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 quarter ended March 31,September 30, 2018, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from _____ to ________

Commission file number: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 West, Suite 250, Salt Lake City, Utah
84123
(Address of principal executive offices)(Zip Code)
  
 (801) 264-1060
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 accelerated filer," "accelerated filer"filer," "smaller reporting company" and "smaller reporting"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]
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]No[X]

Indicate the number of 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
14,569,321
Title of ClassNumber of Shares Outstanding as of May 15, 2018
Class C Common Stock, $2.00 par value
2,089,372
Title of ClassNumber of Shares Outstanding as of May 15, 2018

As of November 13, 2018, the registrant had 14,575,881 shares of Class A Common Stock, $2.00 par value, outstanding and 2,089,184 shares of Class C Common Stock, $2.00 par value, outstanding.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q

QUARTER ENDED MARCH 31,SEPTEMBER 30, 2018

Table of Contents


  Page No.
 Part I  - Financial Information 
Item 1.Financial Statements 
   
 Condensed Consolidated Balance Sheets as of March 31,September 30, 2018 and December 31, 2017 (unaudited)3-4
   
 Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended March 31,September 30, 2018 and 2017 (unaudited)5
   
 Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31,September 30, 2018 and 2017 (unaudited)6
   
 Condensed Consolidated Statements of Stockholders' Equity as of March 31,September 30, 2018 and March 31,September 30, 2017 (unaudited)77-8
   
 Condensed Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2018 and 2017 (unaudited)89-10
   
 Notes to Condensed Consolidated Financial Statements (unaudited)1011
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations4648
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk5054
   
Item 4.Controls and Procedures5054
   
 Part II - Other Information 
   
Item 1.Legal Proceedings5054
   
Item 1A.Risk Factors5154
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds5154
   
Item 3.Defaults Upon Senior Securities5155
   
Item 4.Mine Safety Disclosures5155
   
Item 5.Other Information5155
   
Item 6.Exhibits5156
   
 Signature Page5359


2
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

Part I - Financial Information

Item 1.    Financial Statements.

Assets 
March 31
2018
(Unaudited)
  
December 31
2017
  
September 30
2018
(Unaudited)
  
December 31
2017
 
Investments:            
Fixed maturity securities, held to maturity, at amortized cost $231,474,083  $228,397,623  $230,386,875  $228,397,623 
Equity securities at estimated fair value  5,889,151   6,037,855   5,988,918   6,037,855 
Mortgage loans held for investment (net of allowances for loan losses of $1,696,371 and $1,768,796 for 2018 and 2017)  204,989,906   204,210,885 
Real estate held for investment (net of accumulated depreciation of $15,540,213 and $18,788,869 for 2018 and 2017)  105,063,331   141,298,706 
Other investments and policy loans (net of allowances for doubtful accounts of $931,029 and $846,641 for 2018 and 2017)  45,550,795   45,895,472 
Mortgage loans held for investment (net of allowances for loan losses of $1,470,158 and $1,768,796 for 2018 and 2017)  181,381,522   204,210,885 
Real estate held for investment (net of accumulated depreciation of $16,403,949 and $18,788,869 for 2018 and 2017)  119,076,609   141,298,706 
Other investments and policy loans (net of allowances for doubtful accounts of $1,046,840 and $846,641 for 2018 and 2017)  44,038,625   45,895,472 
Accrued investment income  3,886,170   3,644,077   3,751,942   3,644,077 
Total investments  596,853,436   629,484,618   584,624,491   629,484,618 
Cash and cash equivalents  101,728,202   45,315,661   137,106,471   45,315,661 
Loans held for sale at estimated fair value  124,866,313   133,414,188   165,507,394   133,414,188 
Receivables (net of allowances for doubtful accounts of $1,569,422 and $1,544,518 for 2018 and 2017)  9,398,972   10,443,869 
Restricted assets (including $800,510 and $809,958 for 2018 and 2017 at estimated fair value)  11,146,540   11,830,621 
Cemetery perpetual care trust investments (including $648,381 and $682,315 for 2018 and 2017 at estimated fair value)  3,806,645   4,623,563 
Receivables (net of allowances for doubtful accounts of $1,614,057 and $1,544,518 for 2018 and 2017)  8,898,086   10,443,869 
Restricted assets (including $810,056 and $809,958 for 2018 and 2017 at estimated fair value)  12,226,773   11,830,621 
Cemetery perpetual care trust investments (including $677,699 and $682,315 for 2018 and 2017 at estimated fair value)  4,058,014   4,623,563 
Receivable from reinsurers  13,263,304   13,394,603   10,717,118   13,394,603 
Cemetery land and improvements  9,920,554   9,942,933   9,885,331   9,942,933 
Deferred policy and pre-need contract acquisition costs  82,496,322   80,625,304   87,899,386   80,625,304 
Mortgage servicing rights, net  21,554,050   21,376,937   20,875,905   21,376,937 
Property and equipment, net  7,713,599   8,069,380   7,206,802   8,069,380 
Value of business acquired  6,389,260   6,588,759   5,963,308   6,588,759 
Goodwill  2,765,570   2,765,570   2,765,570   2,765,570 
Other  6,069,569   4,297,048   6,514,889   4,297,048 
                
