      -

 

                      -

 

      (174,704)

 

            (174,704)

Conversion Class C to Class A

 

                 12

 

             (14)

 

                        2

 

                      -

 

                      -

 

                      -

 

                        -

June 30, 2019

 

$ 30,645,660

 

$  4,380,708

 

$   42,357,731

 

$              (1,287)

 

$100,611,335

 

$  (425,971)

 

$ 177,568,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                   -

 

                  -

 

                    -

 

                      -

 

     3,617,414

 

                  -

 

      3,617,414

Other comprehensive loss

 

                      -

 

                      -

 

                      -

 

                       (255)

 

                      -

 

                      -

 

                      (255)

Stock-based compensation expense

 

                      -

 

                      -

 

              65,746

 

                      -

 

                      -

 

                      -

 

                65,746

Exercise of stock options

 

              8,936

 

          127,628

 

             114,376

 

                      -

 

                      -

 

                      -

 

             250,940

Sale of treasury stock

 

                  -

 

                  -

 

           88,162

 

                      -

 

                   -

 

       35,400

 

          123,562

Purchase of treasury stock

 

                      -

 

                      -

 

                      -

 

                      -

 

                      -

 

      (553,193)

 

            (553,193)

Conversion Class C to Class A

 

                      -

 

                      -

 

                      -

 

                      -

 

                      -

 

                      -

 

                              -

September 30, 2019

 

$ 30,654,596

 

$  4,508,336

 

$   42,626,015

 

$              (1,542)

 

$104,228,749

 

$  (943,764)

 

$ 181,072,390

See accompanying notes to condensed consolidated financial statements (unaudited).



7

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30

 

2020

 

2019

Cash flows from operating activities:

 

 

 

    Net cash used in operating activities

$(164,589,158)

 

$  (62,865,938)

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchases of fixed maturity securities

    (56,899,073)

 

    (27,227,180)

Sales, calls and maturities of fixed maturity securities

     75,523,084

 

     19,444,922

Purchases of equity securities

      (6,492,243)

 

      (3,521,610)

Sales of equity securities

       2,011,568

 

       1,691,231

Net changes in restricted assets

      (2,650,188)

 

        (514,574)

Net changes in perpetual care trusts

        (870,485)

 

        (111,076)

Mortgage loans held for investment, other investments and policy loans made

  (486,189,616)

 

  (421,682,247)

Payments received for mortgage loans held for investment, other investments and policy loans

    478,445,833

 

    410,303,611

Purchases of property and equipment

      (1,111,360)

 

        (931,691)

Sales of property and equipment

                    -

 

           51,104

Purchases of real estate

    (27,528,643)

 

      (6,465,802)

Sales of real estate

     13,052,416

 

       8,291,147

Cash paid for purchase of subsidiaries, net of cash acquired

                    -

 

      (3,261,788)

     Net cash used in investing activities

    (12,708,707)

 

    (23,933,953)

 

 

 

 

Cash flows from financing activities:

 

 

 

Investment contract receipts

       8,656,037

 

       9,628,472

Investment contract withdrawals

    (13,759,734)

 

    (13,282,143)

Proceeds from stock options exercised

           10,892

 

          298,113

Purchases of treasury stock

      (1,100,827)

 

        (840,301)

Repayment of bank and other loans

  (251,041,466)

 

  (139,046,605)

Proceeds from bank borrowings

    329,672,821

 

    149,304,399

Net change in warehouse line borrowings for loans held for sale

    128,600,308

 

     62,987,462

     Net cash provided by financing activities

    201,038,031

 

     69,049,397

 

 

 

 

Net change in cash, cash equivalents, restricted cash and restricted cash equivalents

23,740,166

 

(17,750,494)

 

 

 

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period

137,735,673

 

150,936,673

 

 

 

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

$  161,475,839

 

$  133,186,179

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

Cash paid during the year for:

 

 

 

Interest

$     5,917,344

 

$     5,292,868

Income taxes (net of refunds)

       4,995,073

 

       3,350,434

 

 

 

 

Non Cash Operating, Investing and Financing Activities:

 

 

 

Transfer of loans held for sale to mortgage loans held for investment

$     9,170,610

 

$                  -

Right-of-use assets obtained in exchange for operating lease liabilities

       4,796,580

 

     13,441,537

Benefit plans funded with treasury stock

       2,683,974

 

          578,853

Mortgage loans held for investment foreclosed into real estate held for investment

          686,124

 

       1,410,499

Accrued real estate construction costs and retainage

          347,826

 

          689,291

Right-of-use assets obtained in exchange for finance lease liabilities

             8,494

 

          255,147

Mortgage loans held for investment foreclosed into receivables

                    -

 

          155,347

 

 

 

 

See Note 15 regarding non cash transactions included in the acquisition of Probst Family Funeral and Cremations and Heber Valley Funeral Home.



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

(Unaudited)


  
Nine Months Ended
September 30
 
  2017  2016 
Cash flows from operating activities:      
     Net cash provided by operating activities $6,030,453  $17,639,672 
         
Cash flows from investing activities:        
Securities held to maturity:        
        Purchase-fixed maturity securities  (59,325,291)  (6,519,416)
        Calls and maturities - fixed maturity securities  11,933,573   10,032,336 
Securities available for sale:        
       Purchase - equity securities  (5,126,062)  (3,726,194)
       Sales - equity securities  9,153,786   3,349,728 
Purchases of short-term investments  (27,483,124)  (13,379,112)
Sales of short-term investments  37,212,174   7,185,582 
Net changes in restricted assets  (409,625)  (438,204)
Net changes in perpetual care trusts  (231,415)  (966,367)
Mortgage loans, policy loans, and other investments made  (340,424,956)  (338,457,602)
Payments received for mortgage loans, policy loans and other investments  344,278,996   330,303,396 
Purchase of property and equipment  (508,846)  (1,303,979)
Sale of property and equipment  9,977   34,000 
Purchase of real estate  (12,474,490)  (19,448,152)
Sale of real estate  8,612,307   5,672,484 
Cash paid for purchase of subsidiaries, net of cash acquired  -   (4,328,520)
      Net cash used in investing activities  (34,782,996)  (31,990,020)
         
Cash flows from financing activities:        
Investment contract receipts  9,457,285   8,401,542 
Investment contract withdrawals  (11,522,652)  (9,957,964)
Proceeds from stock options exercised  -   77,208 
Purchase of treasury stock  (185,470)  - 
Repayment of bank loans  (2,142,382)  (1,169,233)
Proceeds from borrowing on bank loans  16,729,056   2,523,670 
Net change in warehouse line borrowings  16,022,738   23,893,122 
Net change in line of credit borrowings  -   1,439,650 
      Net cash provided by financing activities  28,358,575   25,207,995 
         
Net change in cash and cash equivalents  (393,968)  10,857,647 
         
Cash and cash equivalents at beginning of period  38,987,430   40,053,242 
         
Cash and cash equivalents at end of period $38,593,462  $50,910,889 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid (received) during the year for:        
Interest (net of amount capitalized) $4,188,579  $3,781,423 
Income taxes (net of refunds)  (788,601)  2,538,097 
         
Non Cash Operating, Investing and Financing Activities:        
Transfer of loans held for sale to mortgage loans held for investment $5,032,147  $7,386,432 
Accrued real estate construction costs and retainage  1,932,790   - 
Mortgage loans foreclosed into real estate  1,576,196   1,703,476 
Benefit plans funded with treasury stock  1,149,968   1,074,688 

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the condensed consolidated statements of cash flows is presented in the table below:

 

Nine Months Ended September 30

 

2020

 

2019

Cash and cash equivalents

$     151,686,960

 

$      123,178,762

Restricted assets

          8,468,191

 

            9,166,838

Cemetery perpetual care trust investments

          1,320,688

 

              840,579

 

 

 

 

Total cash, cash equivalents, restricted cash and restricted cash equivalents

$     161,475,839

 

$      133,186,179

See accompanying notes to condensed consolidated financial statements (unaudited).



8

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


1)Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10‑Q10-Q and Articles 8 and 10 of Regulation S‑X.S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2016,2019, included in the Company'sCompany’s Annual Report on Form 10-K/A (file number10-K (File Number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 20172020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The presentation of certain amounts in the prior year have been reclassified to conform to the 2017 presentation. The Company reclassified certain amounts from other assets to receivables, from receivables to other liabilities, from other assets to other liabilities, from equity securities to other investments, from other liabilities to mortgage loans held for investment, from net investment income to mortgage fee income, and from mortgage fee income to net investment income. These reclassifications had no impact on net earnings or stockholders' equity. Additionally, see the discussion regarding correction of errors in Notes 21 and 22 included in the Company's Form 10-K/A for the year ended December 31, 2016.


2020.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to adopt policies and make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In applying these policies and estimates, the Company makes judgments that frequently require assumptions about matters that are inherently uncertain. The novel coronavirus (“COVID-19”) spread rapidly across the world in the first, second and third quarters of 2020 and was declared a pandemic (the “COVID-19 Pandemic”) by the World Health Organization. The government and private sector responses to contain its spread began to affect the Company’s operations in March, have continued to affect the Company’s operations and will likely continue to affect nearly all of the Company’s operations, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic that may affect the Company’s future earnings, cash flows, and financial condition include the nature and duration of the curtailment or closure of the Company’s various facilities and the long-term effect on the demand for the Company’s products and services. Accordingly, significant estimates used in the preparation of the Company’s financial statements may be subject to significant adjustments in future periods. Actual results could differ from those estimates.


Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits and unearned revenue;benefits; those used in determining the estimated future costsestimating other than temporary impairments on available for pre-need sales;sale securities; those used in determining the value of mortgage servicing rights; those used in determining allowances for loan losses for mortgage loans held for investment; those used in determining loan loss reserve; and those used in determining deferred tax assets and liabilities. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects.


2)2)    Recent Accounting Pronouncements

Accounting Standards Adopted in 2020

ASU No. 2017-01: "Business Combinations2018-13: “Fair Value Measurement (Topic 805)820): ClarifyingDisclosure Framework-Changes to the Definition of a Business"Disclosure Requirements for Fair Value Measurement” – Issued in January 2017,August 2018, ASU 2017-01 intends to clarify2018-13 modifies the definitiondisclosure requirements of a business withTopic 820 by removing, modifying or adding certain disclosures. Among the objective of adding guidance to assistchanges, entities with evaluating whether transactions shouldwill no longer be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a "set," that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially alldisclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01hierarchy, but will be effectiverequired to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. The Company adopted this standard on January 1, 2018.   While2020. The adoption of this standard did not materially impact the Company's acquisitions have historically been classifiedCompany’s financial statements. See Note 8 for the Company’s fair value disclosures.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

2)Recent Accounting Pronouncements (Continued)


Accounting Standards Adopted in 2019

ASU No. 2016-02: “Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations. The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either business combinationsfinance or asset acquisitions, certain acquisitions that were classified as business combinationsoperating leases and to record on the balance sheet right-of-use assets and lease liabilities, equal to the present value of the remaining lease payments. The lease classification will determine whether the lease expense is recognized based on an effective interest rate met hod or a straight-line basis over the term of the leases. The FASB further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20.

The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening balance of retained earnings. Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company likely wouldfirst applied the standard. Under this transition option, the Company will apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company has made an accounting policy election not to apply the recognition requirements to short-term leases, which are leases that, at the commencement date, have been considered asset acquisitions undera lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise. The new authoritative guidance allows for certain practical expedients to be utilized to assist with the implementation of the new standard. As a result, transaction costs are more likely to be capitalized sinceThe Company has elected the transition package of practical expedients which allows the Company expects someto not reassess whether any expired or existing contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases.

The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets. The Company compiled an inventory of its future acquisitionsleases, determined the appropriate discount rates and has determined the impact of this standard which is not material to be classified as asset acquisitions under this new standard. In addition, goodwill that was previously allocated to businesses that were sold or heldthe Company’s results of operations, but has an effect on the balance sheet presentation for sale will no longer be allocated and written off upon sale if future sales were deemed to be sales ofleased assets and obligations. The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019. This standard did not businesses.


impact the Company’s accounting for leases where the Company is the lessor.

Accounting Standards Issued But Not Yet Adopted

ASU No. 2016-13: "Financial“Financial Instruments – Credit Losses (Topic 326)" – Issued in JuneSeptember 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current generally accepted accounting principles ("GAAP")GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP,GAAP; however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. The new authoritative guidance isIn November 2019, the FASB issued an update to ASU No. 2016-13 that made the ASU effective for interim and annual periods beginning after December 15, 2019. Thethe Company is in the process of evaluating the potential impact of this standard.

9

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

2)    Recent Accounting Pronouncements (Continued)
ASU No. 2016-02: "Leases (Topic 842)" - Issued in February 2016, ASU 2016-02 supersedes the requirements in ASC Topic 840, "Leases", and was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2018.January 1, 2023. The Company is in the process of evaluating the potential impact of this standard, which is not expectedespecially as it relates to be materialmortgage loans held for investment.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

2)Recent Accounting Pronouncements (Continued)


ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Company's results of operations but will have an effect on the balance sheet presentationAccounting for leased assets and obligations.


ASU No. 2016-01: "Financial Instruments – Overall (Topic 825-10)"Long-Duration Contracts” – Issued in January 2016,August 2018, ASU 2016-012018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The ASU will simplify and improve the accounting for non-consolidated equity investmentscertain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that are not accountedmade the ASU effective for under the equity method of accounting by requiring changes in fair value to be recognized in income. Under current guidance, changes in fair value for investments of this nature are recognized in accumulated other comprehensive income as a component of stockholders' equity.  Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments.Company on January 1, 2025. The Company holds equity securities classified as available for sale securities that are currently measured at fair value with changes in fair value recognized through other comprehensive income. Upon adoption of ASU 2016-01 the Company will be required to recognize changes in the fair value of these equity securities through earnings, thus increasing the volatility of the Company's earnings. However, adoption of this standard will not significantly affect the Company's comprehensive income or stockholders' equity. This new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017, with the cumulative effect of the adoption made to the balance sheet as of the date of adoption. Thus, the adoption will result in a reclassification of the related accumulated net unrealized gains (losses) currently included in accumulated other comprehensive income to retained earnings. See Note 3 for details regarding the Company's equity securities currently classified as available for sale. The Company will adopt this standard beginning January 1, 2018.

ASU No. 2014-09: "Revenue from Contracts with Customers (Topic 606)" - Issued in May 2014, ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, "Revenue Recognition". ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities and industries. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Insurance contracts are excluded from the scope of this new guidance.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts. The Company intends to adopt ASU 2014-09 using the modified retrospective method. The Company does not expect to record a cumulative effect adjustment to its beginning retained earnings as a result of adoption of ASU 2014-09.

The Company's revenues from contracts with customers that are subject to ASU 2014-09 include revenues on mortuary and cemetery contracts. The recognition and measurement of these items is not expected to change as a result of the Company's adoption of ASU 2014-09 and thus the Company does not expect that the adoption of ASU 2014-09 will significantly impact the Company's results of operations or financial position but is still in the process of evaluating the final impact, including the potential impact on disclosures of contracts with customers. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017. The Company will adopt this standard beginning January 1, 2018.

standard.

The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company'sCompany’s results of operations or financial position.



10

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)



3)Investments


The Company'sCompany’s investments as of September 30, 20172020 are summarized as follows:

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

September 30, 2020:

 

 

 

 

 

 

 

 

Fixed maturity securities, available for sale, at estimated fair value:

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. Government agencies

 

$      92,395,468

 

$       2,059,112

 

$                      -

 

$        94,454,580

    

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

5,765,286

 

322,859

 

(1,792)

 

6,086,353

 

 

 

 

 

 

 

 

 

Corporate securities including public utilities

 

189,323,616

 

24,248,838

 

(2,137,953)

 

211,434,501

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

31,887,810

 

1,313,395

 

(499,496)

 

32,701,709

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

269,214

 

                3,530

 

             (32,500)

 

240,244

 

 

 

 

 

 

 

 

 

Total fixed maturity securities available for sale

 

$    319,641,394

 

$     27,947,734

 

$      (2,671,741)

 

$      344,917,387

 

 

 

 

 

 

 

 

 

Equity securities at estimated fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial, miscellaneous and all other

 

$      11,304,152

 

$       1,845,615

 

$      (1,934,161)

 

$        11,215,606

 

 

 

 

 

 

 

 

 

Total equity securities at estimated fair value

 

$      11,304,152

 

$       1,845,615

 

$      (1,934,161)

 

$        11,215,606

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment at amortized cost:

 

 

 

 

 

 

 

 

Residential

 

$      80,051,914

 

 

 

 

 

 

Residential construction

 

      120,298,836

 

 

 

 

 

 

Commercial

 

        49,378,938

 

 

 

 

 

 

Less: Unamortized deferred loan fees, net

 

           (905,018)

 

 

 

 

 

 

Less: Allowance for loan losses

 

        (2,066,481)

 

 

 

 

 

 

Less: Net discounts

 

        (1,148,662)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans held for investment

 

$    245,609,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for investment - net of accumulated depreciation:

 

 

 

 

 

 

 

 

Residential

 

$      25,166,274

 

 

 

 

 

 

Commercial

 

        97,836,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for investment

 

$    123,002,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for sale:

 

 

 

 

 

 

 

 

Residential

 

$        3,455,244

 

 

 

 

 

 

Commercial

 

          4,534,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for sale

 

$        7,990,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments and policy loans at amortized cost:

 

 

 

 

 

 

 

 

Policy loans

 

$      14,234,935

 

 

 

 

 

 

Insurance assignments

 

        45,858,660

 

 

 

 

 

 

Federal Home Loan Bank stock (1)

 

          4,066,600

 

 

 

 

 

 

Other investments

 

          5,450,438

 

 

 

 

 

 

Less: Allowance for doubtful accounts

 

        (1,602,483)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total policy loans and other investments

 

$      68,008,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued investment income

 

$        5,712,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

 

$    806,456,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                         

 

 

 

 

 

 

 

 

(1) Includes $866,900 of Membership stock and $3,199,700 of Activity stock due to short-term borrowings.



  

Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
 
September 30, 2017
            
Fixed maturity securities held to maturity carried at amortized cost:            
Bonds:            
U.S. Treasury securities and obligations of U.S. Government agencies $54,279,156  $237,071  $(226,543) $54,289,684 
Obligations of states and political subdivisions  5,865,790   124,685   (77,272)  5,913,203 
Corporate securities including public utilities  160,278,125   14,088,157   (1,285,361)  173,080,921 
Mortgage-backed securities  9,764,566   253,573   (171,423)  9,846,716 
Redeemable preferred stock  623,635   53,403   -   677,038 
Total fixed maturity securities held to maturity $230,811,272  $14,756,889  $(1,760,599) $243,807,562 
                 
Equity securities available for sale at estimated fair value:                
                 
Common stock:                
                 
Industrial, miscellaneous and all other $6,310,307  $467,132  $(819,951) $5,957,488 
                 
Total equity securities available for sale at estimated fair value $6,310,307  $467,132  $(819,951) $5,957,488 
                 
Mortgage loans held for investment at amortized cost:                
Residential $65,759,761             
Residential construction  41,306,722             
Commercial  42,923,761             
Less: Unamortized deferred loan fees, net  (637,735)            
Less: Allowance for loan losses  (2,051,818)            
Total mortgage loans held for investment $147,300,691             
                 
Real estate held for investment net of accumulated depreciation:                
Residential $69,469,220             
Commercial  81,099,778             
Total real estate held for investment $150,568,998             
                 
Policy loans and other investments at amortized cost:                
Policy loans $6,677,924             
Insurance assignments  33,340,431             
Federal Home Loan Bank stock  689,400             
Other investments  2,923,681             
Less: Allowance for doubtful accounts  (1,142,287)            
                 
Total policy loans and other investments $42,489,149             
                 
Short-term investments at amortized cost $17,830,990             
                 
Accrued investment income $3,391,688             

11

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)



The Company'sCompany’s investments as of December 31, 20162019 are summarized as follows:

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

December 31, 2019:

 

 

 

 

 

 

 

 

Fixed maturity securities, available for sale, at estimated fair value:

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. Government agencies

 

$    142,740,641

 

$          632,185

 

$           (25,215)

 

$      143,347,611

    

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

7,450,366

 

87,812

 

(9,026)

 

7,529,152

 

 

 

 

 

 

 

 

 

Corporate securities including public utilities

 

156,599,184

 

16,768,449

 

(463,413)

 

172,904,220

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

31,475,280

 

597,395

 

(240,177)

 

31,832,498

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

364,339

 

                      -   

 

                      -   

 

364,339

 

 

 

 

 

 

 

 

 

Total fixed maturity securities available for sale

 

$    338,629,810

 

$     18,085,841

 

$         (737,831)

 

$      355,977,820

 

 

 

 

 

 

 

 

 

Equity securities at estimated fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial, miscellaneous and all other

 

$        6,900,537

 

$       1,139,799

 

$         (769,171)

 

$          7,271,165

 

 

 

 

 

 

 

 

 

Total equity securities at estimated fair value

 

$        6,900,537

 

$       1,139,799

 

$         (769,171)

 

$          7,271,165

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment at amortized cost:

 

 

 

 

 

 

 

 

Residential

 

$    113,043,965

 

 

 

 

 

 

Residential construction

 

        89,430,237

 

 

 

 

 

 

Commercial

 

        38,718,220

 

 

 

 

 

 

Less: Unamortized deferred loan fees, net

 

        (2,391,567)

 

 

 

 

 

 

Less: Allowance for loan losses

 

        (1,453,037)

 

 

 

 

 

 

Less: Net discounts

 

           (653,272)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans held for investment

 

$    236,694,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for investment - net of accumulated depreciation:

 

 

 

 

 

 

 

 

Residential

 

$      12,530,306

 

 

 

 

 

 

Commercial

 

        90,226,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for investment

 

$    102,756,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for sale:

 

 

 

 

 

 

 

 

Residential

 

$        8,021,306

 

 

 

 

 

 

Commercial

 

          6,076,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for sale

 

$      14,097,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments and policy loans at amortized cost:

 

 

 

 

 

 

 

 

Policy loans

 

$      14,762,805

 

 

 

 

 

 

Insurance assignments

 

        41,062,965

 

 

 

 

 

 

Federal Home Loan Bank stock (1)

 

             894,300

 

 

 

 

 

 

Other investments

 

          4,973,225

 

 

 

 

 

 

Less: Allowance for doubtful accounts

 

        (1,448,026)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total policy loans and other investments

 

$      60,245,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued investment income

 

$        4,833,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

 

$    781,876,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                         

 

 

 

 

 

 

 

 

(1) Includes $894,300 of Membership stock and $-0- of Activity stock due to short-term borrowings.