Total Assets $997,972,336  $982,173,054  $1,064,249,538  $982,173,054 


See accompanying notes to condensed consolidated financial statements (unaudited).
3

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 
March 31
2018
(Unaudited)
  
December 31
2017
  
September 30
2018
(Unaudited)
  
December 31
2017
 
Liabilities and Stockholders' Equity            
Liabilities            
Future policy benefits and unpaid claims $605,543,124  $604,746,951  $616,421,261  $604,746,951 
Unearned premium reserve  4,123,289   4,222,410   3,989,237   4,222,410 
Bank and other loans payable  151,451,152   157,450,925   196,422,645   157,450,925 
Deferred pre-need cemetery and mortuary contract revenues  12,150,924   12,873,068   12,442,497   12,873,068 
Cemetery perpetual care obligation  3,729,150   3,710,740   3,793,575   3,710,740 
Accounts payable  3,411,619   3,613,100   3,243,526   3,613,100 
Other liabilities and accrued expenses  30,063,978   29,655,087   33,352,301   29,655,087 
Income taxes  21,593,873   17,332,783   22,552,988   17,332,783 
Total liabilities  832,067,109   833,605,064   892,218,030   833,605,064 
                
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 14,569,321 shares in 2018 and 14,535,577 shares in 2017  29,138,642   29,071,154 
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 14,573,658 shares in 2018 and 14,535,577 shares in 2017  29,147,316   29,071,154 
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 2,089,372 shares in 2018 and 2,089,374 shares in 2017  4,178,744   4,178,748 
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,089,184 shares in 2018 and 2,089,374 shares in 2017  4,178,368   4,178,748 
Additional paid-in capital  38,255,340   38,125,042   38,711,180   38,125,042 
Accumulated other comprehensive income, net of taxes  -   603,170   (687)  603,170 
Retained earnings  95,041,166   77,520,951   100,293,129   77,520,951 
Treasury stock at cost - 468,770 Class A shares in 2018 and 537,203 Class A shares in 2017  (708,665)  (931,075)
Treasury stock at cost - 328,650 Class A shares in 2018 and 537,203 Class A shares in 2017  (297,798)  (931,075)
                
Total stockholders' equity  165,905,227   148,567,990   172,031,508   148,567,990 
                
Total Liabilities and Stockholders' Equity $997,972,336  $982,173,054  $1,064,249,538  $982,173,054 