  Cost  
Gross
Unrealized Gains
  
Gross
 Unrealized Losses
  
Estimated
Fair
Value
 
December 31, 2016:
            
             
Fixed maturity securities held to maturity carried at amortized cost:            
Bonds:            
U.S. Treasury securities and obligations of U.S. Government agencies $4,475,065  $249,028  $(66,111) $4,657,982 
Obligations of states and political subdivisions  6,017,225   153,514   (133,249)  6,037,490 
Corporate securities including public utilities  164,375,636   10,440,989   (3,727,013)  171,089,612 
Mortgage-backed securities  9,488,083   221,400   (280,871)  9,428,612 
Redeemable preferred stock  623,635   13,418   -   637,053 
Total fixed maturity securities held to maturity $184,979,644  $11,078,349  $(4,207,244) $191,850,749 
                 
Equity securities available for sale at estimated fair value:                
                 
Common stock:                
                 
Industrial, miscellaneous and all other $10,323,238  $447,110  $(859,092) $9,911,256 
                 
Total securities available for sale carried at estimated fair value $10,323,238  $447,110  $(859,092) $9,911,256 
                 
Mortgage loans held for investment at amortized cost:                
Residential $58,593,622             
Residential construction  40,800,117             
Commercial  51,536,622             
Less: Unamortized deferred loan fees, net  (190,846)            
Less: Allowance for loan losses  (1,748,783)            
                 
Total mortgage loans held for investment $148,990,732             
                 
Real estate held for investment  net of accumlated depreciation:                
Residential $76,191,985             
Commercial  68,973,936             
Total real estate held for investment $145,165,921             
                 
Policy loans and other investments at amortized cost:                
Policy loans $6,694,148             
Insurance assignments  33,548,079             
Promissory notes  48,797             
Federal Home Loan Bank stock  662,100             
Other investments  1,765,752             
Less: Allowance for doubtful accounts  (1,119,630)            
                 
Total policy loans and other investments $41,599,246             
                 
Short-term investments at amortized cost $27,560,040             
                 
Accrued investment income $2,972,596             

12

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)



Fixed Maturity Securities


The following tables summarize unrealized losses on fixed maturity securities held to maturity,available for sale, which arewere carried at amortized cost,estimated fair value, at September 30, 20172020 and December 31, 2016.2019. The unrealized losses were primarily related to interest rate fluctuations.fluctuations and uncertainties relating to COVID-19. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:


  
Unrealized
Losses for
Less than
Twelve Months
  Fair Value  
Unrealized
Losses for
More than
Twelve Months
  Fair Value  
Total
Unrealized
Loss
  Fair Value 
At September 30, 2017
                  
U.S. Treasury Securities and Obligations of U.S. Government Agencies $182,493  $51,456,444  $44,050  $851,779  $226,543  $52,308,223 
Obligations of states and political subdivisions  18,357   2,486,400   58,915   1,651,253   77,272   4,137,653 
Corporate securities  286,166   16,526,010   999,195   10,820,005   1,285,361   27,346,015 
Mortgage-backed securities  68,972   2,026,033   102,451   1,156,803   171,423   3,182,836 
Total unrealized losses $555,988  $72,494,887  $1,204,611  $14,479,840  $1,760,599  $86,974,727 
                         
At December 31, 2016
                        
U.S. Treasury Securities and Obligations of U.S. Government Agencies $66,111  $1,342,088  $-  $-  $66,111  $1,342,088 
Obligations of states and political subdivisions  133,249   3,686,856   -   -   133,249   3,686,856 
Corporate securities  1,728,312   41,796,016   1,998,701   12,969,135   3,727,013   54,765,151 
Mortgage-backed securities  176,715   4,176,089   104,156   940,278   280,871   5,116,367 
Total unrealized losses $2,104,387  $51,001,049  $2,102,857  $13,909,413  $4,207,244  $64,910,462 

 

 

Unrealized Losses for Less than Twelve Months

 

Fair Value

 

Unrealized Losses for More than Twelve Months

 

Fair Value

 

Total Unrealized Loss

 

Fair Value

At September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of States and Political Subdivisions

 

$            1,792

 

$        207,330

 

$                  -

 

$                  -

 

$            1,792

 

$        207,330

Corporate Securities

 

       1,305,034

 

     28,511,620

 

          832,919

 

       3,366,248

 

       2,137,953

 

     31,877,868

Mortgage and other asset-backed securities

 

          476,698

 

       5,601,677

 

            22,798

 

          401,217

 

          499,496

 

       6,002,894

Redeemable preferred stock

 

            32,500

 

          217,500

 

                    -

 

                    -

 

            32,500

 

          217,500

Total unrealized losses

 

$     1,816,024

 

$   34,538,127

 

$        855,717

 

$     3,767,465

 

$     2,671,741

 

$   38,305,592

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities and Obligations

 

 

 

 

 

 

 

 

 

 

 

 

   of U.S. Government Agencies

 

$          20,211

 

$   30,629,288

 

$            5,004

 

$   10,000,400

 

$          25,215

 

$   40,629,688

Obligations of States and Political Subdivisions

 

              9,026

 

       3,062,889

 

                    -

 

                    -

 

              9,026

 

       3,062,889

Corporate Securities

 

          118,746

 

       7,184,311

 

          344,667

 

       3,950,509

 

          463,413

 

     11,134,820

Mortgage and other asset-backed securities

 

          205,470

 

     13,266,443

 

            34,707

 

          502,769

 

          240,177

 

     13,769,212

Total unrealized losses

 

$        353,453

 

$   54,142,931

 

$        384,378

 

$   14,453,678

 

$        737,831

 

$   68,596,609

There were 143113 securities with an average fair value of 98.3%93.5% of amortized cost at September 30, 2017.2020. There were 25093 securities with an average fair value of 93.9%98.9% of amortized cost at December 31, 2016. During2019. No credit losses have been recognized for the three months ended September 30, 2017 and 2016 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $100,000 and $30,000, respectively, and for the nine months ended September 30, 20172020 and 2016 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $418,366 and $90,000, respectively.


2019.

On a quarterly basis, the Company evaluates its fixed maturity securities held to maturity.available for sale. This evaluation includes a review of current ratings by the National Association of Insurance Commissions ("NAIC"(“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment. Securities with ratings of 3 to 5 are evaluated for impairment. Securities with a rating of 6 are automatically determined to be impaired and are written down. The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument. If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is recognized. Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment. 


The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.



13

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)


The amortized cost and estimated fair value of fixed maturity securities held to maturity,available for sale, at September 30, 2017,2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


  
Amortized
Cost
  
Estimated Fair
Value
 
Held to Maturity:      
Due in 2017 $1,205,533  $1,208,929 
Due in 2018 through 2021  77,063,707   78,846,158 
Due in 2022 through 2026  54,265,268   56,731,089 
Due after 2026  87,888,563   96,497,632 
Mortgage-backed securities  9,764,566   9,846,716 
Redeemable preferred stock  623,635   677,038 
Total held to maturity $230,811,272  $243,807,562 

 

 

Amortized
Cost

 

Estimated Fair
Value

Due in 1 year

 

$       50,670,550

 

$       51,171,942

Due in 2-5 years

 

         74,293,341

 

         77,094,479

Due in 5-10 years

 

         85,128,399

 

         92,517,720

Due in more than 10 years

 

         77,392,080

 

         91,191,293

Mortgage-backed securities

 

         31,887,810

 

         32,701,709

Redeemable preferred stock

 

              269,214

 

              240,244

Total

 

$     319,641,394

 

$     344,917,387

The Company is a member of the Federal Home Loan Bank of Des Moines ("FHLB"and Dallas (“FHLB”). In June through August of 2017, theThe Company purchasedpledged a total of $50,000,000,$90,000,000, par value, of United States Treasury fixed maturity securities that it deposited with the FHLB.FHLB at September 30, 2020. These securities will generate interest income for the Company and will be available to useare used as collateral on any cash borrowings from the FHLB. As of September 30, 2017,2020, the Company did not have any outstanding amounts owed to FHLB.




  
Unrealized
Losses for
 Less than
 Twelve Months
  No. of Investment Positions  
Unrealized
Losses for
 More than
Twelve Months
  
No. of
 Investment
 Positions
  
Total
 Unrealized
Losses
 
At September 30, 2017
               
Industrial, miscellaneous and all other $150,581   108  $669,370   92  $819,951 
Total unrealized losses $150,581   108  $669,370   92  $819,951 
Fair Value $988,159      $1,444,994      $2,433,153 
                     
At December 31, 2016
                    
Industrial, miscellaneous and all other $215,563   124  $643,529   104  $859,092 
Total unrealized losses $215,563   124  $643,529   104  $859,092 
Fair Value $2,063,144      $1,685,874      $3,749,018 

The average fair value of the equity securities available for sale was 74.8% and 81.4% of the original investment as of September 30, 2017 and December 31, 2016, respectively. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations, new factors, including changes in the business environment, can change the Company's previous intent to continue holding a security. During the three months ended September 30, 2017 and 2016, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $63,375 and $-0-, respectively, and for the nine months ended September 30, 2017 and 2016, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $63,375 and $43,630, respectively.
14

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

3)    Investments (Continued)

On a quarterly basis, the Company reviews its investment in equity securities that are in a loss position. The first step is to identify securities by lots which are currently carried on the books at a value greater than the 52-week high. These securities are further evaluated by reviewing current market value in relation to historical value, price earnings ratios, projected earnings, revenue growth rates, negative company related events, market sector comparisons and analyst reports to determine if a security has a reasonable expectation to return$88,000,000 to the current cost basis. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the security will recover from the loss position, the loss is considered to be other than temporary, the security is written down to a restated valueFHLB and an impairment loss is recognized.

its estimated remaining maximum borrowing capacity was $384,000.

Investment Related Earnings

The fair values for equity securities are based on quoted market prices.


There were no investments, aggregated by issuer, in excess of 10% of shareholders' equity (before net unrealized gains and losses on equity securities available for sale) at September 30, 2017, other than investments issued or guaranteed by the United States Government.
The Company'sCompany’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments from investments and other assets are summarized as follows:
  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
  2017  2016  2017  2016 
Fixed maturity securities held to maturity:            
Gross realized gains $110,529  $65,179  $163,950  $259,635 
Gross realized losses  (651,754)  (4,527)  (686,819)  (7,405)
Other than temporary impairments  (100,000)  (30,000)  (418,366)  (90,000)
                 
Equity securities available for sale:                
Gross realized gains  25,898   36,751   132,350   176,331 
Gross realized losses  (26)  (4,544)  (58,464)  (37,146)
Other than temporary impairments  (63,375)  -   (63,375)  (43,630)
                 
Other assets:                
Gross realized gains  225,022   191,992   2,006,721   468,675 
Gross realized losses  (29,335)  (324,020)  (844,672)  (680,794)
Total $(483,041) $(69,169) $231,325  $45,666 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

2020

 

2019

 

2020

 

2019

Fixed maturity securities:

 

 

 

 

 

 

 

 

Gross realized gains

 

$        50,171

 

$      113,849

 

$      201,130

 

$      362,475

Gross realized losses

 

        (39,130)

 

        (16,814)

 

        (51,219)

 

       (121,829)

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

Gains (losses) on securities sold

 

          95,331

 

          85,998

 

        (12,141)

 

        138,662

Unrealized gains and (losses) on securities held at the end of the period

 

        511,168

 

        (98,635)

 

       (512,629)

 

        676,589

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

Gross realized gains

 

      1,480,053

 

        472,691

 

      1,985,817

 

      2,265,914

Gross realized losses

 

    (1,297,086)

 

    (1,076,762)

 

    (1,784,419)

 

    (3,060,716)

Total

 

$      800,507

 

$     (519,673)

 

$     (173,461)

 

$      261,095

The net realized gains and losses on the sale of securities are recorded on the trade date, and the cost of the securities sold is determined using the specific identification method.


On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Proceeds received from the sale of fixed maturity available for sale securities for the nine months ended September 30, 2020, were $2,967,531, and resulted in gross realized gains and gross realized losses of $149,641 and $1,043, respectively. The carrying amount of held to maturity securities sold was $2,240,249 and $1,989,159 for the nine months ended September 30, 20172019 was $2,724,199 and 2016, respectively.  Thethe net realized loss related to these sales was $385,484 for the nine months ended September 30, 2017 and the net realized gain related to these sales was $156,154 for the nine months ended September 30, 2016. Although the intent is to buy and hold a fixed maturity security to maturity, the Company will sell a security prior to maturity if conditions have changed within the entity that issued the security to increase the risk of default to an unacceptable level.$12,394.



15

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)


Major categories of net investment income are as follows:

  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
  2017  2016  2017  2016 
Fixed maturity securities $2,692,586  $2,410,641  $7,475,156  $6,472,847 
Equity securities  66,320   78,402   209,517   208,696 
Mortgage loans held for investment  2,973,349   2,830,853   8,803,257   8,238,249 
Real estate held for investment  2,818,672   2,736,301   8,540,756   8,162,574 
Policy loans  195,098   205,537   621,854   558,778 
Insurance assignments  3,234,520   2,952,170   9,943,561   8,915,654 
Other investments  16,051   -   36,041   13,962 
Short-term investments  109,939   20,978   311,989   66,480 
Gross investment income  12,106,535   11,234,882   35,942,131   32,637,240 
Investment expenses  (3,745,069)  (3,145,025)  (10,383,018)  (9,152,960)
Net investment income $8,361,466  $8,089,857  $25,559,113  $23,484,280 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

2020

 

2019

 

2020

 

2019

Fixed maturity securities

$     3,191,064

 

$     2,563,481

 

$     9,258,850

 

$     7,596,035

Equity securities

         126,369

 

           74,629

 

         329,534

 

         227,280

Mortgage loans held for investment

       6,918,081

 

       4,558,232

 

     18,154,123

 

     13,187,416

Real estate held for investment

       2,998,806

 

       2,259,064

 

       8,940,072

 

       6,266,286

Policy loans

         264,422

 

         113,541

 

         755,914

 

         308,583

Insurance assignments

       4,561,574

 

       3,851,804

 

     13,244,176

 

     11,970,755

Other investments

                   -

 

                   -

 

           25,421

 

         106,678

Cash and cash equivalents

           65,460

 

         398,997

 

         385,848

 

       1,363,873

Gross investment income

     18,125,776

 

     13,819,748

 

     51,093,938

 

     41,026,906

Investment expenses

     (3,416,634)

 

     (3,341,182)

 

   (10,021,552)

 

     (9,965,837)

Net investment income

$   14,709,142

 

$   10,478,566

 

$   41,072,386

 

$   31,061,069

Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $129,235$129,347 and $133,289$102,888 for the three months ended September 30, 20172020 and 2016,2019, respectively, and $369,721$380,079 and $295,630$323,404 for the nine months ended September 30, 20172020 and 2016,2019, respectively.

Net investment income on real estate consists primarily of rental revenue.

Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities.

Securities on deposit with regulatory authorities as required by law amounted to $9,166,082$9,735,147 at September 30, 20172020 and $9,269,121$9,633,818 at December 31, 2016. The pledged2019. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) at September 30, 2020, other than investments issued or guaranteed by the United States Government.

Real Estate Held for Investment

and Held for Sale

The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development and foreclosures on mortgage loans.

and Held for Sale

The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company'sCompany’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors.

The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets. The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.

The Company currently owns and operates 12 commercial properties in 75 states. These properties include industrial warehouses, office buildings, retail centers, undeveloped landan assisted living facility, a funeral home, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company does usealso holds undeveloped land that may be



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued) 


used for future commercial developments. The Company uses bank debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.

The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $65,907,000$70,054,000 and $51,507,000$87,815,000 as of September 30, 20172020 and December 31, 2016,2019, respectively. The associated bank loan carrying values totaled approximately $38,161,000$46,681,000 and $21,831,000$54,917,000 as of September 30, 20172020 and December 31, 2016,2019, respectively.

16

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

During the three months ended September 30, 2017 (Unaudited)


3)    Investments (Continued)

2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $800,000 and $790,827, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $846,980 and $2,658,024, respectively. These impairment losses relate to an office building held by the life insurance segment. Impairment losses are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

The following is a summary of the Company'sCompany’s commercial real estate held for investment for the periods presented:

 

 

Net Ending Balance

 

Total Square Footage

 

 

September 30
2020

 

December 31 2019

 

September 30
2020

 

December 31 2019

Louisiana

 

$    5,889,327

 

$   6,009,079

 

        125,114

 

       125,114

Mississippi

 

      2,932,976

 

     2,951,478

 

          21,521

 

        21,521

Utah (1)

 

    89,014,106

 

   81,266,083

 

        462,730

 

       465,230

 

 

 

 

 

 

 

 

 

 

 

$   97,836,409

 

$ 90,226,640

 

        609,365

 

       611,865

                 

 

 

 

 

 

 

 

 

(1) Includes Center53 phase 1 completed in July 2017 and phase 2 which is under construction



  Net Ending Balance   Total Square Footage 
  September 30   December 31   September 30  December 31 
  2017   2016   2017  2016 
Arizona $4,000(1) $450,538(1)  -   16,270 
Arkansas  97,219    100,369    3,200   3,200 
Kansas  11,993,029    12,450,297    222,679   222,679 
Louisiana  499,573    518,700    7,063   7,063 
Mississippi  3,748,324    3,818,985    33,821   33,821 
New Mexico  7,000(1)  7,000(1)  -   - 
Texas  3,728,960    3,734,974    23,470   23,470 
Utah  61,021,673(2)  47,893,073(2)  433,244   433,244 
                   
  $81,099,778   $68,973,936    723,477   739,747 
                   
(1) Includes undeveloped land              
                   
(2) Includes 53rd Center completed in July 2017          

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued) 


The following is a summary of the Company’s commercial real estate held for sale for the periods presented:

 

 

Net Ending Balance

 

Total Square Footage

 

 

September 30
2020

 

December 31 2019

 

September 30
2020

 

December 31 2019

Arizona (1)

 

$                  -

 

$        2,500

 

                    -

 

                  -

Kansas

 

       4,000,000

 

    4,800,000

 

          222,679

 

        222,679

Mississippi

 

          234,937

 

       318,322

 

           12,300

 

          12,300

Nevada

 

                    -

 

       655,499

 

                    -

 

            4,800

Texas (2)

 

          300,000

 

       300,000

 

                    -

 

                  -

 

 

 

 

 

 

 

 

 

 

 

$      4,534,937

 

$  6,076,321

 

          234,979

 

        239,779

                 

 

 

 

 

 

 

 

 

(1) Undeveloped land

 

 

 

 

 

 

(2) Improved commercial pad

 

 

 

 

 

 

These properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.

Residential Real Estate Held for Investment


and Held for Sale

The Company owns a portfolio of residential homes primarily as a result of loan foreclosures.  The strategy has been to lease these homes to produce cash flow and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns.

The Company also invests in residential subdivision developments.

The Company established Security National Real Estate Services ("SNRE"(“SNRE”) to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country.

As of September 30, 2017,2020, SNRE manages 10719 residential properties in 95 states across the United States which includes a newly constructed apartment complex, Dry Creek at East Village, in Sandy, Utah.

The net ending balance of residential real estate that serves as collateral for a bank borrowing was approximately $34,772,000 and $35,798,000, as of September 30, 2017 and December 31, 2016, respectively. The associated bank loan carrying value was approximately $26,893,000 and $27,377,000 as of September 30, 2017 and December 31, 2016, respectively.
States.

The net ending balance of foreclosed residential real estate included in residential real estate held for investment and sale is $34,167,065$6,256,000 and $39,856,434$12,434,000 as of September 30, 20172020 and December 31, 2016,2019, respectively.

During the three months ended September 30, 2020 and 2019 the Company recorded impairment losses on residential real estate held for investment of $-0- and $125,980, respectively, and during the nine months ended September 30, 2020 and 2019 the Company recorded impairment losses on residential real estate held for investment of $43,394 and $125,980, respectively. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.



17

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)



The following is a summary of the Company'sCompany’s residential real estate held for investment for the periods presented:

 

 

Net Ending Balance

 

 

September 30
2020

 

December 31 2019

Florida

 

$      1,261,975

 

$     2,487,723

Nevada

 

          686,124

 

         293,516

Utah (1)

 

      22,931,994

 

       9,462,886

Washington

 

          286,181

 

         286,181

 

 

$    25,166,274

 

$   12,530,306

                 

 

 

 

 

(1) Includes subdivision land developments

The following is a summary of the Company’s residential real estate held for sale for the periods presented:

 

 

Net Ending Balance

 

 

September 30
2020

 

December 31 2019

California

 

                     -

 

       640,452

Florida

 

        1,104,936

 

    1,300,641

Nevada

 

           293,516

 

                 -

Ohio

 

            10,000

 

        10,000

Utah

 

        2,046,792

 

    5,880,213

Washington

 

                     -

 

       190,000

 

 

$      3,455,244

 

$  8,021,306



  Net Ending Balance 
  September 30  December 31 
  2017  2016 
Arizona $217,516  $742,259 
California  5,663,871   5,848,389 
Colorado  -   364,489 
Florida  7,311,913   8,327,355 
Hawaii  712,286   - 
Ohio  46,658   46,658 
Oklahoma  17,500   - 
Texas  511,486   1,091,188 
Utah  54,701,809   59,485,466 
Washington  286,181   286,181 
  $69,469,220  $76,191,985 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued) 


These properties are all actively being marketed with the assistance of residential real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.

Real Estate Owned and Occupied by the Company


The primary business units of the Company occupy a portion of the real estate owned by the Company.  Currently, the Company occupies nearly 80,000 square feet, or approximately 10% of the overall commercial real estate holdings.


As of September 30, 2017,2020, real estate owned and occupied by the Company is summarized as follows:

LocationBusiness Segment 
Approximate
 Square
 Footage
  
Square
 Footage
Occupied
 by the
Company
 
5300 South 360 West, Salt Lake City, UT (1)Corporate Offices, Life Insurance and Cemetery/Mortuary Operations  36,000   100%
5201 Green Street, Salt Lake City, UTMortgage Operations  36,899   34%
1044 River Oaks Dr., Flowood, MSLife Insurance Operations  5,522   27%
          
(1) This asset is included in property and equipment on the condensed consolidated balance sheet     

18

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

3)    Investments (Continued)

Location

 

Business Segment

 

Approximate Square Footage

 

Square Footage Occupied by the Company

121 W. Election Rd., Draper, UT

 

Corporate Offices, Life Insurance and
    Cemetery/Mortuary Operations

 

78,979

 

18%

5201 Green Street, Salt Lake City, UT (1)

 

Life Insurance and Mortgage Operations

 

39,157

 

73%

1044 River Oaks Dr., Flowood, MS

 

Life Insurance Operations

 

19,694

 

28%

1818 Marshall Street, Shreveport, LA (1)(2)

 

Life Insurance Operations

 

12,274

 

100%

909 Foisy Street, Alexandria, LA (1)(2)

 

Life Insurance Sales

 

8,059

 

100%

812 Sheppard Street, Minden, LA (1)(2)

 

Life Insurance Sales

 

1,560

 

100%

1550 N 3rd Street, Jena, LA (1)(2)

 

Life Insurance Sales

 

1,737

 

100%

                      

 

 

 

 

 

 

(1) Included in property and equipment on the condensed consolidated balance sheets

 

 

 

 

 

 

 

 

 

 

 

(2) See Note 15 regarding the acquisition of Kilpatrick Life Insurance Company

 

 

 

 

Mortgage Loans Held for Investment


Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from threenine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors'debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At September 30, 2017,2020, the Company had 45%62%, 11%, 11%8%, 7%, 5%3%, 5% and 4%3% of its mortgage loans from borrowers located in the states of Utah, California,Florida, Texas, Florida, Arizona,California, Nevada, and Tennessee,Arizona, respectively.


At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively.

Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs, premiums, discounts and the related allowance for loan losses. Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the condensed consolidated statements of earnings.


Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding.  Generally, the Company will fund a loan not to exceed 80% of the loan'sloan’s collateral fair market value.  Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer.


The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company'sCompany’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued) 


days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them.


investment or held for sale.

The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company'sCompany’s actual collection experience. The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events.


For purposes of determining the allowance for losses, the Company has segmented its mortgage loans held for investment by loan type. The Company'sCompany’s loan types are commercial, residential, and residential construction. The inherent risks within the portfolio vary depending upon the loan type as follows:


Commercial - Underwritten in accordance with the Company'sCompany’s policies to determine the borrower'sborrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower'sborrower’s (or guarantors) ability to repay.


Residential – Secured by family dwelling units. These loans are secured by first mortgages on the unit, which are generally the primary residence of the borrower, generally at a loan-to-value ratio ("LTV"(“LTV”) of 80% or less.


Residential construction (including land acquisition and development) – Underwritten in accordance with the Company'sCompany’s underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing.  Additionally, land is underwritten according to the Company'sCompany’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity.



19

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)



The Company establishes a valuation allowance for credit losses in its mortgage loans held for investment portfolio. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:

 

Commercial

 

Residential

 

Residential Construction

 

Total

September 30, 2020

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

Beginning balance - January 1, 2020

$        187,129

 

$     1,222,706

 

$          43,202

 

$     1,453,037

  Charge-offs

                      -

 

                      -

 

                      -

 

                      -

  Provision

                      -

 

          613,444

 

                      -

 

          613,444

Ending balance - September 30, 2020

$        187,129

 

$     1,836,150

 

$          43,202

 

$     2,066,481

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$                    -

 

$        238,997

 

$                    -

 

$        238,997

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$        187,129

 

$     1,597,153

 

$          43,202

 

$     1,827,484

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

Ending balance

$   49,378,938

 

$   80,051,914

 

$ 120,298,836

 

$ 249,729,688

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$     3,414,719

 

$     5,193,865

 

$        630,574

 

$     9,239,158

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$   45,964,219

 

$   74,858,049

 

$ 119,668,262

 

$ 240,490,530

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

Beginning balance - January 1, 2019

$        187,129

 

$     1,125,623

 

$          35,220

 

$     1,347,972

  Charge-offs

                      -

 

           (32,692)

 

                      -

 

           (32,692)

  Provision

                      -

 

          129,775

 

              7,982

 

          137,757

Ending balance - December 31, 2019

$        187,129

 

$     1,222,706

 

$          43,202

 

$     1,453,037

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$                    -

 

$        195,993

 

$                    -

 

$        195,993

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$        187,129

 

$     1,026,713

 

$          43,202

 

$     1,257,044

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

Ending balance

$   38,718,220

 

$ 113,043,965

 

$   89,430,237

 

$ 241,192,422

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$     4,488,719

 

$     3,752,207

 

$        655,000

 

$     8,895,926

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$   34,229,501

 

$ 109,291,758

 

$   88,775,237

 

$ 232,296,496



Allowance for Credit Losses and Recorded Investment in Mortgage Loans 
             
  Commercial  Residential  Residential Construction  Total 
September 30, 2017            
Allowance for credit losses:            
Beginning balance - January 1, 2017 $187,129  $1,461,540  $100,114  $1,748,783 
   Charge-offs  -   (49,775)  (64,894)  (114,669)
   Provision  -   417,704   -   417,704 
Ending balance - September 30, 2017 $187,129  $1,829,469  $35,220  $2,051,818 
                 
Ending balance: individually evaluated for impairment $-  $411,172  $-  $411,172 
                 
Ending balance: collectively evaluated for impairment $187,129  $1,418,297  $35,220  $1,640,646 
                 
Mortgage loans:                
Ending balance $42,923,761  $65,759,761  $41,306,722  $149,990,244 
                 
Ending balance: individually evaluated for impairment $203,806  $5,425,757  $-  $5,629,563 
                 
Ending balance: collectively evaluated for impairment $42,719,955  $60,334,004  $41,306,722  $144,360,681 
                 
December 31, 2016                
Allowance for credit losses:                
Beginning balance - January 1, 2016 $187,129  $1,560,877  $100,114  $1,848,120 
   Charge-offs  -   (420,135)  -   (420,135)
   Provision  -   320,798   -   320,798 
Ending balance - December 31, 2016 $187,129  $1,461,540  $100,114  $1,748,783 
                 
Ending balance: individually evaluated for impairment $-  $374,501  $-  $374,501 
                 
Ending balance: collectively evaluated for impairment $187,129  $1,087,039  $100,114  $1,374,282 
                 
Mortgage loans:                
Ending balance $51,536,622  $58,593,622  $40,800,117  $150,930,361 
                 
Ending balance: individually evaluated for impairment $202,992  $2,916,538  $64,895  $3,184,425 
                 
Ending balance: collectively evaluated for impairment $51,333,630  $55,677,084  $40,735,222  $147,745,936 

20

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)



The following is a summary of the aging of mortgage loans held for investment for the periods presented:

 

30-59 Days
Past Due

60-89 Days
Past Due

Greater Than
90 Days (1)

In Process of Foreclosure (1)

Total
Past Due

Current

Total
Mortgage Loans

Allowance for
Loan Losses

Unamortized deferred loan fees, net

Unamortized discounts, net

Net Mortgage
Loans

September 30, 2020

 

 

 

 

 

 

 

 

 

 

Commercial

$        255,858

$     495,937

$      3,414,719

$                           -

$      4,166,514

$     45,212,424

$    49,378,938

$        (187,129)

$           (43,338)

$         (828,049)

$    48,320,422

Residential

         5,261,818

       1,930,361

        3,745,621

             1,448,244

      12,386,044

       67,665,870

         80,051,914

        (1,836,150)

              (521,661)

             (320,613)

       77,373,490

Residential
 Construction

           276,403

      1,630,000

           630,574

                              -

       2,536,977

        117,761,859

      120,298,836

            (43,202)

             (340,019)

                            -

         119,915,615

 

 

 

 

 

 

 

 

 

 

 

 

Total

$    5,794,079

$  4,056,298

$     7,790,914

$          1,448,244

$   19,089,535

$   230,640,153

$  249,729,688

$    (2,066,481)

$          (905,018)

$       (1,148,662)

$  245,609,527

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

Commercial

$     1,872,000

$                    -

$     4,488,719

$                           -

$     6,360,719

$     32,357,501

$     38,718,220

$        (187,129)

$            (88,918)

$         (653,272)

$     37,788,901

Residential

      10,609,296

     4,085,767

        2,100,742

              1,651,465

      18,447,270

       94,596,695

       113,043,965

       (1,222,706)

          (1,567,581)

                            -

       110,253,678

Residential
 Construction

                         -

           ��           -

           655,000

                              -

           655,000

       88,775,237

       89,430,237

            (43,202)

            (735,068)

                            -

        88,651,967

 

 

 

 

 

 

 

 

 

 

 

 

Total

$    12,481,296

$  4,085,767

$     7,244,461

$           1,651,465

$  25,462,989

$   215,729,433

$    241,192,422

$    (1,453,037)

$      (2,391,567)

$         (653,272)

$  236,694,546

                            

 

 

 

 

 

 

 

 

 

 

 

(1)  Interest income is not recognized on loans past due greater than 90 days or in foreclosure.



Age Analysis of Mortgage Loans Held for Investment 
                               
  
30-59 Days
Past Due
  
60-89 Days
Past Due
  
Greater Than
90 Days (1)
  In Process of Foreclosure (1)  
Total
Past Due
  Current  
Total
Mortgage Loans
  
Allowance for
Loan Losses
  Unamortized deferred loan fees, net  
Net Mortgage
Loans
 
September 30, 2017                            
Commercial $513,218  $-  $-  $203,806  $717,024  $42,206,737  $42,923,761  $(187,129) $(229,603) $42,507,029 
Residential  22,277   1,236,721   2,200,206   3,225,551   6,684,755   59,075,006   65,759,761   (1,829,469)  (21,578)  63,908,714 
Residential Construction  -   -   -   -   -   41,306,722   41,306,722   (35,220)  (386,554)  40,884,948 
                                         
Total $535,495  $1,236,721  $2,200,206  $3,429,357  $7,401,779  $142,588,465  $149,990,244  $(2,051,818) $(637,735) $147,300,691 
                                         
December 31, 2016                                     
Commercial $-  $-  $-  $202,992  $202,992  $51,333,630  $51,536,622  $(187,129) $(155,725) $51,193,768 
Residential  964,960   996,779   1,290,355   1,626,183   4,878,277   53,715,345   58,593,622   (1,461,540)  (35,121)  57,096,961 
Residential Construction  -   -   64,895   -   64,895   40,735,222   40,800,117   (100,114)  -   40,700,003 
                                         
Total $964,960  $996,779  $1,355,250  $1,829,175  $5,146,164  $145,784,197  $150,930,361  $(1,748,783) $(190,846) $148,990,732 
                                         
(1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure. 

21

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


3)3)    Investments (Continued)



Impaired Mortgage Loans Held for Investment


Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary. The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows:

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

September 30, 2020

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$    3,414,719

 

$    3,414,719

 

$                  -

 

$    1,772,817

 

$                   -

  Residential

      3,435,710

 

      3,435,710

 

                    -

 

      4,235,285

 

                     -

  Residential construction

         630,574

 

         630,574

 

                    -

 

         673,383

 

                     -

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$                  -

 

$                   -

 

$                  -

 

$                  -

 

$                   -

  Residential

      1,758,155

 

      1,758,155

 

        238,997

 

      1,186,545

 

                     -

  Residential construction

                    -

 

                     -

 

                    -

 

                    -

 

                     -

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

  Commercial

$    3,414,719

 

$    3,414,719

 

$                  -

 

$    1,772,817

 

$                   -

  Residential

      5,193,865

 

      5,193,865

 

        238,997

 

      5,421,830

 

                     -

  Residential construction

         630,574

 

         630,574

 

                    -

 

         673,383

 

                     -

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$    4,488,719

 

$    4,488,719

 

$                  -

 

$    1,499,043

 

$                   -

  Residential

      2,254,189

 

      2,254,189

 

                    -

 

      3,367,151

 

                     -

  Residential construction

         655,000

 

         655,000

 

                    -

 

      1,457,278

 

                     -

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$                  -

 

$                   -

 

$                  -

 

$                  -

 

$                   -

  Residential

      1,498,018

 

      1,498,018

 

        195,993

 

         665,270

 

                     -

  Residential construction

                    -

 

                     -

 

                    -

 

                    -

 

                     -

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

  Commercial

$    4,488,719

 

$    4,488,719

 

$                  -

 

$    1,499,043

 

$                   -

  Residential

      3,752,207

 

      3,752,207

 

        195,993

 

      4,032,421

 

                     -

  Residential construction

         655,000

 

         655,000

 

                    -

 

      1,457,278

 

                     -



Impaired Loans 
                
  
Recorded
 Investment
  
Unpaid
 Principal
 Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
 Recognized
 
September 30, 2017               
With no related allowance recorded:               
   Commercial $203,806  $203,806  $-  $456,524  $- 
   Residential  3,872,587   3,872,587   -   3,281,980   - 
   Residential construction  -   -   -   -   - 
                     
With an allowance recorded:                    
   Commercial $-  $-  $-  $-  $- 
   Residential  1,553,170   1,553,170   411,172   1,287,394   - 
   Residential construction  -   -   -   -   - 
                     
Total:                    
   Commercial $203,806  $203,806  $-  $456,524  $- 
   Residential  5,425,757   5,425,757   411,172   4,569,374   - 
   Residential construction  -   -   -   -   - 
                     
December 31, 2016                    
With no related allowance recorded:                    
   Commercial $202,992  $202,992  $-  $202,992  $- 
   Residential  -   -   -   -   - 
   Residential construction  64,895   64,895   -   79,082   - 
                     
With an allowance recorded:                    
   Commercial $-  $-  $-  $-  $- 
   Residential  2,916,538   2,916,538   374,501   3,001,850   - 
   Residential construction  -   -   -   -   - 
                     
Total:                    
   Commercial $202,992  $202,992  $-  $202,992  $- 
   Residential  2,916,538   2,916,538   374,501   3,001,850   - 
   Residential construction  64,895   64,895   -   79,082   - 


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued) 


Credit Risk Profile Based on Performance Status


The Company'sCompany’s mortgage loan held for investment portfolio is monitored based on performance of the loans. Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The Company defines non-performing mortgage loans as loans 90 days or greater delinquent or on non-accrual status.

22

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

3)    Investments (Continued)

The Company'sCompany’s performing and non-performing mortgage loans held for investment were as follows:


Mortgage Loans Held for Investment Credit Exposure 
Credit Risk Profile Based on Payment Activity 
                         
  Commercial  Residential  Residential Construction  Total 
  
September
30, 2017
  
December
31, 2016
  
September
30, 2017
  
December
31, 2016
  
September
30, 2017
  
December
31, 2016
  
September
30, 2017
  
December
31, 2016
 
                         
Performing $42,719,955  $51,333,630  $60,334,004  $55,677,084  $41,306,722  $40,735,222  $144,360,681  $147,745,936 
Non-performing  203,806   202,992   5,425,757   2,916,538   -   64,895   5,629,563   3,184,425 
                                 
Total $42,923,761  $51,536,622  $65,759,761  $58,593,622  $41,306,722  $40,800,117  $149,990,244  $150,930,361 

 

Commercial

 

Residential

 

Residential Construction

 

Total

 

September  
30, 2020

 

December
31, 2019

 

September  
30, 2020

 

December
31, 2019

 

September  
30, 2020

 

December
31, 2019

 

September  
30, 2020

 

December
31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$   45,964,219

 

$   34,229,501

 

$   74,858,049

 

$  109,291,758

 

$   119,668,262

 

$  88,775,237

 

$ 240,490,530

 

$     232,296,496

Non-performing

          3,414,719

 

         4,488,719

 

          5,193,865

 

         3,752,207

 

              630,574

 

            655,000

 

           9,239,158

 

              8,895,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$  49,378,938

 

$   38,718,220

 

$     80,051,914

 

$  113,043,965

 

$  120,298,836

 

$  89,430,237

 

$ 249,729,688

 

$       241,192,422

Non-Accrual Mortgage Loans Held for Investment


Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans totals approximately $185,000$397,000 and $172,000$203,000 as of September 30, 20172020 and December 31, 2016,2019, respectively.


The following is a summary of mortgage loans held for investment on a non-accrual status for the periods presented.


  Mortgage Loans on Non-Accrual Status 
    
  
As of
September 30
2017
  
As of
December 31
2016
 
Commercial $203,806  $202,992 
Residential  5,425,757   2,916,538 
Residential construction  -   64,895 
Total $5,629,563  $3,184,425 

 

As of September 30
2020

 

As of December 31
2019

Commercial

$                    3,414,719

 

$                   4,488,719

Residential

                      5,193,865

 

                     3,752,207

Residential construction

                         630,574

 

                        655,000

Total

$                    9,239,158

 

$                   8,895,926

4)23


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)



4)    Loans Held for Sale

Fair Value Option Election

Accounting Standards Codification ("ASC") No. 825, "Financial Instruments", allows for the option to report certain financial assets and liabilities at fair value initially and at subsequent measurement dates with changes in fair value included in earnings. The option may be applied instrument by instrument, but it is irrevocable.

The Company has elected the fair value option for loans held for sale originated after July 1, 2017. The Company believes the fair value option most closely aligns the timing of the recognition of gains and costs. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Electing fair value also reduces certain timing differences and better matches changes in the fair value of these assets with changessale. Changes in the fair value of the related derivatives used for these assets.


loans are included in mortgage fee income. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company'sCompany’s policy on mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings. NoneThere is one loan with an unpaid principal balance of these loans are$190,560 that is 90 or more days past due norand on a nonaccrual status as of September 30, 2017.2020. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

4)Loans Held for Sale (Continued) 


The following is a summary of the aggregate fair value and the aggregate unpaid principal balance ("UPB") of loans held for sale for the periods presented:


  
As of
 September 30
2017
 
    
Aggregate fair value $166,990,187 
UPB  161,165,793 
Unrealized gain  5,824,394 

 

As of September 30
2020

As of December 31 2019

 

 

 

Aggregate fair value

$         445,878,979

$          213,457,632

Unpaid principal balance

           428,860,105

           206,417,122

Unrealized gain

             17,018,874

               7,040,510

Mortgage Fee Income


Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans held for sale.


Major categories of mortgage fee income for loans held for sale are as follows:


  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
  2017  2016  2017  2016 
Loan fees $15,203,107  $11,988,959  $33,291,947  $33,071,486 
Interest income  2,097,249   2,204,286   5,679,868   6,022,796 
Secondary gains  28,550,295   41,346,576   87,165,736   108,667,085 
Change in fair value of loan commitments  (4,833,268)  (1,505,820)  (3,677,554)  1,459,568 
Change in fair value of loans held for sale  1,061,917   -   1,061,917   - 
Provision for loan loss reserve  (481,727)  (838,238)  (1,435,180)  (2,253,689)
Mortgage fee income $41,597,573  $53,195,763  $122,086,734  $146,967,246 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

2020

 

2019

 

2020

 

2019

Loan fees

$      20,630,052

 

$        8,438,471

 

$      40,167,476

 

$      22,162,455

Interest income

         3,348,929

 

         2,127,775

 

         7,630,993

 

         5,032,505

Secondary gains

        70,627,864

 

        27,574,294

 

      151,215,666

 

        66,434,923

Change in fair value of loan commitments

         3,901,086

 

            378,899

 

        12,454,218

 

         1,915,223

Change in fair value of loans held for sale

         1,404,131

 

         1,411,322

 

         4,231,347

 

         2,065,978

Provision for loan loss reserve

        (1,352,438)

 

          (195,009)

 

        (3,489,982)

 

          (449,894)

Mortgage fee income

$      98,559,624

 

$      39,735,752

 

$    212,209,718

 

$      97,161,190

Loan Loss Reserve


When a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from a third-party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated. The key factors that are used in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor.

24

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

4)    Loans Held for Sale (Continued)

The following is a summary of the loan loss reserve that is included in other liabilities and accrued expenses:

 

As of September 30
2020

 

As of December 31
2019

Balance, beginning of period

$                4,046,288

 

$               3,604,869

Provision on current loan originations (1)

                  3,489,982

 

                    643,284

Charge-offs, net of recaptured amounts

                (4,527,157)

 

                  (201,865)

Balance, end of period

$                3,009,113

 

$               4,046,288

                      

 

 

 

(1) Included in mortgage fee income

 

 

 



  
As of
September 30
2017
  
As of
 December 31
2016
 
Balance, beginning of period $627,733  $2,805,900 
Provision on current loan originations (1)  1,435,180   2,988,754 
Additional provision for loan loss reserve  -   1,700,000 
Charge-offs, net of recaptured amounts  108,175   (6,866,921)
Balance, end of period $2,171,088  $627,733 
         
(1) Included in Mortgage fee income        

The Company believes the loan loss reserve represents probable loan losses incurred as of the balance sheet date. Actual loan loss experience could change, in the near-term, from the established reserve based upon claims that could be asserted by third-party investors. The Company believes there is potential to resolve any alleged claims by third-party investors on acceptable terms. If the Company is unable to resolve such claims on acceptable terms, legal action may ensue. In the event of legal action by any third-party investor, the Company believes it has significant defenses to any such action and intends to vigorously defend itself against such action.
25

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)

4)Loans Held for Sale (Continued) 


The Company maintains reserves for estimated losses on current production volumes. For the nine months ended September 30, 2020, $3,489,982 in reserves were added at a rate of 8.9 basis points per loan, the equivalent of $890 per $1,000,000 in loans originated. This is an increase over the nine months ended September 30, 2019, when reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated.  The economic impact of COVID-19 and subsequent government action has increased the potential for losses due to early payoff penalties and potential for losses due to increased delinquency.  The unique nature of these current events creates significant difficulty for forecasting potential future losses.  Based on the Company’s best estimate for potential loan losses and considering published industry data, a loss reserve of 8 basis points per loan originated will be used in the fourth quarter 2020.  The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production.

During the third quarter 2020, the loan loss reserve decreased significantly primarily due to a $3,000,000 settlement that was paid to an investor for loans originated between 2004 and 2007. No additional loss reserves are being held for loans originated between 2004 and 2007.

Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.




SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)


5)5)    Stock Compensation Plans


The Company has fourtwo fixed option plans (the "2003 Plan", the "2006 Director Plan", the "2013 Plan"“2013 Plan” and the "2014“2014 Director Plan"Plan”). Compensation expense for options issued of $102,429$104,562 and $84,949$65,746 has been recognized for these plans for the three months ended September 30, 20172020 and 2016,2019, respectively, and $305,741$271,959 and $253,427$195,487 has been recognized for these plans for the nine months ended September 30, 20172020 and 2016,2019, respectively. As of September 30, 2017,2020, the total unrecognized compensation expense related to the options issued was $69,719,$126,071, which is expected to be recognized over the vesting period of one year.


The fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model. The Company generally estimates the expected life of the options based uponusing the contractual term of the options adjusted for actual experience.simplified method. Future volatility is estimated based upon the weighted historical volatility of the Company'sCompany’s Class A common stock over a period equal to the estimatedexpected life of the options. Common stock issuedThe risk-free interest rate for the expected life of the options is based upon exercisethe Federal Reserve Board’s daily interest rates in effect at the time of stock options are generally new share issuances rather than from treasury shares.


the grant.

A summary of the status of the Company'sCompany’s stock compensation plans as of September 30, 2017,2020, and the changes during the nine months ended September 30, 2017,2020, are presented below:

 

 

Number of
Class A Shares

 

Weighted Average Exercise Price

 

Number of
Class C Shares

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2020

 

     1,086,053

 

$      4.41

 

        594,132

 

$      5.36

Adjustment for effect of stock dividends

 

          27,968

 

 

 

          19,354

 

 

Granted

 

          77,000

 

 

 

        180,000

 

 

Exercised

 

        (78,803)

 

 

 

                   -

 

 

Cancelled

 

                   -

 

 

 

                   -

 

 

Outstanding at September 30, 2020

 

     1,112,218

 

$      4.28

 

        793,486

 

$      4.88

 

 

 

 

 

 

 

 

 

As of September 30, 2020:

 

 

 

 

 

 

 

 

Options exercisable

 

     1,053,033

 

$      4.39

 

        652,805

 

$      5.14

 

 

 

 

 

 

 

 

 

As of September 30, 2020:

 

 

 

 

 

 

 

 

Available options for future grant

 

        325,372

 

 

 

        266,500

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

outstanding at September 30, 2020

 

5.72 years

 

 

 

5.94 years

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

exercisable at September 30, 2020

 

5.51 years

 

 

 

5.49 years

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

outstanding at September 30, 2020 (1)

 

$2,242,693

 

 

 

$1,115,985

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

exercisable at September 30, 2020 (1)

 

$2,228,291

 

 

 

$894,505

 

 

                                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The Company used a stock price of $6.40 as of September 30, 2020 to derive intrinsic value.



  
Number of
Class A Shares
  Weighted Average Exercise Price  
Number of
Class C Shares
  Weighted Average Exercise Price 
             
Outstanding at December 31, 2016  741,973  $4.33   556,298  $4.61 
Granted  -       -     
Exercised  -       (103,402)  1.31 
Cancelled  -       (24,227)  1.31 
Outstanding at September 30, 2017  741,973  $4.33   428,669  $5.59 
                 
As of September 30, 2017:                
Options exercisable  706,854  $4.21   407,669  $5.50 
                 
As of September 30, 2017:                
Available options for future grant  525,682       227,750     
                
Weighted average contractual term of options outstanding at September 30, 2017
 6.62 years      2.63 years     
                
Weighted average contractual term of options exercisable at September 30, 2017
 6.50 years      2.55 years     
                 
Aggregated intrinsic value of options outstanding at September 30, 2017 (1)
 $941,567      $151,012     
                 
Aggregated intrinsic value of options exercisable at September 30, 2017 (1)
 $941,311      $151,012     
                 
(1) The Company used a stock price of $5.10 as of September 30, 2017 to derive intrinsic value. 

26

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


5)Stock Compensation Plans (Continued) (Continued)



A summary of the status of the Company'sCompany’s stock compensation plans as of September 30, 2016,2019, and the changes during the nine months ended September 30, 2016,2019, are presented below:

  
Number of
Class A
Shares
  
Weighted
Average
Exercise
Price
  
Number of
Class C
Shares
  
Weighted
Average
 Exercise
 Price
 
             
Outstanding at December 31, 2015  618,261  $3.89   577,436  $3.54 
Granted  -       -     
Exercised  (32,417)  2.38   -     
Cancelled  -       -     
Outstanding at September 30, 2016  585,844  $3.97   577,436  $3.54 
                 
As of September 30, 2016:                
Options exercisable  550,792  $3.82   551,186  $3.38 
                 
As of September 30, 2016:                
Available options for future grant  397,342       57,750     
                
Weighted average contractual term of options outstanding at September 30, 2016 6.99 years      2.00 years     
                
Weighted average contractual term of options exercisable at September 30, 2016 6.86 years      1.90 years     
                
Aggregated intrinsic value of options outstanding at September 30, 2016 (1) $1,179,541      $1,460,167     
                
Aggregated intrinsic value of options exercisable at September 30, 2016 (1) $1,179,541      $1,460,167     
                 
(1) The Company used a stock price of $5.86 as of September 30, 2016 to derive intrinsic value.     

 

 

Number of
Class A Shares

 

Weighted Average Exercise Price

 

Number of
Class C Shares

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2019

 

     1,011,274

 

$      4.49

 

        577,280

 

$      5.15

Granted

 

            2,000

 

 

 

                   -

 

 

Exercised

 

        (19,796)

 

 

 

        (63,814)

 

 

Cancelled

 

                   -

 

 

 

                   -

 

 

Outstanding at September 30, 2019

 

        993,478

 

$      4.50

 

        513,466

 

$      5.33

 

 

 

 

 

 

 

 

 

As of September 30, 2019:

 

 

 

 

 

 

 

 

Options exercisable

 

        955,195

 

$      4.46

 

        489,840

 

$      5.34

 

 

 

 

 

 

 

 

 

As of September 30, 2019:

 

 

 

 

 

 

 

 

Available options for future grant

 

        299,351

 

 

 

        146,425

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

outstanding at September 30, 2019

 

5.40 years

 

 

 

3.63 years

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

exercisable at September 30, 2019

 

5.34 years

 

 

 

3.37 years

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

outstanding at September 30, 2019 (1)

 

$765,360

 

 

 

$106,646

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

exercisable at September 30, 2019 (1)

 

$765,360

 

 

 

$106,646

 

 

                                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The Company used a stock price of $4.90 as of September 30, 2019 to derive intrinsic value.

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the nine months ended September 30, 20172020 and 20162019 was $578,017$191,309 and $98,663,$112,340, respectively.



27

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)



6)Earnings Per Share


The basic and diluted earnings per share amounts were calculated as follows:


   
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
  2017  2016  2017  2016 
Numerator:            
Net earnings $1,096,838  $4,183,005  $5,442,702  $11,737,952 
Denominator:                
Basic weighted-average shares outstanding  15,256,857   14,830,078   15,159,569   14,744,779 
Effect of dilutive securities:                
Employee stock options  285,803   439,535   315,257   421,266 
                 
Diluted weighted-average shares outstanding  15,542,660   15,269,613   15,474,826   15,166,045 
                 
Basic net earnings per share $0.07  $0.28  $0.36  $0.80 
                 
Diluted net earnings per share $0.07  $0.27  $0.35  $0.77 

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2020

 

2019

 

2020

 

2019

Numerator:

 

 

 

 

 

 

 

 

 

Net earnings

 

$   29,304,769

 

$   3,617,414

 

$   51,286,265

 

$       9,027,786

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

     18,873,886

 

   18,551,116

 

     18,760,884

 

       18,560,874

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options

 

          559,733

 

        203,975

 

          404,006

 

            208,561

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

     19,433,619

 

   18,755,091

 

     19,164,890

 

       18,769,435

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

$1.55

 

$0.19

 

$2.73

 

$0.49

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$1.51

 

$0.19

 

$2.68

 

$0.48

Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the nine months ended September 30, 20172020 and 2016,2019, there were 486,725-0- and 250,039864,915 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.


7)7)    Business Segment Information


Description of Products and Services by Segment


The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company'sCompany’s life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company'sCompany’s independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company'sCompany’s cemetery and mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company'sCompany’s mortgage segment consists of fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing loans held for sale.


Measurement of Segment Profit or Loss and Segment Assets


The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K/A10-K for the year ended December 31, 2016.2019. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.


Factors Management Used to Identify the Enterprise'sEnterprise’s Reportable Segments


The Company'sCompany’s reportable segments are business units that are managed separately due to the different products provided and the need to report separately to the various regulatory jurisdictions. The Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported.


28


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


7)7)    Business Segment Information (Continued)


 

 

Life Insurance

 

Cemetery/
Mortuary

 

Mortgage

 

Intercompany Eliminations

 

Consolidated

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$   39,261,044

 

$   5,495,990

 

$ 101,447,531

 

$                -

 

$   146,204,565

Intersegment revenues

 

       2,952,836

 

         79,096

 

         168,890

 

    (3,200,822)

 

                     -

Segment profit before income taxes

 

       4,807,280

 

    1,322,303

 

    32,454,348

 

                  -

 

      38,583,931

 

 

 

 

                 -

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$   29,824,686

 

$   3,570,419

 

$   41,984,554

 

$                -

 

$     75,379,659

Intersegment revenues

 

       1,465,778

 

       106,638

 

         120,891

 

    (1,693,307)

 

                     -

Segment profit before income taxes

 

       1,263,836

 

       213,198

 

      3,282,788

 

                  -

 

        4,759,822

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$  110,255,399

 

$ 14,815,991

 

$ 219,403,866

 

$                -

 

$   344,475,256

Intersegment revenues

 

       5,677,189

 

       272,409

 

         559,923

 

    (6,509,521)

 

                     -

Segment profit before income taxes

 

       5,408,482

 

    2,975,556

 

    58,867,883

 

                  -

 

      67,251,921

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets

 

 1,232,786,760

 

   55,339,760

 

   443,756,079

 

  (88,204,200)

 

  1,643,678,399

Goodwill

 

       2,765,570

 

       754,018

 

                   -

 

                  -

 

        3,519,588

Total Assets

 

 1,235,552,330

 

   56,093,778

 

   443,756,079

 

  (88,204,200)

 

  1,647,197,987

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$   88,937,110

 

$ 12,472,711

 

$ 103,908,855

 

$                -

 

$   205,318,676

Intersegment revenues

 

       3,441,497

 

       336,911

 

         372,170

 

    (4,150,578)

 

                     -

Segment profit before income taxes

 

       4,568,178

 

    2,421,845

 

      4,825,801

 

                  -

 

      11,815,824

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets

 

   941,739,161

 

   84,250,592

 

   243,272,631

 

 (110,132,588)

 

  1,159,129,796

Goodwill

 

       2,765,570

 

       754,018

 

                   -

 

                  -

 

        3,519,588

Total Assets

 

   944,504,731

 

   85,004,610

 

   243,272,631

 

 (110,132,588)

 

  1,162,649,384



  
Life
Insurance
  
Cemetery/
Mortuary
  Mortgage  
Intercompany
Eliminations
  Consolidated 
For the Three Months Ended               
September 30, 2017
               
Revenues from external customers $25,229,759  $2,988,137  $43,753,955  $-  $71,971,851 
Intersegment revenues  3,333,593   116,290   86,580   (3,536,463)  - 
Segment profit before income taxes  522,574   237,108   378,335   -   1,138,017 
                     
For the Three Months Ended                    
September 30, 2016
                    
Revenues from external customers $24,972,397  $2,900,917  $55,075,343  $-  $82,948,657 
Intersegment revenues  3,318,369   107,745   79,164   (3,505,278)  - 
Segment profit before income taxes  2,139,702   54,891   4,378,937   -   6,573,530 
                     
For the Nine Months Ended                    
September 30, 2017
                    
Revenues from external customers $77,112,117  $9,907,037  $128,953,552  $-  $215,972,706 
Intersegment revenues  9,299,671   338,745   268,764   (9,907,180)  - 
Segment profit before income taxes  4,824,654   1,331,896   1,873,536   -   8,030,086 
                     
Identifiable Assets  853,298,860   94,716,098   190,202,990   (133,079,207)  1,005,138,741 
Goodwill  2,765,570   -   -   -   2,765,570 
Total Assets  856,064,430   94,716,098   190,202,990   (133,079,207)  1,007,904,311 
                     
For the Nine Months Ended                    
September 30, 2016
                    
Revenues from external customers $70,616,968  $10,045,384  $151,829,880  $-  $232,492,232 
Intersegment revenues  9,780,803   616,532   239,503   (10,636,838)  - 
Segment profit before income taxes  5,785,464   1,283,553   11,561,479   -   18,630,496 
                     
Identifiable Assets  797,486,493   95,414,964   194,469,525   (138,809,339)  948,561,643 
Goodwill  2,765,570   -   -   -   2,765,570 
Total Assets  800,252,063   95,414,964   194,469,525   (138,809,339)  951,327,213 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)


8)Fair Value of Financial Instruments


Generally accepted accounting principles (GAAP)

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:

29

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

8)    Fair Value of Financial Instruments (Continued)

Level 1:Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.


Level 2:    2: Financial assets and financial liabilities whose values are based on the following:

a)Quoted prices for similar assets or liabilities in active markets;
b)Quoted prices for identical or similar assets or liabilities in non-active markets; or
c)Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

a) Quoted prices for similar assets or liabilities in active markets;  

b) Quoted prices for identical or similar assets or liabilities in non-active markets; or

c)Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. 

Level 3:Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company'sCompany’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

The


The Company utilizes a combination of third partythird-party valuation service providers, brokers, and internal valuation models to determine fair value.

The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments:


instruments.

The items shown under Level 1 and Level 2 are valued as follows:


EquityFixed Maturity Securities Available for Sale: The fair values of investmentsfixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 investments), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

Equity Securities: The fair values for equity securities along with methods used to estimate such values are disclosed in Note 3based on quoted market prices.

Loans Held for Sale: The Company elected the fair value option for loans held for sale. The fair value is based on quoted market prices, when available.  When a quoted market price is not readily available, the Company uses the market price from its last sale of the Notes to the condensed consolidated financial statements.




Call and Put OptionsOption Derivatives: The Company uses quoted market prices to value itsfair values for call and put options.

options are based on quoted market prices.



Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)


The items shown under Level 3 are valued as follows:


Loans Held for Sale, at Fair Value: The Company elected the fair value option for all loans held for sale originated after July 1, 2017. The fair value is based on quoted market prices, when available.  When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets.


Loan Commitments and Forward Sale Commitments: The Company'sCompany’s mortgage segment enters into loan commitments with potential borrowers and forward sale commitments to sell loans to third-party investors. The Company also uses a hedging strategy for these transactions. A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period of time, generally up to 30 days after issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings.

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued. Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company'sCompany’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.


Impaired Mortgage Loans Held for Investment: The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral.  For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal.  The appraisal typically considers area comparables and property condition as well as potential rental income that could be generated (particularly for commercial properties).  For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from Marshall and Swift, a provider of building cost information to the real estate construction.

Real Estate Held for Investment: The Company believes that in an orderly market, fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company'sCompany’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims.


It should be noted that for replacement cost, when determining the fair value of mortgage properties,real estate held for investment, the Company uses Marshall and Swift, a provider of building cost information to the real estate construction industry. For the investment analysis, the Company useduses market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also considers area comparables and property condition when determining fair value.


In addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment. This depreciation reduces the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values.


Mortgage Servicing Rights: The Company initially recognizes Mortgage Servicing Rights ("MSRs"(“MSRs”) at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction. The precise fair value of MSRs cannot be readily determined because MSRs are not actively traded in stand-alone markets. Considerable judgment is required to estimate the fair values of these assets and the exercise of such judgment can significantly affect the Company's earnings.



31

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


8)Fair Value of Financial Instruments (Continued) (Continued)


The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at September 30, 2017.

2020.

 

Total

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

Significant Observable Inputs
(Level 2)

 

Significant Unobservable Inputs
(Level 3)

Assets accounted for at fair value on a
  recurring basis

 

 

 

 

 

 

 

Fixed maturity securities available for sale

$       344,917,387

 

$                        -

 

$     342,627,234

 

$          2,290,153

Equity securities

           11,215,606

 

          11,215,606

 

                          -

 

                           -

Loans held for sale

         445,878,979

 

                          -

 

                          -

 

        445,878,979

Restricted assets (1)

             1,470,114

 

                          -

 

           1,470,114

 

                           -

Restricted assets (2)

             2,193,831

 

            2,193,831

 

                          -

 

                           -

Cemetery perpetual care trust investments (1)

                576,292

 

                          -

 

              576,292

 

                           -

Cemetery perpetual care trust investments (2)

             1,832,703

 

            1,832,703

 

                          -

 

                           -

Derivatives - loan commitments (3)

           17,945,259

 

                          -

 

                          -

 

          17,945,259

Total assets accounted for at fair value on a
  recurring basis

$       826,030,171

 

$        15,242,140

 

$     344,673,640

 

$      466,114,391

 

 

 

 

 

 

 

 

Liabilities accounted for at fair value on a
  recurring basis

 

 

 

 

 

 

 

Derivatives - call options (4)

$            (126,193)

 

$           (126,193)

 

$                        -

 

$                         -

Derivatives - loan commitments (4)

           (2,999,809)

 

                          -

 

                          -

 

          (2,999,809)

Total liabilities accounted for at fair value
  on a recurring basis

$         (3,126,002)

 

$           (126,193)

 

$                        -

 

$        (2,999,809)

                             

 

 

 

 

 

 

 

(1) Fixed maturity securities available for sale

 

 

 

 

 

 

 

(2) Equity securities

 

 

 

 

 

 

 

(3) Included in other assets on the consolidated balance sheets

 

 

 

 

 

 

(4) Included in other liabilities and accrued expenses on the consolidated balance sheets

 

 



  Total  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Observable
Inputs
(Level 2)
  
Significant Unobservable
Inputs
(Level 3)
 
Assets accounted for at fair value on a recurring basis            
Common stock $5,957,488  $5,957,488  $-  $- 
Total equity securities available for sale $5,957,488  $5,957,488  $-  $- 
                 
Loans held for sale $166,990,187  $-  $-  $166,990,187 
Restricted assets (1)  78,421   78,421   -   - 
Cemetery perpetual care trust investments (1)  676,881   676,881   -   - 
Derivatives - loan commitments (2)  3,140,704   -   -   3,140,704 
Total assets accounted for at fair value on a recurring basis $176,843,681  $6,712,790  $-  $170,130,891 
                 
Liabilities accounted for at fair value on a  recurring basis                
Derivatives  - bank loan interest rate swaps (3) $(138) $-  $-  $(138)
   - call options (4)  (50,452)  (50,452)  -   - 
   - put options (4)  (63,637)  (63,637)  -   - 
   - loan commitments (4)  (8,926)  -   -   (8,926)
Total liabilities accounted for at fair value on a recurring basis $(123,153) $(114,089) $-  $(9,064)
                 
(1) Excluding cash                
(2) Included in other assets on the condensed consolidated balance sheet         
(3) Included in bank and other loans payable on the condensed consolidated balance sheet         
(4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheet     

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)


The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at December 31, 2019.

 

Total

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

Significant Observable Inputs
(Level 2)

 

Significant Unobservable Inputs
(Level 3)

Assets accounted for at fair value on a
  recurring basis

 

 

 

 

 

 

 

Fixed maturity securities available for sale

$       355,977,820

 

$                        -

 

$     352,761,438

 

$          3,216,382

Equity securities

             7,271,165

 

            7,271,165

 

                          -

 

                           -

Loans held for sale

         213,457,632

 

                          -

 

                          -

 

        213,457,632

Restricted assets (1)

             1,008,867

 

                          -

 

           1,008,867

 

                           -

Restricted assets (2)

             1,976,480

 

            1,976,480

 

                          -

 

                           -

Cemetery perpetual care trust investments (1)

                975,673

 

                          -

 

              975,673

 

                           -

Cemetery perpetual care trust investments (2)

             1,605,451

 

            1,605,451

 

                          -

 

                           -

Derivatives - loan commitments (3)

             2,722,580

 

                          -

 

                          -

 

            2,722,580

Total assets accounted for at fair value on a
  recurring basis

$       584,995,668

 

$        10,853,096

 

$     354,745,978

 

$      219,396,594

 

 

 

 

 

 

 

 

Liabilities accounted for at fair value on a
  recurring basis

 

 

 

 

 

 

 

Derivatives - call options (4)

$              (62,265)

 

$             (62,265)

 

$                        -

 

$                         -

Derivatives - put options (4)

                (22,282)

 

               (22,282)

 

                          -

 

                           -

Derivatives - loan commitments (4)

              (231,347)

 

                          -

 

                          -

 

             (231,347)

Total liabilities accounted for at fair value
  on a recurring basis

$            (315,894)

 

$             (84,547)

 

$                        -

 

$           (231,347)

                             

 

 

 

 

 

 

 

(1) Fixed maturity securities available for sale

 

 

 

 

 

 

 

(2) Mutual funds and equity securities

 

 

 

 

 

 

 

(3) Included in other assets on the condensed consolidated balance sheets

 

 

 

 

(4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets

 

 



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)


For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

 

 

 

 

 

 

Significant

 

Range of Inputs

 

 

 

 

Fair Value at

 

Valuation

 

Unobservable

 

Minimum

Maximum

 

Weighted

 

 

9/30/2020

 

Technique

 

Input(s)

 

Value

Value

 

Average

Loans held for sale

 

$  445,878,979

 

Market approach

 

Investor contract pricing as a percentage of unpaid principal balance

 

99.0%

110.0%

 

104.0%

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives - loan commitments (net)

 

     14,945,451

 

Market approach

 

Fall-out factor

 

1.0%

92.0%

 

80.0%

 

 

 

 

 

 

Initial-Value

 

N/A

N/A

 

N/A

 

 

 

 

 

 

Servicing

 

0 bps

133 bps

 

67 bps

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities available for sale

 

       2,290,153

 

Broker quotes

 

Pricing quotes

 

$    91.49

$  123.46

 

$ 117.45

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

 

 

 

 

 

 

Significant

 

Range of Inputs

 

 

 

 

Fair Value at

 

Valuation

 

Unobservable

 

Minimum

Maximum

 

Weighted

 

 

12/31/2019

 

Technique

 

Input(s)

 

Value

Value

 

Average

Loans held for sale

 

$ 213,457,632

 

Market approach

 

Investor contract pricing as a percentage of unpaid principal balance

 

98.0%

109.0%

 

103.0%

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives - loan commitments (net)

 

       2,491,233

 

Market approach

 

Fall-out factor

 

1.0%

92.0%

 

81.0%

 

 

 

 

 

 

Initial-Value

 

N/A

N/A

 

N/A

 

 

 

 

 

 

Servicing

 

0 bps

318 bps

 

79 bps

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities available for sale

 

       3,216,382

 

Broker quotes

 

Pricing quotes

 

$    95.02

$  115.80

 

$ 107.98



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)


Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:

 

 

Net Loan Commitments

 

Loans Held for Sale

 

Fixed Maturity Securities Available for Sale

 

Balance - December 31, 2019

 

$         2,491,233

 

$      213,457,632

 

$               3,216,382

 

Originations and purchases

 

                          -

 

     3,824,329,264

 

                               -

 

Sales, maturities and paydowns

 

                          -

 

    (3,709,992,155)

 

               (1,031,500)

 

Transfer to mortgage loans held for investment

 

                          -

 

           (9,170,610)

 

                               -

 

Total gains (losses):

 

 

 

 

 

 

 

Included in earnings

 

         12,454,218

(1)

        127,254,848

(1)

                        2,532

(2)

Included in other comprehensive income

 

                          -

 

                           -

 

                    102,739

 

 

 

 

 

 

 

 

 

Balance - September 30, 2020

 

$       14,945,451

 

$      445,878,979

 

$               2,290,153

 

                         

 

 

 

 

 

 

 

(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings

 

(2) As a component of Net investment income on the condensed consolidated statements of earnings

 

Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:

 

 

Net Derivatives Loan Commitments

 

Loans Held for Sale

 

Fixed Maturity Securities Available for Sale

 

 

 

 

 

 

 

Balance - December 31, 2018

 

$           1,591,816

 

$      136,210,853

 

$                             -

Originations/purchases

 

                            -

 

     2,606,839,175

 

                               -

Sales

 

                            -

 

    (2,580,875,055)

 

                               -

Transfer to mortgage loans held for investment

 

                            -

 

         (31,881,851)

 

                               -

Transfer from fixed maturity securities held to maturity

 

                            -

 

                           -

 

                3,216,382

Total gains (losses):

 

 

 

 

 

 

Included in earnings (1)

 

                899,417

 

          83,164,510

 

                               -

 

 

 

 

 

 

 

Balance - December 31, 2019

 

$           2,491,233

 

$      213,457,632

 

$              3,216,382

                             

 

 

 

 

 

 

(1) As a component of mortgage fee income on the condensed consolidated statements of earnings



  
Net
 Loan
Commitments
  
Bank
 Loan
 Interest
Rate Swaps
  
Loans
 Held
 for Sale
 
Balance - December 31, 2016 $6,809,332  $(3,308) $- 
Purchases          636,022,818 
Sales          (473,930,540)
Total gains (losses):            
Included in earnings (1)  (3,677,554)  -   4,897,909 
Included in other comprehensive income (2)  -   3,170   - 
             
Balance - September 30, 2017 $3,131,778  $(138) $166,990,187 
             
(1) As a component of Mortgage fee income on the condensed consolidated statement of earnings 
(2) As a component of Unrealized gains on derivative instruments on the condensed consolidated statement of comprehensive income 


32

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


8)Fair Value of Financial Instruments (Continued) (Continued)


The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at September 30, 2017.


     Quoted Prices       
     in Active  Significant  Significant 
     Markets for  Observable  Unobservable 
     Identical Assets  Inputs  Inputs 
  Total  (Level 1)  (Level 2)  (Level 3) 
Assets accounted for at fair value on a nonrecurring basis            
Impaired mortgage loans held for investment $5,218,392  $-  $-  $5,218,392 
Mortgage servicing rights additions  4,057,974   -   -   4,057,974 
Total assets accounted for at fair value on a nonrecurring basis $9,276,366  $-  $-  $9,276,366 

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at December 31, 2016.
  Total  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant
Observable
Inputs
(Level 2)
  
Significant Unobservable
Inputs
(Level 3)
 
Assets accounted for at fair value on a recurring basis            
Common stock $9,911,256  $9,911,256  $-  $- 
Total equity securities available for sale $9,911,256  $9,911,256  $-  $- 
                 
Restricted assets (1) $736,603  $736,603  $-  $- 
Cemetery perpetual care trust investments (1)  698,202   698,202   -   - 
Derivatives - loan commitments (2)  6,911,544   -   -   6,911,544 
Total assets accounted for at fair value on a recurring basis $18,257,605  $11,346,061  $-  $6,911,544 
Liabilities accounted for at fair value on a recurring basis                
Derivatives - bank loan interest rate swaps (3) $(3,308)  -   -  $(3,308)
                   - call options (4)  (109,474)  (109,474)  -   - 
                   - put options (4)  (26,494)  (26,494)  -   - 
                   - loan commitments (4)  (102,212)  -   -   (102,212)
Total liabilities accounted for at fair value on a recurring basis $(241,488) $(135,968) $-  $(105,520)
                 
(1) Excluding cash                
(2) Included in other assets on the condensed consolidated balance sheet             
(3) Included in bank and other loans payable on the condensed consolidated balance sheet         
(4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheet     

33

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

8)    Fair Value of Financial Instruments (Continued)
Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:
  Net Loan Commitments  
Bank
Loan
Interest Rate
Swaps
 
Balance - December 31, 2015 $7,671,495  $(13,947)
Total gains (losses):        
Included in earnings (1)  (862,163)  - 
Included in other comprehensive income (2)  -   10,639 
Balance - December 31, 2016 $6,809,332  $(3,308)
         
(1) As a component of Mortgage fee income on the condensed consolidated statement of earnings 
(2) As a component of Unrealized gains on derivative instruments on the condensed consolidated statement of comprehensive income 
2020.

 

Total

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

Significant Observable Inputs
(Level 2)

 

Significant Unobservable Inputs
(Level 3)

Assets accounted for at fair value on a nonrecurring basis

 

 

 

 

 

 

 

Impaired mortgage loans held for investment

$     1,519,159

 

$                        -

 

$                -

 

$     1,519,159

Impaired real estate held for sale

       4,000,000

 

                          -

 

                  -

 

       4,000,000

Total assets accounted for at fair value on a nonrecurring basis

$     5,519,159

 

$                        -

 

$                -

 

$     5,519,159

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at December 31, 2016.

2019.

 

Total

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

Significant Observable Inputs
(Level 2)

 

Significant Unobservable Inputs
(Level 3)

Assets accounted for at fair value on a
  nonrecurring basis

 

 

 

 

 

 

 

Impaired mortgage loans held for investment

$        1,302,025

 

$                        -

 

$                -

 

$        1,302,025

Impaired real estate held for investment

          8,375,884

 

                          -

 

                  -

 

          8,375,884

Total assets accounted for at fair value on
  a nonrecurring basis

$        9,677,909

 

$                        -

 

$                -

 

$        9,677,909



     
Quoted Prices
in Active
       
      Markets for  Significant  Significant 
      Identical  Observable  Unobservable 
      Assets  Inputs  Inputs 
  Total  (Level 1)  (Level 2)  (Level 3) 
            
Assets accounted for at fair value on a nonrecurring basis            
Impaired mortgage loans held for investment $2,809,925  $-  $-  $2,809,925 
Mortgage servicing rights additions  8,603,154   -   -   8,603,154 
Real estate held for investment  2,347,820   -   -   2,347,820 
                
Total assets accounted for at fair value on a nonrecurring basis $13,760,899  $-  $-  $13,760,899 
34

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


8)Fair Value of Financial Instruments (Continued) (Continued)


Fair Value of Financial Instruments Carried at Other Than Fair Value


ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.


Management uses its best judgment in estimating the fair value of the Company'sCompany’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 20172020 and December 31, 2016.


2019.

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of September 30, 2017:

2020:

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Total Estimated Fair Value

Assets

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment

 

 

 

 

 

 

 

 

 

  Residential

$       77,373,490

 

$                  -

 

$                      -

 

$       82,076,345

 

$       82,076,345

  Residential construction

       119,915,615

 

                    -

 

                        -

 

       119,915,615

 

       119,915,615

  Commercial

         48,320,422

 

                    -

 

                        -

 

         47,954,726

 

         47,954,726

Mortgage loans held for investment, net

$     245,609,527

 

$                  -

 

$                      -

 

$     249,946,686

 

$     249,946,686

Policy loans

         14,234,935

 

                    -

 

                        -

 

         14,234,935

 

         14,234,935

Insurance assignments, net (1)

         44,256,177

 

                    -

 

                        -

 

         44,256,177

 

         44,256,177

Restricted assets (2)

           4,110,252

 

                    -

 

                        -

 

           4,110,252

 

           4,110,252

Mortgage servicing rights, net

         28,387,476

 

                    -

 

                        -

 

         30,288,406

 

         30,288,406

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Bank and other loans payable

$   (424,932,007)

 

$                  -

 

$                      -

 

$   (424,932,007)

 

$   (424,932,007)

Policyholder account balances (3)

  ��    (44,246,123)

 

                    -

 

                        -

 

       (41,229,265)

 

       (41,229,265)

Future policy benefits - annuities (3)

     (110,638,182)

 

                    -

 

                        -

 

     (115,049,853)

 

     (115,049,853)

                               

 

 

 

 

 

 

 

 

 

(1) Included in other investments and policy loans on the condensed consolidated balance sheets

 

 

 

(2) Mortgage loans held for investment

 

 

 

 

 

 

 

 

 

(3) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets

 

 



  Carrying Value  Level 1  Level 2  Level 3  
Total
 Estimated
Fair Value
 
Assets
               
Fixed maturity securities held to maturity $230,811,272  $-  $243,807,562  $-  $243,807,562 
Mortgage loans held for investment:                    
Residential  63,908,714   -   -   68,139,551   68,139,551 
Residential construction  40,884,948   -   -   40,884,948   40,884,948 
Commercial  42,507,029   -   -   44,223,823   44,223,823 
Mortgage loans held for investment, net $147,300,691  $-  $-  $153,248,322  $153,248,322 
Loans held for sale (at amortized costs)  34,905,719   -   -   35,131,853   35,131,853 
Policy loans  6,677,924   -   -   6,677,924   6,677,924 
Insurance assignments, net (1)  32,198,144   -   -   32,198,144   32,198,144 
Short-term investments  17,830,990   -   17,830,990   -   17,830,990 
Mortgage servicing rights, net  20,396,568   -   -   26,785,380   26,785,380 
                     
Liabilities
                    
Bank and other loans payable $(182,769,531) $-  $-  $(182,769,531) $(182,769,531)
Policyholder account balances (2)  (48,200,442)  -   -   (37,564,692)  (37,564,692)
Future policy benefits - annuities (2)  (99,519,758)  -   -   (100,851,101)  (100,851,101)
                     
(1) Included in policy loans and other investments on the condensed consolidated balance sheet.         
(2) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.     

35

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


8)Fair Value of Financial Instruments (Continued) (Continued)



The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2016:


  Carrying Value  Level 1  Level 2  Level 3  
Total
 Estimated
 Fair Value
 
Assets
               
Fixed maturity securities held to maturity $184,979,644  $-  $191,850,749  $-  $191,850,749 
Mortgage loans held for investment:                    
Residential  57,096,961   -   -   61,357,393   61,357,393 
Residential construction  40,700,003   -   -   40,700,003   40,700,003 
Commercial  51,193,768   -   -   53,299,800   53,299,800 
Mortgage loans held for investment, net $148,990,732  $-  $-  $155,357,196  $155,357,196 
Loans held for sale  189,578,243   -   -   192,289,854   192,289,854 
Policy loans  6,694,148   -   -   6,694,148   6,694,148 
Insurance assignments, net (1)  32,477,246   -   -   32,477,246   32,477,246 
Short-term investments  27,560,040   -   27,560,040   -   27,560,040 
Mortgage servicing rights, net  18,872,362   -   -   25,496,832   25,496,832 
                     
Liabilities
                    
Bank and other loans payable $(152,137,371) $-  $-  $(152,137,371) $(152,137,371)
Policyholder account balances (2)  (49,421,125)  -   -   (38,530,031)  (38,530,031)
Future policy benefits - annuities (2)  (99,388,662)  -   -   (100,253,261)  (100,253,261)
                     
(1) Included in policy loans and other investments on the condensed consolidated balance sheet.         
(2) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.     

2019:

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Total Estimated Fair Value

Assets

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment

 

 

 

 

 

 

 

 

 

  Residential

$     110,253,678

 

$                  -

 

$                      -

 

$     115,320,638

 

$     115,320,638

  Residential construction

         88,651,967

 

                    -

 

                        -

 

         88,651,967

 

         88,651,967

  Commercial

         37,788,901

 

                    -

 

                        -

 

         39,289,462

 

         39,289,462

Mortgage loans held for investment, net

$     236,694,546

 

$                  -

 

$                      -

 

$     243,262,067

 

$     243,262,067

Policy loans

         14,762,805

 

                    -

 

                        -

 

         14,762,805

 

         14,762,805

Insurance assignments, net (1)

         39,614,939

 

                    -

 

                        -

 

         39,614,939

 

         39,614,939

Restricted assets (2)

           2,275,756

 

                    -

 

                        -

 

           2,289,679

 

           2,289,679

Cemetery perpetual care trust investments (2)

              524,000

 

                    -

 

                        -

 

              536,553

 

              536,553

Mortgage servicing rights, net

         17,155,529

 

                    -

 

                        -

 

         22,784,571

 

         22,784,571

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Bank and other loans payable

$   (217,572,612)

 

$                  -

 

$                      -

 

$   (217,572,612)

 

$   (217,572,612)

Policyholder account balances (3)

       (45,154,180)

 

                    -

 

                        -

 

       (41,828,469)

 

       (41,828,469)

Future policy benefits - annuities (3)

     (113,579,830)

 

                    -

 

                        -

 

     (117,304,614)

 

     (117,304,614)

                               

 

 

 

 

 

 

 

 

 

(1) Included in other investments and policy loans on the condensed consolidated balance sheets

 

 

 

(2) Mortgage loans held for investment

 

 

 

 

 

 

 

 

 

(3) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets

 

 

The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these financial instruments are summarized as follows:


Fixed Maturity Securities Held to Maturity:The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.


Mortgage Loans Held for Investment: The estimated fair value of the Company'sCompany’s mortgage loans held for investment is determined using various methods. The Company'sCompany’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment.

Residential – The estimated fair value of mortgage loans is determined through a combination of discounted cash flows (estimating expected future cash flows of interest payments and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently.


Residential Construction – These loans are primarily short in maturity accordingly,maturity. Accordingly, the estimated fair value is determined to be the carrying value.


Commercial – The estimated fair value is determined by estimating expected future cash flows of interest payments and discounting them using current interest rates for commercial mortgages.


Loans Held for Sale, at Amortized Cost: The fair value is based on quoted market prices, when available.  When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets.


Policy Loans: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies.
Insurance Assignments, Net: These investments are primarily short in maturity, accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.



Short-Term Investments: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to their short-term nature.


Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

Mortgage Servicing Rights, Net8): The methods used to determine fair valueFair Value of mortgage servicing rights were previously disclosed in this Note 8.


Financial Instruments (Continued)


Bank and Other Loans Payable: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable interest rates.


Policyholder Account Balances and Future Policy Benefits-Annuities:  Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows.


The fair values for the Company'sCompany’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company'sCompany’s overall management of interest rate risk, such that the Company'sCompany’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.


9)Allowance for Doubtful Accounts


The Company records an allowance and recognizes an expense for potential losses from other investments and receivables in accordance with generally accepted accounting principles.


Receivables are the result of cemetery and mortuary operations, mortgage loan operations and life insurance operations. The allowance is based upon the Company'sCompany’s historical experience for collectively evaluated impairment. Other allowances are based upon receivables individually evaluated for impairment. Collectability of the cemetery and mortuary receivables is significantly influenced by current economic conditions. The critical issues that impact recovery of mortgage loan operations are interest rate risk, loan underwriting, new regulations and the overall economy.

economy

10)37


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)


10)    Derivative Instruments

Mortgage Banking Derivatives


Loan Commitments


The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a loan commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded. Managing price risk is complicated by the fact that the ultimate percentage of loan commitments that will be exercised (i.e., the number of loans that will be funded) fluctuates. The probability that a loan will not be funded or the loan application is denied or withdrawn within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the issuance of the loan commitment.


In general, the probability of funding increases if mortgage rates rise and decreases if mortgage rates fall. This is due primarily to the relative attractiveness of current mortgage rates compared to the applicant'sapplicant’s committed rate. The probability that a loan will not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker or correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance), product type and the application approval status. The Company has developed fallout estimates using historical data that take into account all of the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the loan commitments and are updated periodically to reflect the most current data.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

10)Derivative Instruments (Continued)


The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBSmortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued and is shown net of expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans.


Forward Sale Commitments


The Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments. A forward commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments. Management expects these types of commitments will experience changes in fair value opposite to changes in fair value of the loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments.


The net changes in fair value of all loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income.


income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the condensed consolidated balance sheets.

Call and Put Options


The Company uses a strategy of selling "out“out of the money"money” call options on its available for sale equity securities as a source of revenue.  The options give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future.  The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current market prices.  The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair value of the option.  The liability for options is adjusted to fair value at each reporting date. In the event a call option is exercised, the Company recognizes a gain on the sale ofsells the equity security at a favorable price enhanced by the value of the option that was sold. If the option expires unexercised, the Company recognizes a gain from the sale of theexpired option. In the event a put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option. The equity security is then tradedtreated as a normal equity security in the Company'sCompany’s portfolio.

38

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

10)    Derivative Instruments (Continued)

The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets.

The following table shows the notional amount and fair value of derivatives as of September 30, 20172020 and December 31, 2016.

2019.

 

Fair Values and Notional Values of Derivative Instruments

 

 

 

September 30, 2020

 

December 31, 2019

 

Balance Sheet Location

 

Notional Amount

 

Asset Fair Value

 

Liability Fair Value

 

Notional Amount

Asset Fair Value

 

Liability Fair Value

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Loan commitments

Other assets and Other liabilities

 

$977,036,503

 

$17,945,259

 

$2,999,809

 

$224,202,514

$2,722,580

 

$231,347

Call options

Other liabilities

 

      1,957,000

 

                   -

 

    126,193

 

      1,813,500

               -

 

 62,265

Put options

Other liabilities

 

                     -

 

                   -

 

               -

 

      1,573,100

               -

 

  22,282

Total

 

 

$978,993,503

 

$17,945,259

 

$3,126,002

 

$227,589,114

$2,722,580

 

$315,894



  Fair Values and Notional Values of Derivative Instruments 
     September 30, 2017  December 31, 2016 
Balance Sheet Location Notional Amount  Asset Fair Value  Liability Fair Value  Notional Amount  Asset Fair Value  Liability Fair Value 
Derivatives not designated as hedging instruments:                    
Loan commitments Other assets and Other liabilities $147,086,043  $3,140,704  $8,926  $191,757,193  $6,911,544  $102,212 
Call options Other liabilities  1,473,050   --   50,452   2,169,850   --   109,474 
Put options Other liabilities  2,593,300   --   63,637   1,336,750   --   26,494 
Derivatives designated as fair value hedging instruments:                          
Interest rate swaps Bank and other loans payable  43,940   --   138   175,762   --   3,308 
Total   $151,196,333  $3,140,704  $123,153  $195,439,555  $6,911,544  $241,488 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

10)Derivative Instruments (Continued)


The following table shows the gains and losses on derivatives for the periods presented. There were no gains or losses reclassified from accumulated other comprehensive income (OCI) into income or gains or losses recognized in income on derivatives ineffective portion or any amounts excluded from effective testing.


     Net Amount Gain (Loss)  Net Amount Gain (Loss) 
     Three Months Ended September 30  Nine Months Ended September 30 
Derivative Classification 2017  2016  2017  2016 
Interest Rate Swaps Other comprehensive income $554  $-  $3,170  $5,541 
                   
Loan commitments Mortgage fee income $(4,833,268) $(1,505,820) $(3,677,554) $1,459,568 
                   
Call and put options Realized gains on investments and other assets $27,734  $73,250  $216,561  $210,522 

 

 

 

 

Net Amount Gain (Loss)              

 

Net Amount Gain (Loss)             

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

Derivative

 

Classification

 

2020

 

2019

 

2020

 

2019

Loan commitments

 

Mortgage fee income

 

$       3,901,086

 

$            378,899

 

$     12,454,218

 

$         1,915,223

 

 

 

 

 

 

 

 

 

 

 

Call and put options

 

Gains on investments and other assets

 

$            34,171

 

$            104,702

 

$          124,516

 

$            509,639

11)11)    Reinsurance, Commitments and Contingencies


Reinsurance


The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranges from $25,000 to $100,000. The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. The Company has also assumed insurance from other companies.


Mortgage Loan Loss Settlements


Future loan losses can be extremely difficult to estimate. However, management believes that the Company'sCompany’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of September 30, 20172020 and December 31, 2016,2019, the balances were $2,171,000$3,009,000 and $628,000,$4,046,000, respectively.

Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.

Mortgage Loan Loss Litigation



In January 2014, Lehman Brothers Holdings Inc. ("(“Lehman Holdings"Holdings”) entered into a settlement with the Federal National Mortgage Association (Fannie Mae) concerning the mortgage loan claims that Fannie Mae had asserted against Lehman Holdings, which were based on alleged breaches of certain representations and warranties by Lehman Holdings in the mortgage loans it had sold to Fannie Mae.  Lehman Holdings had acquired these loans from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, which in turn purchased the loans from certain residential mortgage loan originators, including SecurityNational Mortgage.Mortgage Company (“SecurityNational Mortgage”). A settlement based on similar circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.



39

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 20172020 (Unaudited)


11)11)    Reinsurance, Commitments and Contingencies (Continued)



Lehman Holdings filed a motion in May 2014 with the U.S. Bankruptcy Court of the Southern District of New York to require the mortgage loan originators, including SecurityNational Mortgage, to engage in non-binding mediations of theirthe alleged indemnification claims against the mortgage loan originators relative to the Fannie Mae and Freddie Mac settlements with Lehman Holdings.  The mediation was not successful in resolving any issues between SecurityNational Mortgage and Lehman Holdings.



On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York seeking a declaration of rights similar in nature to the declaratory judgmentdeclaration that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the alleged obligations of the defendants under  the indemnification provisions of the alleged agreements, in amounts to be determined at trial, including interest, attorneys'attorneys’ fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants. No response was required to be filed relative to the Complaint or the Amended Complaint dated March 7, 2016. A Case Management Order was entered on November 1, 2016.


On December 27, 2016, pursuant to the Case Management Order, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage, which eliminates the declaratory judgment claim but retains a similar claim for damages as in the Complaint. The case is presently in a motion period. Many of the defendants, including SecurityNational Mortgage, filed a joint motion in the case asserting that the Bankruptcy Court does not have subject matter jurisdiction concerning the matter and that venue is improper. Lehman Holdings'Holdings’ response memorandum was filed on May 31, 2017 and a reply memorandum of the defendants filing the motion was filed on July 14, 2017. A hearing dateon the motion was held on June 12, 2018.

On August 13, 2018, the Court issued its Memorandum Decision and Order (“Decision”) denying the motion. On August 27, 2018, a number of the defendants, including SecurityNational Mortgage, filed a joint motion with the United States District Court (Case No. 18-mc-00392(VEC)) requesting that the Bankruptcy Court’s Decision be treated as findings of fact and conclusions of law, and for the District Court to review the Decision de novo as to jurisdiction. Included with the motion haswere proposed objections to the Bankruptcy Court’s Decision. On September 18, 2018, Lehman Holdings filed its response to the joint motion, and defendants’ reply was filed on October 2, 2018.

On September 17, 2018, certain defendants, including SecurityNational Mortgage, also filed a notice of appeal, and thereafter a motion for leave to file an interlocutory appeal as to the Bankruptcy Court’s Decision pertaining to jurisdiction and improper venue as a “protective” appeal should the District Court decide not to treat the Decision as findings of fact and conclusions of law. Separately, certain other defendants also filed a notice of appeal and motion for leave to file an interlocutory appeal with respect to the Bankruptcy Court’s Decision concerning improper venue. Lehman Holdings filed its response on October 22, 2018, and defendants filed a joint reply to Lehman Holdings’ response on November 26, 2018. The motions to file appeals were consolidated before Valerie Caproni, U.S. District Court Judge, Case No. 18-cv-08986 (VEC). Case No. 18-mc-00392 (VEC) was also before Judge Caproni.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

11)Reinsurance, Commitments and Contingencies (Continued) 


On May 8, 2019, Judge Caproni issued her Opinion and Order denying the motion for an interlocutory appeal of the bankruptcy court’s ruling relative to jurisdiction and venue. Further, the judge denied the motion for immediate de novo review of the bankruptcy court’s ruling indicating that de novo review can be left for the future.

On October 1, 2018, Lehman Holdings filed a motion for leave to file Third Amended Complaints against numerous defendants including SecurityNational Mortgage. In addition to the Fannie Mae and Freddie Mac related loans, the amendments and supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization (“RMBS loans”). The RMBS loans had allegedly been set. No Answersold by defendants to Lehman Bank that, in turn, sold them to Lehman Holdings. The allegations pertaining to the RMBS loans include, e.g., purported breaches of representations and warranties made to the securitization trusts by Lehman Holdings. Lehman Holdings asserts that it made representations and warranties purportedly based in part by representations and warranties made to Lehman Bank by loan originators, including SecurityNational Mortgage.

The alleged RMBS loans in dispute with SecurityNational Mortgage allegedly involve millions of dollars pertaining to approximately 577 mortgage loans in addition to the Fannie Mae and Freddie Mac related loans. Lehman Holdings also moved the Court to simultaneously allow alternative dispute resolution procedures to take place including potential mediation. Over objections, at a hearing on October 29, 2018, the Court granted Lehman Holdings’ motion to amend or supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants including SecurityNational Mortgage.

Instead of filing a Third Amended Complaint to include the RMBS loans referenced above, Lehman Holdings filed the matter against SecurityNational Mortgage as a new complaint ("RMBS Complaint") (United States Bankruptcy Court, Southern District of New York, Adversary Proceeding 18-01819) pertaining to the approximately 577 RMBS loans, in addition to the Second Amended Complaint is requiredalready on file. The RMBS Complaint seeks alleged damages relating to obligations under alleged contractual indemnification provisions in an amount to be fileddetermined at trial, interest, costs and expenses incurred by LBHI in enforcing alleged obligations, including attorneys' fees and costs and any expert witness fees incurred in litigation; and such other relief as the Court deems just and proper.

In response to a Court order, certain defendants referenced in the Second Amended Complaint and the RMBS Complaints negotiated with Lehman Holdings concerning an amended case management order pertaining to certain case procedures and management for both lawsuits including, but not limited to, timing for filing motions and answering the complaints, and provisions concerning discovery such as a document production, taking depositions, and use of experts. At a hearing held on March 7, 2019, the Court considered differences of the parties as to the content of an amended case management order, and thereafter signed an amended case management order dated March 13, 2019. SecurityNational Mortgage filed an answer and amended answer in the Fannie Mae and Freddie Mac case, and in the RMBS case. Discovery is in process.

Lehman Holdings sent an Indemnification Alternative Dispute Resolution Notice to SecurityNational Mortgage dated August 1, 2019. SecurityNational Mortgage sent its Statement of Position to Lehman Brothers Holdings dated September 3, 2019 in response to the notice. Thereafter, Lehman Holdings sent its Reply dated October 2, 2019 to SecurityNational Mortgage. On January 9, 2020, SecurityNational Mortgage submitted further information to the mediator. Mediation was set to take place on January 23, 2020 in New York. In view of a motion of SecurityNational Mortgage dated January 15, 2020, Lehman Holdings requested that the mediation be continued.

On January 15, 2020, SecurityNational Mortgage filed a motion to dismiss Lehman Holdings’ RMBS action in the Bankruptcy Court for lack of subject matter jurisdiction and standing. It was not filed in the Bankruptcy Court but in the United States District Court for the Southern District of New York. The District Court referred the matter to a magistrate judge for general pretrial, which “includes scheduling, discovery, non-dispositive pretrial motions, and settlement,” as well as for “a Report and Recommendation” as to the pending further ordermotion. The final disposition of the motion will be with the District Court judge. Lehman Holdings asked the District Court to transfer the case to one of two other judges allegedly due to related matters. No action has been taken by the District Court to transfer the case.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

11)Reinsurance, Commitments and Contingencies (Continued) 


However, Lehman Holdings filed its response brief to the motion and SecurityNational Mortgage filed its reply. On July 10, 2020, the Magistrate Judge filed a report and recommendation with the District Court judge recommending that SecurityNational Mortgage’s motion to dismiss be denied on the procedural basis that the motion should not be in the District Court, but the Bankruptcy Court. SecurityNational Mortgage deniesfiled an objection to the report and recommendation to which Lehman Holdings responded. The District Court entered an order on August 10, 2020 adopting the Magistrate Judge’s recommendation that SecurityNational Mortgage’s motion be denied on the procedural basis that the matter should not be in the District Court at present, and that the Bankruptcy Court may recommend on an interlocutory basis whether there is subject matter jurisdiction and standing, and that later in the proceedings the District Court could then review the recommendation as to subject matter jurisdiction and standing.

On September 15, 2020, SecurityNational Mortgage filed a Petition for a Writ of Mandamus with the Second Circuit Court of Appeals asking that the District Court be ordered to presently resolve SecurityNational Mortgage’s motion as its motion is filed in the proper court. No action has yet to be taken by the Second Circuit.

Earlier, on March 17, 2020, Lehman Holdings filed a motion for partial summary judgment against dozens of defendants asserting that sufficient notice was given defendants concerning the settlement of the RMBS claims so that Lehman Holdings, as an indemnitee, would not have to prove that it has(Lehman Holdings) had liability to the RMBS Trustees, but only that its settlement was reasonable and in good faith. Defendants involved filed a response brief that for various reasons Lehman Holdings cannot establish sufficient notice as required by law. Certain defendants, excluding SecurityNational Mortgage, also filed a cross motion to seek an affirmative ruling on the issue of Lehman Holdings’ motion.

Thereafter, Lehman Holdings filed a reply brief in support of its motion, and also a response brief to certain defendants’ cross motion. Defendants that filed a cross motion filed a reply brief in support of the cross motion. The motions are now under advisement with the Bankruptcy Court. Even if Lehman Holdings were to prevail on its motion, it does not absolve Lehman Holdings of its burden to prove indemnity liability to the defendants. SecurityNational Mortgage denies any liability to Lehman Holdings and intends to vigorously protect and defend its position.

Debt Covenants for Mortgage Warehouse Lines of Credit

The Company, through its subsidiary SecurityNational Mortgage, has a $150,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month LIBOR rate plus 2.1% and matures on June 24, 2021. SecurityNational Mortgage is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and the liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.00.

The Company, through its subsidiary SecurityNational Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows SecurityNational Mortgage to borrow up to $175,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on November 15, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

The Company through its subsidiary SecurityNational Mortgage, also uses a line of credit with Comerica Bank. This agreement with the bank allows SecurityNational Mortgage to borrow up to $90,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on May 27, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months.  



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

11)Reinsurance, Commitments and Contingencies (Continued) 


The Company, through its subsidiary EverLEND Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows EverLEND Mortgage to borrow up to $5,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on August 1, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.  

The agreements for warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant violation under the other agreement.  As of September 30, 2020, the Company believes that it was in compliance with all debt covenants.

Other Contingencies and Commitments

The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of September 30, 2017,2020, the Company'sCompany’s commitments were approximately $69,601,000$187,305,000 for these loans, of which $41,307,000$124,409,000 had been funded. The Company will advance funds once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum. Maturities range between six and eighteen months.


The Company belongs to a captive insurance group for certain casualty insurance, worker compensation and liability programs. Insurance reserves are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive insurance management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required. The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.

40

The Company is a defendant in various other legal actions arising from the normal conduct of business. Management believes that none of the actions will have a material effect on the Company'sCompany’s financial position or results of operations. Based on management'smanagement’s assessment and legal counsel'scounsel’s representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial statements.


The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which, if adversely determined, would have a material adverse effect on its financial condition or results of operations.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)


12)Mortgage Servicing Rights


The Company initially records these Mortgage Servicing Rights ("MSRs")MSRs at fair value as discussed in Note 8.


The Company's subsequent accounting for MSRs is based on the class of MSRs. The Company has identified two classes of MSRs: MSRs backed by mortgage loans with initial term of 30 years and MSRs backed by mortgage loans with initial term of 15 years. The Company distinguishes between these classes of MSRs due to their differing sensitivities to change in value as the result of changes in market.

After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance straight-line over an estimated seven and nine-year life which estimates thein proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.


The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset'sasset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance.


Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.

41

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

12)    Mortgage Servicing Rights (Continued)

The following is a summary of the MSR activity for the periods presented.

  
As of
September 30
2017
  
As of
December 31
2016
 
Amortized cost:      
Balance before valuation allowance at beginning of year $18,872,362  $12,679,755 
MSR additions resulting from loan sales  4,057,974   8,603,154 
Amortization (1)  (2,533,768)  (2,410,547)
Application of valuation allowance to write down MSRs with other than temporary impairment  -   - 
Balance before valuation allowance at end of period $20,396,568  $18,872,362 
         
Valuation allowance for impairment of MSRs:        
Balance at beginning of year $-  $- 
Additions  -   - 
Application of valuation allowance to write down MSRs with other than temporary impairment  -   - 
Balance at end of period $-  $- 
         
Mortgage servicing rights, net $20,396,568  $18,872,362 
         
Estimated fair value of MSRs at end of period $26,785,380  $25,496,832 
         
(1) Included in other expenses on the condensed consolidated statements of earnings 

 

As of September 30
2020

As of December 31
2019

Amortized cost:

 

 

Balance before valuation allowance at beginning of year

$             17,155,529

$             20,016,822

MSR additions resulting from loan sales

               19,400,262

                4,194,502

Amortization (1)

               (8,168,315)

               (7,055,795)

Application of valuation allowance to write down MSRs
  with other than temporary impairment

                             -

                             -

Balance before valuation allowance at end of period

$             28,387,476

$             17,155,529

 

 

 

Valuation allowance for impairment of MSRs:

 

 

Balance at beginning of year

$                           -

$                           -

Additions

                             -

                             -

Application of valuation allowance to write down MSRs
  with other than temporary impairment

                             -

                             -

Balance at end of period

$                           -

$                           -

 

 

 

Mortgage servicing rights, net

$             28,387,476

$             17,155,529

 

 

 

Estimated fair value of MSRs at end of period

$             30,288,406

$             22,784,571

                         

 

 

(1) Included in other expenses on the condensed consolidated statements of earnings



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

12)Mortgage Servicing Rights (Continued)


The following table summarizes the Company'sCompany’s estimate of future amortization of its existing MSRs carried at amortized cost:


  Estimated MSR Amortization 
2017 $162,284 
2018  3,372,381 
2019  3,372,381 
2020  3,372,381 
2021  3,372,381 
Thereafter  6,744,760 
Total $20,396,568 

 

 

Estimated MSR Amortization

2020

 

                4,926,285

2021

 

                3,690,972

2022

 

                3,094,986

2023

 

                2,609,308

2024

 

                2,213,796

Thereafter

              11,852,129

Total

 

$            28,387,476

The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the condensed consolidated statement of earnings:


  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
  2017  2016  2017  2016 
Contractual servicing fees $1,848,831  $1,496,365  $5,359,425  $4,024,720 
Late fees  99,077   67,032   266,218   189,237 
Total $1,947,908  $1,563,397  $5,625,643  $4,213,957 

42

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

12)    Mortgage Servicing Rights (Continued)

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

2020

 

2019

 

2020

 

2019

Contractual servicing fees

$     2,340,546

 

$    1,765,957

 

$     6,055,055

 

$     5,433,970

Late fees

            69,314

 

      ��    82,547

 

          238,826

 

          261,437

Total

$     2,409,860

 

$    1,848,504

 

$     6,293,881

 

$     5,695,407

The following is a summary of the unpaid principal balances ("UPB"(“UPB”) of the servicing portfolio for the periods presented:


  
As of
 September 30
2017
  
As of
December 31
2016
 
Servicing UPB $3,003,608,494  $2,720,441,340 

 

As of  September 30
2020

 

As of December 31 2019

Servicing UPB

$           4,215,559,388

 

$        2,804,139,415

The following key assumptions were used in determining MSR value:


  
Prepayment
Speeds
  
Average
Life (Years)
  
Discount
Rate
 
September 30, 2017  3.59   6.2   10.01 
December 31, 2016  3.77   6.52   10.01 
43

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

 

Prepayment
Speeds

Average
Life (Years)

Discount
Rate

September 30, 2020

16.70

5.06

9.5

December 31, 2019

15.30

5.27

9.51

13) Acquisitions





Fixed maturity securities, held to maturity $43,878,084 
Equity securities, available for sale  646,335 
Mortgage loans held for investment  4,528,582 
Real estate held for investment  528,947 
Policy loans  145,953 
Short-term investments  5,358,403 
Accrued investment income  585,985 
Cash and cash equivalents  2,424,480 
Receivables  73,347 
Property and equipment  21,083 
Deferred tax asset  1,190,862 
Receivable from reinsurers  34,948 
Other  57,768 
Total assets acquired  59,474,777 
Future policy benefits and unpaid claims  (52,648,838)
Accounts payable  (6,953)
Other liabilities and accrued expenses  (65,986)
Total liabilities assumed  (52,721,777)
Fair value of net assets acquired/consideration paid $6,753,000 

The estimated fair value of the fixed maturity securities and the equity securities is based on unadjusted quoted prices for identical assets in an active market.  These types of financial assets are considered Level 1 under the fair value hierarchy. The estimated fair value of future policy benefits and unpaid claims is based on assumptions of the future value of the business acquired. Based on the unobservable nature of certain of these assumptions, the valuation for these financial liabilities is considered to be Level 3 under the fair value hierarchy. The Company determined that the estimated fair value of the remaining assets and liabilities acquired approximated their book values. The fair value of assets acquired and liabilities assumed were subject to adjustment during the first twelve months after the acquisition date if additional information became available to indicate a more accurate or appropriate value for an asset or liability. No adjustments were made.
44

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (Unaudited)

13)    Acquisitions (Continued)

The following unaudited pro forma information has been prepared to present the results of operations of the Company assuming the acquisition of First Guaranty had occurred at the beginning of the three and nine-month periods ended September 30, 2016. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisition occurred on those dates and may not reflect the operations that will occur in the future:

  
For the Nine Months Ended
September 30
(unaudited)
 
  2016 
Total revenues $234,629,101 
Net earnings $11,472,978 
Net earnings per Class A equivalent common share $0.78 
Net earnings per Class A equivalent common share    
assuming dilution $0.76 

The pro forma results for the three and nine-month periods ended September 30, 2017 and for the three-month period ended September 30, 2016 are not included in the table above because the operating results for the First Guaranty acquisition were included in the Company's condensed consolidated statements of earnings for these periods.

14) Income Taxes

The Company'sCompany’s overall effective tax rate for the three months ended September 30, 20172020 and 20162019 was 3.6%24.0% and 36.4%24.0%, respectively, which resulted in a provision for income taxes of $41,000$9,279,162 and $2,390,000,$1,142,408, respectively. The Company'sCompany’s overall effective tax rate for the nine months ended September 30, 20172020 and 20162019 was 32.2%23.7% and 37.0%23.6%, respectively, which resulted in a provision for income taxes of $2,587,000$15,965,656 and $6,892,000,$2,788,038, respectively. The Company's effective tax rates differ from the U.S. federal statutory rate of 34% largely21% partially due to its provision for state income taxes and a reduction in the valuation allowance related to the prior acquisition of First Guaranty Insurance Company that decreased thetaxes.  The effective income tax rates for both periods,rate increased when compared to the prior year periods.period partly due the Company’s provision for state income taxes.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)


14) Revenues from Contracts with Customers

The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers.

Information about Performance Obligations and Contract Balances

The Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations. Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled.

The Company’s three types of future obligations are as follows:

Pre-need Merchandise and Service Revenue: All pre-need merchandise and service revenue is deferred and the funds are placed in trust until the need arises, the merchandise is received or the service is performed. The trust is then relieved, and the revenue and commissions are recognized.

At-need Specialty Merchandise Revenue: At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is deferred until the at-need merchandise is received.

Deferred Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments. Deferred pre-need land revenue is not placed in trust.

Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services does not fulfill an obligation and revenue remains deferred.

The opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows:

 

Contract Balances

 

Receivables (1)

Contract Asset

Contract Liability

Opening (1/1/2020)

$       2,778,879

$                         -

$              12,607,978

Closing (9/30/2020)

         3,580,669

                          -

                13,045,307

Increase/(decrease)

           801,790

                          -

                    437,329

 

 

 

 

 

Contract Balances

 

Receivables (1)

Contract Asset

Contract Liability

Opening (1/1/2019)

$       2,816,225

$                         -

$              12,508,625

Closing (12/31/2019)

         2,778,879

                          -

                12,607,978

Increase/(decrease)

           (37,346)

                          -

                      99,353

                             

 

 

 

(1) Included in Receivables, net on the condensed consolidated balance sheets



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

14) Revenues from Contracts with Customers (Continued)


The amount of revenue recognized and included in the opening contract liability balance for the three months ended September 30, 2020 and 2019 was $1,427,418 and $884,180, respectively, and for the nine months ended September 30, 2020 and 2019 was $3,258,824 and $2,515,278, respectively.

The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.

Disaggregation of Revenue

The following table disaggregates revenue for the Company’s cemetery and mortuary contracts for the periods presented:

 

Three Months Ended
September 30

 

Nine Months
Ended September 30

 

2020

 

2019

 

2020

 

2019

Major goods/service lines

 

 

 

 

 

 

 

At-need

$  4,272,816

 

$ 2,888,996

 

$    10,915,712

 

$    8,883,846

Pre-need

    1,098,899

 

     637,420

 

       3,614,872

 

      2,321,928

 

$  5,371,715

 

$ 3,526,416

 

$    14,530,584

 

$   11,205,774

 

 

 

 

 

 

 

 

Timing of Revenue Recognition

 

 

 

 

 

 

 

Goods transferred at a point in time

$  3,559,431

 

$ 2,371,041

 

$      9,641,751

 

$    7,515,881

Services transferred at a point in time

    1,812,284

 

  1,155,375

 

       4,888,833

 

      3,689,893

 

$  5,371,715

 

$ 3,526,416

 

$    14,530,584

 

$   11,205,774

The following table reconciles revenues from cemetery and mortuary contracts to Note 7 – Business Segment Information for the Cemetery/Mortuary Segment for the periods presented:

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

2020

 

2019

 

2020

 

2019

Net mortuary and cemetery sales

$ 5,371,715

 

$  3,526,416

 

$ 14,530,584

 

$ 11,205,774

Gains (losses) on investments and other assets

     (66,673)

 

     (100,685)

 

     (244,413)

 

       752,412

Net investment income

     168,478

 

      112,246

 

       444,971

 

       387,617

Other revenues

       22,470

 

        32,442

 

        84,849

 

       126,908

Revenues from external customers

  5,495,990

 

    3,570,419

 

  14,815,991

 

  12,472,711



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)


15) Acquisitions

Probst Family Funerals and Cremations and Heber Valley Funeral Home

On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family Funerals and Cremations, LLC. (“Probst Family Funerals”) and Heber Valley Funeral Home, Inc. (“Heber Valley Funeral Home”). These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City.

Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, Memorial Mortuary Inc. paid a net purchase price of $3,315,647 for the business and assets of Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback. In August 2019, this escrow account was settled and $137,550 was paid to the prior owners.

The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows:

Cash

$     53,859

Property and equipment

  2,475,526

Receivables

       13,620

Goodwill

     754,018

Other

       21,800

Total assets acquired

  3,318,823

Bank and other loans payable

       (3,176)

Total liabilities assumed

       (3,176)

Fair value of net assets acquired/consideration paid

$ 3,315,647



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

15) Acquisitions (Continued)


Kilpatrick Life Insurance Company

On December 13, 2019, the Company, through its wholly owned subsidiary, Security National Life Insurance Company (“Security National Life”) completed a stock purchase transaction with Kilpatrick Life Insurance Company, a Louisiana domiciled life insurance company (“Kilpatrick Life”) and its shareholders, which resulted in the purchase of all the outstanding shares of common stock of Kilpatrick Life. The closing of the transaction was subject to approval by the Louisiana Department of Insurance of the change of control of Kilpatrick Life, which was received on December 12, 2019.  Under the terms of the transaction, the total Purchase Price that Security National Life paid for all the shares held by the Kilpatrick shareholders was $23,779,940 subject to a $1,400,000 holdback, as agreed with the shareholders.

Kilpatrick Life has been in operation since 1932 and provides life insurance products and services through insurance plans such as permanent and term life insurance, asset protection plans, graded whole life insurance, and annuities.  Additionally, it provides insurance services for emergencies and pre‐arranged funeral services. Kilpatrick Life is based in Shreveport, Louisiana with additional offices in Jena, Alexandria, Minden, and Arcadia, Louisiana.

Kilpatrick Life employs a staff of almost 120 associates in four offices in Louisiana and is licensed to operate in Louisiana, Texas, Arkansas, Oklahoma, and Mississippi with the home office located in Shreveport, LA.  It is the mission of Kilpatrick Life to continue providing the utmost service and protection for its policyholders for generations to come.

Prior to the stock purchase transaction, Security National life and Kilpatrick Life entered into a coinsurance agreement, effective October 1, 2019. After the effective date, Security National Life, as coinsurer, agreed to be responsible for and was obligated with respect to 100% of the contractual liabilities under the Kilpatrick Life’s life insurance policies in accordance with the terms and conditions of the policies and applicable law. Unless otherwise directed by Security National Life, as coinsurer, Kilpatrick Life continued to administer the policies on behalf of Security National Life, as coinsurer, for the duration of the coinsurance agreement.

As part of the coinsurance agreement, effective October 1, 2019, Security National Life acquired the following assets and assumed the following contractual liabilities.

Other investments and policy loans

$      9,124,459

Real estate held for investment

       2,850,000

Mortgage loans held for investment

          200,000

Receivables

          131,258

Total assets acquired

      12,305,717

Future policy benefits and unpaid claims

  (165,404,970)

Other liabilities and accrued expenses

      (5,259,341)

Total liabilities assumed

  (170,664,311)

Cash received for reinsurance assumed

$  158,358,594



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

15) Acquisitions (Continued)


Contemporaneous with the stock purchase transaction, both Kilpatrick Life and Security National Life, as coinsurer, agreed to terminate the coinsurance agreement, to require the recapture of the life insurance policies by Kilpatrick Life and provided notification to the Louisiana Department of Insurance. The final settlement and transfer of the coinsurance trust assets from Security National Life back to Kilpatrick Life occurred shortly thereafter.

The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition, on December 13, 2019, are shown in the following table. At the time of acquisition some of these assets and liabilities became intercompany items, and the Company has eliminated them for consolidation.

Fixed maturity securities, available for sale

$     22,766,520

 

Fixed maturity securities, held to maturity

             16,436

 

Mortgage loans held for investment

         8,011,660

 

Real estate held for investment

         2,708,557

 

Other investments

           446,655

 

Accrued investment income

           183,527

 

Total investments

       34,133,355

 

 

 

 

Cash and cash equivalents

         6,900,654

 

Receivables, net

         5,407,736

(1)

Receivables from reinsurers

     168,105,064

(1)

Property and equipment, net

         1,498,245

 

Value of business acquired

         4,962,831

 

Deferred taxes

           167,344

 

Other

           712,323

 

Total assets acquired

     221,887,552

 

 

 

 

Future policy benefits and unpaid claims

    (189,071,407)

 

Accounts payable

          (283,304)

 

Other liabilities and accrued expenses

       (7,870,944)

 

Income taxes

          (881,957)

 

Total liabilities assumed

    (198,107,612)

 

Fair value of net assets acquired/consideration paid

$     23,779,940

 

 

 

 

Fair value of net assets acquired/consideration paid, net of cash acquired

$     16,879,286

 

                               

 

 

(1) Receivable from reinsurers of $162,907,008 and receivables, net of $5,000,000 were settled with the recapture of the coinsurance agreement by Kilpatrick Life from Security National Life.





Operations.

Overview


The Company'sCompany’s operations over the last several years generally reflect three trends or events which the Company expects to continue:continue to focus on: (i) increased attention to "niche"“niche” insurance products, such as the Company'sCompany’s funeral plan policies and traditional whole life products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on relatively low interest ratesan improving housing market by originating mortgage loans.


The Company has adjusted its strategy to respond to the changing economic circumstances resulting from the COVID-19 pandemic.

Insurance Operations


The Company'sCompany’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning.


A funeral plan is a small face value life insurance policy that generally has face coverage of up to $25,000. The Company believes that funeral plans represent a marketing niche that has lower competitionis less competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person'sperson’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.


In response to the COVID-19 pandemic, the life insurance sales force has transitioned to virtual and tele sales processes and transitioned approximately 95% of office staff to work remotely.

The following table shows the condensed financial results of the insurance operations for three and nine months ended September 30, 20172020 and 2016.2019.  See Note 7 to the condensed consolidated financial statements.


  
Three months ended September 30
(in thousands of dollars)
  
Nine months ended September 30
(in thousands of dollars)
 
  2017  2016  % Increase (Decrease)  2017  2016  % Increase (Decrease) 
Revenues from external customers                  
Insurance premiums $17,490  $17,157   2% $52,345  $47,508   10%
Net investment income  8,110   7,828   4%  24,831   22,768   9%
Other  (370)  (13)  2746%  (64)  341   (119%)
Total $25,230  $24,972   1% $77,112  $70,617   9%
Intersegment revenue $3,334  $3,319   0% $9,300  $9,781   (5%)
Earnings before income taxes $523  $2,139   (76%) $4,825  $5,785   (17%)

 

Three months ended September 30
(in thousands of dollars)

 

Nine months ended September 30
(in thousands of dollars)

 

2020

 

2019

 

% Increase (Decrease)

 

2020

 

2019

 

% Increase (Decrease)

Revenues from external customers

 

 

 

 

 

 

 

 

 

 

 

Insurance premiums

$            23,767

 

$        19,832

 

20%

 

$            68,983

 

$        58,505

 

18%

Net investment income

              14,240

 

          10,147

 

40%

 

              40,074

 

          30,020

 

3%

Gains (losses) on investments and other assets

                   860

 

             (486)

 

(277%)

 

                     71

 

             (615)

 

(112%)

Other

                   394

 

               331

 

19%

 

                1,127

 

            1,027

 

10%

Total

$            39,261

 

$        29,824

 

32%

 

$          110,255

 

$        88,937

 

24%

Intersegment revenue

$              2,953

 

$          1,466

 

101%

 

$              5,677

 

$          3,441

 

65%

Earnings before income taxes

$              4,807

 

$          1,264

 

280%

 

$              5,408

 

$          4,568

 

18%

Intersegment revenues are primarily interest income from the warehouse line for loans held for sale provided to SecurityNational Mortgage Company ("(“SecurityNational Mortgage"Mortgage”). Profitability infor the three and nine months ended September 30, 2017 2020 has decreasedincreased due to a $10,478,000 increase in insurance premiums and other considerations, a $10,054,000 increase in net investment income, a $2,236,000 increase in intersegment revenue, a $686,000 increase in gains on investments and other assets primarily due to a decrease in the fair value of equity securities due to the recent downturn of the economy caused by the COVID-19 Pandemic offset by a decrease in impairment losses on commercial real estate, a $100,000 increase in other revenues, and a $238,000 decrease in interest expense. This increase was partially offset by a $14,456,000 increase in death, surrenders and other policy benefits, a $5,907,000 increase in selling, general and administrative expenses, a $1,127,000 increase in future policy benefits, and a $980,000 increase in amortization of deferred policy acquisition costs primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs. The Company acquired Kilpatrick Life Insurance Company (“Kilpatrick Life”) in December 2019. See Note 15 to the condensed consolidated financial statements. This acquisition is the primary reason for the increases in insurance premiums, net investment income, death, surrenders and other policy benefits, and expensesselling, general and increases in other than temporary impairments.administrative expenses.



46

Cemetery and Mortuary Operations


The Company sells mortuary services and products through its eight mortuaries in Utah. The Company also sells cemetery products and services through its five cemeteries in Utah and one cemetery in San Diego County, California. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.


As a result of the COVID-19 pandemic, the Company has seen a decrease in its average case size as funeral services have been limited. The Company has transitioned its pre-need sales force to virtual selling and has done in home sales as local regulations permit.

The following table shows the condensed financial results of the cemetery and mortuary operations for the three and nine months ended September 30, 20172020 and 2016.2019. See Note 7 to the condensed consolidated financial statements.


  
Three months ended September 30
(in thousands of dollars)
  
Nine months ended September 30
(in thousands of dollars)
 
  2017  2016  
% Increase
(Decrease)
  2017  2016  
% Increase
(Decrease)
 
Revenues from external customers                  
Mortuary revenues $1,161  $1,059   10% $3,749  $3,711   1%
Cemetery revenues  1,697   1,818   (7%)  6,041   6,186   (2%)
Other  130   24   442%  117   148   (21%)
Total $2,988  $2,901   3% $9,907  $10,045   (1%)
Earnings before income taxes $237  $55   331% $1,332  $1,284   4%

Included

 

Three months ended September 30
(in thousands of dollars)

 

Nine months ended September 30
(in thousands of dollars)

 

2020

 

2019

 

% Increase (Decrease)

 

2020

 

2019

 

% Increase (Decrease)

Revenues from external customers

 

 

 

 

 

 

 

 

 

 

 

Mortuary revenues

$        2,112

 

$        1,465

 

44%

 

$        5,560

 

$        4,693

 

18%

Cemetery revenues

          3,260

 

          2,061

 

58%

 

          8,970

 

          6,512

 

38%

Net investment income

             168

 

             112

 

50%

 

             445

 

             388

 

15%

Gains (losses) on investments and other assets

             (67)

 

           (101)

 

(34%)

 

           (244)

 

             752

 

(132%)

Other

               23

 

               32

 

(28%)

 

               85

 

             127

 

(33%)

Total

$        5,496

 

$        3,569

 

54%

 

$      14,816

 

$      12,472

 

19%

Earnings before income taxes

$        1,322

 

$           213

 

521%

 

$        2,976

 

$        2,422

 

23%

Profitability in other revenue is rental income from residential and commercial properties purchased from Security National Life. Memorial Estates purchased these properties from financing provided by Security National Life. The rental income is offset by property insurance, taxes and maintenance expenses. Memorial Estates has recorded depreciation on these properties of $157,000 and $176,000 for the three months ended September 30, 2017 and 2016, respectively, and $490,000 and $543,000 for the nine months ended September 30, 20172020 has increased due to a $1,293,000 increase in cemetery pre-need sales, a $1,165,000 increase in cemetery at-need sales, an $867,000 increase in mortuary at-need sales, and 2016, respectively.

an $82,000 increase in net investment income. This increase was partially offset by a $997,000 decrease in gains on investments and other assets primarily attributable to a $564,000 decrease in gains on real estate sales and a $433,000 decrease in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments due to the recent downturn of the economy caused by the COVID-19 Pandemic, an $801,000 increase in selling, general and administrative expenses, and a $357,000 increase in costs of goods sold.

Mortgage Operations


The Company'sCompany’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company, (formerly known as Green Street Mortgage Services, Inc.), are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage originate and refinance mortgage loans on a retail basis. Mortgage loans originated or refinanced by the Company'sCompany’s mortgage subsidiaries are funded through loan purchase agreements with Security National Life and unaffiliated financial institutions.


The Company'sCompany’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans originated by the mortgage subsidiaries. Mortgage loans originated by the mortgage subsidiaries are generally sold with mortgage servicing rights released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 30%65% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.


For the nine months ended September 30, 20172020 and 2016,2019, SecurityNational Mortgage originated 9,77314,462 loans ($1,913,207,0003,708,810,000 total volume) and 11,7207,817 loans ($2,252,108,0001,792,058,000 total volume), respectively. For the nine months ended




September 30, 20172020 and 2016,2019, EverLEND Mortgage originated 29400 loans ($6,715,000115,519,000 total volume) and one loan185 loans ($256,00048,494,000 total volume), respectively.

47

During the COVID-19 pandemic, the demand for mortgage loans has remained steady. The Company has seen most markets increase their demand for new homes and refinances on existing homes. The Company has transitioned 90% of its processes to a work from home environment. The largest hurdle that the Company faces is being able to process all applications in a timely manner.

The following table shows the condensed financial results of the mortgage operations for the three and nine months ended September 30, 20172020 and 2016.2019.  See Note 7 to the condensed consolidated financial statements.


  
Three months ended September 30
(in thousands of dollars)
  
Nine months ended September 30
(in thousands of dollars)
 
  2017  2016  % Increase (Decrease)  2017  2016  % Increase (Decrease) 
Revenues from external customers                  
Income from loan originations $15,204  $13,728   11% $41,788  $43,163   (3%)
Secondary gains from investors  28,550   41,347   (31%)  87,166   108,667   (20%)
Total $43,754  $55,075   (21%) $128,954  $151,830   (15%)
Earnings before income taxes $379  $4,379   (91%) $1,874  $11,561   (84%)

 

Three months ended September 30
(in thousands of dollars)

 

Nine months ended September 30
(in thousands of dollars)

 

2020

 

2019

 

% Increase (Decrease)

 

2020

 

2019

 

% Increase (Decrease)

Revenues from external customers

 

 

 

 

 

 

 

 

 

 

 

Income from loan originations

$      27,932

 

$      12,162

 

130%

 

$      60,994

 

$      30,726

 

99%

Secondary gains from investors

        70,628

 

        27,574

 

156%

 

      151,216

 

        66,435

 

128%

Net investment income

             300

 

             219

 

37

 

             553

 

             654

 

(15%)

Gains on investments and other assets

                 7

 

               67

 

(90%)

 

                  -

 

             123

 

(100%)

Other

          2,581

 

          1,962

 

32%

 

          6,641

 

          5,971

 

11%

Total

$    101,448

 

$      41,984

 

142%

 

$    219,404

 

$    103,909

 

111%

Earnings before income taxes

$      32,454

 

$        3,283

 

889%

 

$      58,868

 

$        4,826

 

1120%

Included in other revenues is service fee income. The decreaseincrease in earnings for the three and nine months ended September 30, 20172020 was due to a reductionan increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.


Mortgage Loan Loss Settlements

Future mortgage loan losses can be extremely difficult to estimate. However, management believes that the Company'sCompany’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on mortgage loans sold. The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of September 30, 20172020 and December 31, 2016,2019, the balances were $2,171,000$3,009,000 and $628,000,$4,046,000, respectively.


Mortgage Loan Loss Litigation


For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1. Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.


Consolidation


Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 2016


2019

Total revenues decreasedincreased by $10,977,000,$70,825,000, or 13.2%94.0%, to $71,972,000$146,205,000 for the three months ended September 30, 2017,2020, from $82,949,000$75,380,000 for the comparable period in 2016.2019. Contributing to this decreaseincrease in total revenues was a $11,598,000 decrease$58,824,000 increase in mortgage fee income, a $280,000 decrease in realized gains on investments and other assets, a $133,000$4,231,000 increase in other than temporary impairments on investments, andnet investment income, a $59,000 decrease in net mortuary and cemetery sales. This decrease in total revenues was partially offset by a $490,000 increase in other revenues, a $332,000$3,934,000 increase in insurance premiums and other considerations, and a $271,000$1,845,000 increase in net investment income.


recent years, particularly in whole life products, which resulted in more premium paying business in force.




Net investment income increased by $271,000,$4,231,000, or 3.4%40.4%, to $8,361,000$14,709,000 for the three months ended September 30, 2017,2020, from $8,090,000$10,478,000 for the comparable period in 2016.2019. This increase was primarily attributable to a $282,000 increase in fixed maturity securities income, a $282,000 increase in insurance assignment income, a $142,000$2,360,000 increase in mortgage loan interest an $89,000 increase in short-term investment income, an $82,000($545,000 due to the acquisition of Kilpatrick Life), a $740,000 increase in rental income from real estate owned,held for investment ($52,000 due to the acquisition of Kilpatrick Life), a $628,000 increase in fixed maturity securities income ($719,000 due to the acquisition of Kilpatrick Life), a $710,000 increase in insurance assignment income, a $151,000 increase in policy loan income ($133,000 due to the acquisition of Kilpatrick Life), and a $16,000$52,000 increase in income from other investments.equity securities income. This increase was partially offset by a $600,000$334,000 decrease in interest on cash and cash equivalents and a $76,000 increase in investment expenses, a $12,000 decrease in equity securities income, and a $10,000 decrease in policy loan income.

48

expenses.

Net mortuary and cemetery sales decreasedincreased by $59,000,$1,845,000, or 2.1%52.3%, to $2,717,000$5,371,000 for the three months ended September 30, 2017,2020, from $2,776,000$3,526,000 for the comparable period in 2016.2019. This decreaseincrease was primarily due to a decrease$737,000 increase in cemetery at-need sales, ofa $647,000 increase in mortuary at-need sales, and a $461,000 increase in cemetery plots, markers and vaults.


Realized gainspre-need sales.

Gains on investments and other assets decreasedincreased by $280,000,$1,320,000, or 716.1%254.0%, to $319,000 in realized lossesgains of $800,000 for the three months ended September 30, 2017,2020, from $39,000 in realized losses of $520,000 for the comparable period in 2016.2019. This decreaseincrease in realized gains on investments and other assets was primarily due a $787,000 increase in gains ($338,000 due to the acquisition of Kilpatrick Life) on other assets mostly attributable to a $602,000decrease in impairment losses on commercial real estate. This increase in realized lossesgains on fixed maturity securities,investments and other assets was also due to a $6,000$619,000 increase in realized lossesgains on equity securities available for sale.($149,000 due to the acquisition of Kilpatrick Life) mostly attributable to increases in the fair value of these equity securities. Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income. This increasedecrease in gains on investments and other assets was partially offset by a $328,000 increase$86,000 decrease in realized gains on other assets due to the sale of various residential real estate properties.


fixed maturity securities.

Mortgage fee income decreasedincreased by $11,598,000,$58,824,000, or 21.8%148.0%, to $41,598,000,$98,560,000, for the three months ended September 30, 2017,2020, from $53,196,000$39,736,000 for the comparable period in 2016.2019.  This decreaseincrease was primarily due to a decline$43,054,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $13,412,000 increase in loan fees and interest income, and a $3,515,000 increase in the fair value of loans held for sale and loan commitments. This increase in mortgage loan originations thatfee income was indicative of the mortgage loan industry as a whole. The decline in mortgage loan originations was primarily causedpartially offset by a shortage of available new housing$1,157,000 increase in the provision for mortgage loan origination transactions, and the decline in mortgage loan refinancings was primarily caused by recent increases in interest rates on mortgage loans. Additionally, the decline in mortgage originations and refinancings by SecurityNational Mortgage has resulted in a decline in fees earned from third-party investors that purchase mortgage loans from SecurityNational Mortgage.


loss reserve.

Other revenues increased by $490,000,$671,000, or 27.2%28.8%, to $2,289,000$2,997,000 for the three months ended September 30, 2017,2020, from $1,799,000$2,326,000 for the comparable period in 2016.2019. This increase was dueprimarily attributable to an increase in mortgage servicing fees.


fee revenue.

Total benefits and expenses were $70,834,000,$107,621,000, or 98.4%73.6% of total revenues, for the three months ended September 30, 2017,2020, as compared to $76,375,000,$70,620,000, or 92.1%93.7% of total revenues, for the comparable period in 2016.


2019.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $1,791,000$5,421,000 or 12.6%32.7%, to $16,055,000$21,976,000 for the three months ended September 30, 2017,2020, from $14,264,000$16,555,000 for the comparable period in 2016.2019. This increase was primarily the result of a $1,522,000$6,089,000 increase in death benefits ($2,290,000 due to the acquisition of Kilpatrick Life and $2,045,000 for COVID-19 related deaths) and a $352,000$420,000 increase in futuresurrender and other policy benefits.benefits ($279,000 due to the acquisition of Kilpatrick Life). This increase was partially offset by a $83,000$1,088,000 decrease in surrender and otherfuture policy benefits.


benefits ($166,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreasedincreased by $62,000,$763,000, or 2.7%21.9%, to $2,239,000$4,240,000 for the three months ended September 30, 2017,2020, from $2,301,000$3,477,000 for the comparable period in 2016. This decrease was primarily due to improved persistency in the traditional life business.


2019.

Selling, general and administrative expenses decreasedincreased by $7,417,000,$30,334,000, or 12.8%63.5%, to $50,431,000$78,142,000 for the three months ended September 30, 2017,2020, from $57,848,000$47,808,000 for the comparable period in 2016.2019. This decreaseincrease was primarily the result of a $5,396,000 decrease$21,048,000 increase in commissions, resulting from a decrease$5,412,000 increase in sales (primarily mortgage fee income),personnel expenses, a $1,040,000 decrease$2,347,000 increase in other expenses, a $600,000 decrease in the provision for loan loss reserve, a $555,000 decrease in personnel expenses, a $394,000 decrease in advertising, and a $11,000 decrease in depreciation on property and equipment. This decrease was partially offset by a $444,000$1,140,000 increase in costs related to funding mortgage loans, a $245,000 increase in advertising expenses, a $94,000 increase in depreciation on property and equipment, and a $135,000$48,000 increase in rent and rent related expenses.

Most of these increases are attributable to the mortgage segment due to




the increase in mortgage loan originations and refinancings, most notably $38,936,000 in commissions, $3,904,000 in personnel expenses, $2,254,000 in other expenses, and $251,838 in advertising expenses. Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $490,000 in personnel expenses, $382,000 in other expenses, and $171,000 in commissions.

Interest expense increased by $180,000,$284,000, or 12.2%13.7%, to $1,656,000$2,363,000 for the three months ended September 30, 2017,2020, from $1,476,000$2,079,000 for the comparable period in 2016.2019. This increase was primarily due to an increase of $470,000 in interest expense on mortgage warehouse lines andfor loans held for sale. This increase was partially offset by a $179,000 decrease in interest expense on bank loans forcollateralized by real estate held for investment.


Comprehensive income

Cost of goods and services sold-mortuaries and cemeteries increased by $198,000, or 28.2%, to $899,000 for the three months ended September 30, 2017 and 2016 amounted to gains of $1,191,000 and $4,321,000, respectively.2020, from $701,000 for the comparable period in 2019. This $3,130,000 decrease in comprehensive incomeincrease was primarily the result ofdue to an $85,000 increase in mortuary at-need sales, a $3,086,000 decrease$61,000 increase in net incomecemetery at-need sales, and a $44,000 decrease$51,000 increase in unrealized gains in securities available for sale.

49

cemetery pre-need sales.

Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 2016


2019

Total revenues decreasedincreased by $16,519,000,$139,156,000, or 7.1%67.8%, to $215,973,000$344,475,000 for the nine months ended September 30, 2017,2020, from $232,492,000$205,319,000 for the comparable period in 2016.2019. Contributing to this decreaseincrease in total revenues was a $24,881,000 decrease$115,048,000 increase in mortgage fee income, a $348,000 increase in other than temporary impairments on investments, and a $185,000 decrease in net mortuary and cemetery sales. This decrease in total revenues was partially offset by $4,837,000$10,478,000 increase in insurance premiums and other considerations, a $2,075,000$10,011,000 increase in net investment income, a $1,449,000$3,325,000 increase in net mortuary and cemetery sales, and a $729,000 increase in other revenues, and a $534,000revenues. This increase in realizedtotal revenues was partially offset by a $435,000 decrease in gains on investments and other assets.


Insurance premiums and other considerations increased by $4,837,000,$10,478,000, or 10.2%17.9%, to $52,345,000$68,983,000 for the nine months ended September 30, 2017,2020, from $47,508,000$58,505,000 for the comparable period in 2016.2019. This increase was primarily due to $8,560,000 from the acquisition of Kilpatrick Life in December 2019. See Note 15 to the condensed consolidated financial statements. This increase was also due to an increase in renewal premiums and an increasedue to the growth of the Company in first year premiums as a result of increased insurance sales.


recent years, particularly in whole life products, which resulted in more premium paying business in force.

Net investment income increased by $2,074,000,$10,011,000, or 8.8%32.2%, to $25,559,000$41,072,000 for the nine months ended September 30, 2017,2020, from $23,484,000$31,061,000 for the comparable period in 2016.2019. This increase was primarily attributable to a $1,028,000 increase in insurance assignment income, a $1,002,000 increase in fixed maturity securities income, a $565,000$4,967,000 increase in mortgage loan interest ($1,611,000 due to the acquisition of Kilpatrick Life), a $378,000$2,674,000 increase in rental income from real estate owned,held for investment ($145,000 due to the acquisition of Kilpatrick Life), a $246,000$1,663,000 increase in short-term investmentfixed maturity securities income ($1,799,000 due to the acquisition of Kilpatrick Life), a $1,273,000 increase in insurance assignment income, a $63,000$447,000 increase in policy loan income ($401,000 due to the acquisition of Kilpatrick Life), and a $22,000$102,000 increase in income from other investments.equity securities income. This increase was partially offset by a $1,230,000$978,000 decrease in interest on cash and cash equivalents ($120,000 increase due to the acquisition of Kilpatrick Life), a $81,000 decrease in other investment income ($25,000 increase due to the acquisition of Kilpatrick Life), and a $56,000 increase in investment expenses.


expenses ($169,000 increase due to the acquisition of Kilpatrick Life)

Net mortuary and cemetery sales decreasedincreased by $185,000,$3,325,000, or 1.9%29.7%, to $9,357,000$14,531,000 for the nine months ended September 30, 2017,2020, from $9,542,000$11,206,000 for the comparable period in 2016.2019. This decreaseincrease was primarily due to a decrease$1,293,000 increase in cemetery pre-need sales, ofa $1,165,000 increase in cemetery plots, markersat-need sales, and vaults.


Realized gainsa $867,000 increase in mortuary at-need sales.

Gains on investments and other assets increaseddecreased by $534,000,$435,000, or 297.7%166.4%, to $713,000 in realized gainslosses of $174,000 for the nine months ended September 30, 2017,2020, from $179,000 in realized gains of $261,000 for the comparable period in 2016.2019. This increasedecrease in realized gains on investments and other assets was primarily due a $1,340,000 decrease in gains on equity securities mostly attributable to a $1,374,000 increasedecreases in realized gains on other assetsthe fair value of these equity securities, due to the salerecent downturn of the economy caused by the COVID-19 Pandemic. Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income. This decrease in gains on investments and other assets was also due to a commercial real estate property and various residential real estate properties. $91,000 decrease in gains on fixed maturity securities.




This increasedecrease was partially offset by a $775,000$996,000 increase in realizedgains on other assets mostly attributable to a decrease in impairment losses on fixed maturity securities, and a $65,000 increase in realized losses on securities availablecommercial real estate held for sale.


Mortgage fee income decreasedincreased by $24,881,000, or 16.9%$115,049,000, or118.4%, to $122,086,000,$212,210,000, for the nine months ended September 30, 2017,2020, from $146,967,000$97,161,000 for the comparable period in 2016.2019.  This decreaseincrease was primarily due to a decline$84,781,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $20,604,000 increase in loan fees and interest income, and a $12,704,000 increase in the fair value of loans held for sale and loan commitments. This increase in mortgage loan originations thatfee income was indicative of the mortgage loan industry as a whole. The decline in mortgage loan originations was primarily causedpartially offset by a shortage of available new housing$3,040,000 increase in the provision for mortgage loan origination transactions, and the decline in mortgage loan refinancings was primarily caused by recent increases in interest rates on mortgage loans. Additionally, the decline in mortgage originations and refinancings by SecurityNational Mortgage has resulted in a decline in fees earned from third-party investors that purchase mortgage loans from SecurityNational Mortgage.


loss reserve.

Other revenues increased by $1,449,000,$729,000, or 29.3%10.2%, to $6,394,000$7,854,000 for the nine months ended September 30, 2017,2020, from $4,945,000$7,125,000 for the comparable period in 2016.2019. This increase was dueprimarily attributable to an increase in mortgage servicing fees.


fee revenue.

Total benefits and expenses were $207,943,000,$277,223,000, or 96.3%80.5% of total revenues, for the nine months ended September 30, 2017,2020, as compared to $213,862,000,$193,503,000, or 92.0%94.2% of total revenues, for the comparable period in 2016.


2019.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $5,971,000$15,582,000 or 15.0%31.8%, to $45,868,000$64,521,000 for the nine months ended September 30, 2017,2020, from $39,897,000$48,939,000 for the comparable period in 2016.2019. This increase was primarily the result of a $3,704,000$13,757,000 increase in death benefits ($6,744,000 due to the acquisition of Kilpatrick Life and $3,338,000 for COVID-19 related deaths), a $1,892,000$1,127,000 increase in future policy benefits ($2,096,000 due to the acquisition of Kilpatrick Life) and a $375,000$699,000 increase in surrender and other policy benefits.


benefits ($840,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $50,000,$1,103,000, or 0.8%11.4%, to $6,271,000$10,782,000 for the nine months ended September 30, 2017,2020, from $6,221,000$9,679,000 for the comparable period in 2016.2019. This increase was primarily due to an increase in insurance sales expenses.


50

the average outstanding balance of deferred policy and pre-need acquisition costs and $152,000 due to the acquisition of Kilpatrick Life.

Selling, general and administrative expenses decreasedincreased by $12,571,000,$65,969,000, or 7.7%51.7%, to $150,000,000$193,456,000 for the nine months ended September 30, 2017,2020, from $162,571,000$127,487,000 for the comparable period in 2016.2019. This decreaseincrease was primarily the result of a $14,338,000 decrease$41,313,000 increase in commissions, resulting from a decrease in sales (primarily mortgage fee income), a $646,000 decrease in advertising, and a $600,000 decrease in the provision for loan loss reserve. This increase was partially offset by a $1,220,000$13,941,000 increase in personnel expenses, a $839,000$7,926,000 increase in other expenses, a $458,000 increase in rent and rent related expenses, a $358,000$2,561,000 increase in costs related to funding mortgage loans, and a $138,000$256,000 increase in depreciation on property and equipment.


equipment, and a $275,000 increase in advertising expenses. This increase was partially offset by a $303,000 decrease in rent and rent related expenses. Most of these increases are attributable to the mortgage segment due to the increase in mortgage loan originations and refinancings, most notably $40,244,000 in commissions, $9,111,000 in personnel expenses, and $6,873,000 in other expenses. Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $1,707,000 in personnel expenses, $1,341,000 in other expenses, and $1,086,000 in commissions.   

Interest expense increased by $520,000,$710,000, or 13.8%13.3%, to $4,295,000$6,063,000 for the nine months ended September 30, 2017,2020, from $3,775,000$5,353,000 for the comparable period in 2016.2019. This increase was primarily due to ana $1,001,000 increase in interest expense on mortgage warehouse lines andfor loans held for sale offset by a $260,000 decrease in interest expense on bank loans related tocollateralized by real estate held for investment.


Comprehensive income

Cost of goods and services sold-mortuaries and cemeteries increased by $357,000, or 17.4%, to $2,402,000 for the nine months ended September 30, 2017 and 2016 amounted to gains of $5,515,000 and $12,188,000, respectively.2020, from $2,045,000 for the comparable period in 2019. This $6,673,000 decrease in comprehensive incomeincrease was primarily the result ofdue to a $6,295,000 decrease$182,000 increase in net incomecemetery at-need sales, a $99,000 increase in cemetery pre-need sales, and a $378,000 decrease$76,000 increase in unrealized gains in securities available for sale.

mortuary at-need sales.




Liquidity and Capital Resources


The Company'sCompany’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity of held to maturity investments or sale of other investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans, and fees earned from mortgage loans held for sale that are sold to investors.investors into the secondary market. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, and debt service, and to meet current operating expenses.


It should be noted that current conditions in the financial markets and economy caused by the COVID-19 Pandemic may affect the cash flows of the Company.

During the nine months ended September 30, 20172020 and 2016,2019, the Company's operations providedused cash of $6,030,000$164,589,000 and $17,639,672,$62,866,000, respectively. This decrease was due primarily to a decline in cash collected onoriginations of mortgage loans held for sale during the nine months ended September 30, 2017.


sale.

The Company'sCompany’s liability for future policy benefits is expected to be paid out over the long-term due to the Company'sCompany’s market niche of selling funeral plans. Funeral plans are small face value life insurance that will pay the costs and expenses incurred at the time of a person'sperson’s death. A person generally will keep these policies in force and will not surrender them prior to a person'sperson’s death. Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate, and mortgage loans, thus reducing the risk of liquidatinghaving to liquidate these long-term investments as a result of any sudden changes in their fair values.


The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company'sCompany’s products. The Company'sCompany’s investment philosophy is intended to provide a rate of return that will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.


The Company'sCompany’s investment policy is to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries and classified as fixed maturity securities available for sale carried at estimated fair value amounted to $230,188,000$344,677,000 and $184,356,000$355,613,000 as of September 30, 20172020 and December 31, 2016,2019, respectively. This represents 38.5%42.74% and 33.1%45.5% of the total investments as of September 30, 20172020 and December 31, 2016,2019, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At September 30, 2017, 5.4%2020, 3.6% (or $12,449,000)$12,269,000) and at December 31, 2016, 9.0%2019, 2.2% (or $16,513,000)$7,633,000) of the Company'sCompany’s total bond investments were invested in bonds in rating categories three through six, which were considered non‑investmentnon-investment grade.


The Company has classified its fixed income securities, including high-yield securities, in its portfolio as held to maturity. Notwithstanding, business conditions may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event, the Company believes it could sell short-term investment grade securities before liquidating higher yielding longer-term securities.

The Company is subject to risk basedrisk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At September 30, 20172020 and December 31, 2016,2019, the life insurance subsidiaries were in compliance with the regulatory criteria.


The Company'sCompany’s total capitalization of stockholders'stockholders’ equity, bank and other loans payable was $322,114,000$682,332,000 as of September 30, 2017,2020, as compared to $284,700,000$414,283,000 as of December 31, 2016. Stockholders'2019. Stockholders’ equity as a percent of total capitalization was 43.3%37.7% and 46.6%47.5% as of September 30, 20172020 and December 31, 2016,2019, respectively.


Lapse rates measure the amount of insurance terminated during a particular period. The Company'sCompany’s lapse rate for life insurance in 20162019 was 9.6%9.8% as compared to a rate of 7.4%9.9% for 2015.2018. The 20172020 lapse rate to date has been approximately the same as 2016.


2019.

At September 30, 2017,2020, the combined statutory capital and surplus of the Company'sCompany’s life insurance subsidiaries was $42,584,000.$74,881,000. The life insurance subsidiaries cannot pay a dividend to its parent company without approval of state insurance regulatory authorities.




COVID-19 Pandemic

During the first and second quarters of 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19 poses a threat to the health and economic well-being of the Company’s employees, customers, and vendors. The Company is closely monitoring developments relating to the COVID-19 pandemic and assessing its impact on the Company’s business. The COVID-19 pandemic has had and continues to have a major impact on the global economy and financial markets. Governments and businesses have taken numerous measures to try to contain the virus, which include the implementation of travel bans, self-imposed quarantine periods, and social distancing. These measures have disrupted and will continue to disrupt businesses globally. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize the economic conditions.

Like most businesses, COVID-19 has impacted the Company. However, the Company cannot, with any certainty predict the severity or duration with which COVID-19 will impact the Company’s business, financial condition, results of operations, and cash flows. To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, and results of operations, it may also have the effect of heightening many of the other risks described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risks.” These uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s fixed maturity debt securities and individual borrowers with mortgage loans held by the Company.

The Company has implemented risk management, business continuity plans and has taken preventive measures and other precautions, such as business travel restrictions and remote work arrangements. Such measures and precautions have enabled the Company to continue to conduct business.

51



Risk.

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.



Disclosure Controls and Procedures


As of September 30, 2017,2020, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). The Company'sCompany’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC'sSEC’s rules and forms and that such information is accumulated and communicated to management, including the Company'sCompany’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The executive officers have concluded that the Company'sCompany’s disclosure controls and procedures were not effective as of September 30, 2017,2020, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company'sCompany’s financial condition, results of operations, and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP).


Changes in Internal Control over Financial Reporting


Except for the remediation steps taken to address the material weaknessesweakness discussed in the Company'sCompany’s Annual Report on Form 10K/A,10-K for the year ended December 31, 2019, there have not been any significant changes in the Company'sCompany’s internal control over financial reporting (as defined in Rule 13a-15(f) underduring the Securities and Exchange Act of 1934, as amended) in the thirdmost recently completed fiscal quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




Remediation Efforts to Address the Material Weakness


During

The Company acquired Kilpatrick Life in December 2019. Prior to the fourth quarter of 2016, there were changesacquisition, the Company identified a material weakness in the Company'sKilpatrick Life’s internal control over financial reporting related to change management and segregation of duties for the policy administration system. As of September 30, 2020, the known deficiencies have been remediated to the extent that has materially affected, orthey no longer give rise to a material weakness with the following controls implemented by management.

·Execution of a formal consultant agreement with the former system developer. 

·Creation of unique login credentials for system users. 

·Implementation of system change control processes, including the installation of a third-party database logging software. 

As of November 13, 2020, the Company had not fully assessed Kilpatrick Life’s internal controls over financial reporting and is reasonably likelycurrently testing new and revised internal controls for design and operating effectiveness. The Securities and Exchange Commission permits companies to materially affect, the Company'sexclude acquisitions from their assessment of internal control over financial reporting. Tworeporting during the first year of an acquisition, and the prior errors were determinedCompany has elected to be immaterial errorsexclude Kilpatrick Life from its assessment. The Company has performed additional analysis and were noted in connection withprocedures to conclude that it believes the annual audit of the Company'scondensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations, comprehensive income (loss) and cash flows for the fiscal year ended December 31, 2016. The other two errors were discovered as a result of a review of current accounting policies and were determined to be material errors.  Management has corrected these errorsperiods presented in the Form 10-K/A for the fiscal year ended December 2016. See Notes 21 and 22 to the Company's consolidated financial statements.


The Company is implementing measures to remediate the underlying causes that gave rise to the material weaknesses. The following remediation steps are among the measures currently being implemented at the time of this filing by management: (i) a thorough review of the accounting department to ensure that the staff has the appropriate training and the level of reviews are commensurateconformity with the complexity of the accounting; (ii) a thorough review of the processes and procedures used in the Company's accounting policies and the implementation of those policies; and (iii) engaging an outside specialist to help with the complex accounting matters related to the Company's mortgage banking operations.

The Company believes the measures described above will remediate the control deficiencies that it identified and strengthened its internal control over financial reporting. The Company is committed to continuous improvement of its internal control processes and will continue to diligently review its financial reporting controls and procedures.

U.S. GAAP.

Part II - Other Information



For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1. Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.


The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which if adversely determined, would have a material adverse effect on its financial condition or results of operation.



Factors.

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.



Proceeds.

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities


None.


52

Issuer Purchases of Equity Securities


On

In September 11, 2015,2018, the Board approved the Company's Stock Purchase Plan for the mutual benefitof Directors of the Company and its stockholders. Underapproved a Stock Repurchase Plan that authorized the termsrepurchase of 300,000 shares of the Plan,Company's Class A Common Stock in the Company may, in its discretion, purchaseopen market. The repurchased shares of Class A common stock from its officers and directors who exercise the stock options granted to them under any of the Company's stock option plans with the proceeds from such purchasewill be held as treasury shares to be used to payas the taxes owed by such officers and directors as a result of the exercise of their stock options. Additionally, the officers and directors who exercise their stock options may, in their discretion, request that the Company purchase shares of their Class A common stock with the proceeds from such sale to be used to pay the taxes owed by such officers and directors as a result of the exercise of their stock options.


The Company is authorized under the plan to purchase no more than 60,000 shares of Class A common stock in any calendar year to pay the taxes owed by the officers and directors who exercise their stock options under the Stock Purchase Plan. The Company's purchase price for the Class A common stock under the Stock Purchase Plan shall be equalemployer matching contribution to the closing sales price of the Company's Class A common stock as reported by The Nasdaq National Market on the day that the applicable stock options are exercised by such officers and directors. The Company may only purchase shares of Class A common stock from the officers and directors exercising their stock options under the Stock Purchase Plan during the "Trading Window" as defined in the Company's Insider Trading Policy and Guidelines.
Employee 401(k) Retirement Savings Plan.




The following table shows the Company's repurchase activity during the ninethree months ended September 30, 20172020 under the Stock PurchaseRepurchase Plan.


Period (a) Total Number of Class A Shares Purchased   (b) Average Price Paid per Class A Share  (c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program  (d) Maximum Number (or Approximate Dollar Value) of Class A Shares that May Yet Be Purchased Under the Plan or Program 
1/1/2017-1/31/2017  -    -       
2/1/2017-2/28/2017  -    -       
3/1/2017-3/31/2017  29,393(1) $6.31       
4/1/2017-4/30/2017  -    -       
5/1/2017-5/31/2017  -    -       
6/1/2017-6/30/2017  -    -       
7/1/2017-7/31/2017  -    -       
8/1/2017-8/31/2017  -    -       
9/1/2017-9/30/2017  -    -       
                
Total  29,393   $6.31   -   - 
                  
(1) On March 29, 2017, the Company purchased 29,393 shares of its Class A common stock from Scott M. Quist, Chairman, President and Chief Executive Officer of the Company, pursuant to the Company's Stock Purchase Plan. 

Period

(a) Total Number of Class A Shares Purchased

 

(b) Average Price Paid per Class A Share

 

(c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program

 

(d) Maximum Number (or Approximate Dollar Value) of Class A Shares that May Yet Be Purchased Under the Plan or Program

7/1/2020-7/31/2020

                  12,809

 

$                      6.26

 

                                            -

 

                                         109,118

8/1/2020-8/31/2020

                    8,644

 

                        6.48

 

                                            -

 

                                         100,474

9/1/2020-9/30/2020

                  11,356

 

                        6.48

 

                                            -

 

                                           89,118

 

 

 

 

 

 

 

 

Total

                  32,809

 

$                      6.38

 

                                            -

 

                                           89,118

Item 3.Defaults Upon Senior Securities.




None.




53


(a)(1)Financial Statements


See "Table“Table of Contents – Part I – Financial Information"Information” under page 2 above


(a)(2)Financial Statement Schedules


None


All other schedules to the consolidated financial statements required by Article 7 of Regulation S‑XS-X are not required under the related instructions or are inapplicable and therefore have been omitted.


(a)(3)Exhibits


The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S‑KS-K or are incorporated by reference to previous filings.

3.1Amended and Restated Articles of Incorporation (5) 

3.2Amended and Restated Bylaws (9) 

4.1Specimen Class A Stock Certificate (1) 

4.2Specimen Class C Stock Certificate (1) 

4.3Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1) 

10.1Employee Stock Ownership Plan, as amended and restated (ESOP) and Trust Agreement (1) 

10.2Amended and Restated 2013 Stock Option and Other Equity Incentive Awards Plan (3) 

10.3Amended and Restated 2014 Director Stock Option Plan (12) 

10.4Employment Agreement with Scott M. Quist (2) 

10.5Stock Purchase Agreement among Security National Financial Corporation, Beta Capital Corp., and Ronald D. Maxson, sole shareholder (6) 

10.6Stock Repurchase Plan (7) 

10.7Asset Purchase Agreement among SN Probst LLC, Probst Family Funerals and Cremations, L.L.C, Heber Valley Funeral Home, Inc., Joe T. Probst, Clinton Wayne Probst, Calle J. Probst, and Marsha J. Probst (8) 



3.1
3.2
4.1Specimen Class A Stock Certificate (1)
4.2Specimen Class C Stock Certificate (1)
4.3Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1)
7.1
10.1Amended Employee Stock Ownership Plan (ESOP) and Trust Agreement (1)
10.2
10.3
10.4
10.5
10.6
10.7
10.8
54

21
23.1
23.2
31.1Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.xmlInstance Document
101.xsdTaxonomy Extension Schema Document
101.calTaxonomy Extension Calculation Linkbase Document
101.defTaxonomy Extension Definition Linkbase Document
101.labTaxonomy Extension Label Linkbase Document
101.preTaxonomy Extension Presentation Linkbase Document

10.8Coinsurance Agreement between Kilpatrick Life Insurance Company and Security National Life Insurance Company (10) 

10.9Stock Purchase Agreement among Security National Financial Corporation, Kilpatrick Life Insurance Company, and the Shareholders of Kilpatrick Life Insurance Company (10) 

10.10Consolidated Statement of Assets Acquired and Liabilities Assumed at December 13, 2019 (11) 

14Code of Business Conduct and Ethics (9) 

21Subsidiaries of the Registrant

23.1Consent of Eide Bailly LLP (4) 

23.2Consent of Mackey Price & Mecham (4) 

31.1Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002

31.2Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002

32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.xmlInstance Document 

101.xsdTaxonomy Extension Schema Document 

101.calTaxonomy Extension Calculation Linkbase Document 

101.defTaxonomy Extension Definition Linkbase Document 

101.labTaxonomy Extension Label Linkbase Document 

101.preTaxonomy Extension Presentation Linkbase Document 

(1)Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987 

(2)Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2015 

(3)Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016 

(4)Incorporated by reference from Registration Statement on Form S-8, as filed on September 7, 2016 

(5)Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017 

(6)Incorporated by reference from Report on Form 8-K, as filed on June 6, 2018 

(7)Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2018 

(8)Incorporated by reference from Report on Form 8-K, as filed on February 28, 2019 

(9)Incorporated by reference from Report on Form 10-Q, as filed on May 15, 2019 

(10) Incorporated by reference from Report on Form 8-K, as filed on November 12, 2019

(11) Incorporated by reference from Report on Form 8-K/A, as filed on February 26, 2020

(12) Incorporated by reference from Report on Form 10-Q, as filed on August 14, 2020




(1)Incorporated by reference from Registration Statement on Form S‑1, as filed on September 29, 1987
(2)Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on June 5, 2003, relating to the Company's Annual Meeting of Stockholders
(3)Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on June 1, 2007, relating to the Company's Annual Meeting of Stockholders
(4)Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on June 2, 2014, related to Company's Annual Meeting of Stockholders
(5)Incorporated by reference from Report on Form 8-K, as filed on June 13, 2014
(6)Incorporated by reference from Report on Form 10-Q, as filed on August 14, 2015
(7)Incorporated by reference from Registration Statement on Form S-8, as filed on October 20, 2015
(8)Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016

(9)

Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017
(10)Incorporated by reference from Report on Form 8-K, as filed on August 4, 2017
(11)Incorporated by reference from Report on Form 10-Q, as filed on August 25, 2017

55SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



REGISTRANT


SECURITY NATIONAL FINANCIAL CORPORATION

Registrant



Dated: November 14, 201713, 2020

/s/ Scott M. Quist

Scott M. Quist

Chairman, President and Chief Executive Officer

(Principal Executive Officer)


Dated: November 14, 201713, 2020

/s/ Garrett S. Sill

Garrett S. Sill

Chief Financial Officer and Treasurer

(Principal Financial Officer and Principal Accounting Officer)




68

56