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
 March 31
  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
 2018  2017  2018  2017  2018  2017 
Revenues:                  
Insurance premiums and other considerations $18,810,358  $17,357,124  $18,639,401  $17,489,560  $56,640,590  $52,345,184 
Net investment income  10,074,431   9,016,376   9,641,496   8,220,430   29,457,892   25,559,113 
Net mortuary and cemetery sales  3,232,729   3,358,973   3,646,290   2,717,311   10,430,128   9,356,659 
Gains on investments and other assets  22,020,939   145,330   1,022,427   (319,666)  25,371,595   713,066 
Other than temporary impairments on investments  -   (52,139)  -   (163,375)  -   (481,741)
Mortgage fee income  25,460,160   38,974,760   31,664,704   41,597,573   88,833,944   122,086,734 
Other  2,477,492   2,028,873   2,608,775   2,288,982   7,430,179   6,393,691 
Total revenues  82,076,109   70,829,297   67,223,093   71,830,815   218,164,328   215,972,706 
                        
Benefits and expenses:                        
Death benefits  9,608,098   8,794,598   8,616,285   8,772,153   27,579,540   26,113,770 
Surrenders and other policy benefits  810,128   857,531   692,445   547,648   2,198,479   2,085,296 
Increase in future policy benefits  5,584,936   5,568,042   6,686,536   6,735,141   18,420,499   17,669,279 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired  3,109,933   2,264,039   2,746,288   2,238,955   7,967,003   6,271,763 
Selling, general and administrative expenses:                        
Commissions  11,282,401   16,355,048   13,619,192   18,999,583   39,361,315   53,877,389 
Personnel  16,566,688   18,589,687   17,075,236   17,059,279   50,547,638   53,754,920 
Advertising  1,029,591   1,310,674   1,423,933   1,611,599   3,647,610   4,407,877 
Rent and rent related  1,963,350   2,223,996   1,913,813   2,257,259   5,806,296   6,693,292 
Depreciation on property and equipment  477,031   625,812   457,430   517,041   1,426,087   1,723,879 
Costs related to funding mortgage loans  1,369,281   2,219,649   1,732,617   2,809,471   5,147,557   7,315,227 
Other  6,810,324   7,346,493   7,616,264   7,035,570   21,562,432   22,227,370 
Interest expense  1,761,677   1,254,039   1,855,548   1,655,870   5,297,066   4,295,263 
Cost of goods and services sold-mortuaries and cemeteries  515,490   521,919   575,708   453,229   1,641,596   1,507,295 
Total benefits and expenses  60,888,928   67,931,527   65,011,295   70,692,798   190,603,118   207,942,620 
                        
Earnings before income taxes  21,187,181   2,897,770   2,211,798   1,138,017   27,561,210   8,030,086 
Income tax expense  (4,261,258)  (1,037,770)  (198,052)  (41,179)  (5,383,324)  (2,587,384)
                        
Net earnings $16,925,923  $1,860,000  $2,013,746  $1,096,838  $22,177,886  $5,442,702 
                        
Net earnings per Class A Equivalent common share (1) $1.05  $0.12  $0.12  $0.07  $1.36  $0.34 
                        
Net earnings per Class A Equivalent common share-assuming dilution (1) $1.04  $0.11  $0.12  $0.07  $1.35  $0.33 
                        
Weighted-average Class A equivalent common share outstanding (1)  16,171,412   15,827,495   16,330,839   16,026,199   16,250,714   15,928,911 
                        
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)  16,347,777   16,320,830   16,554,334   16,326,292   16,462,877   16,259,931 

(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
March 31
  
Three Months Ended
 September 30
  
Nine Months Ended
September 30
 
 2018  2017  2018  2017  2018  2017 
Net earnings $16,925,923  $1,860,000  $2,013,746  $1,096,838  $22,177,886  $5,442,702 
Other comprehensive income:                        
Unrealized gains on equity securities  -   29,871   -   144,381   -   106,543 
Unrealized gains on derivative instruments  -   1,595   -   554   -   3,170 
Foreign currency translation adjustments  1,013   -   (916)  - 
Other comprehensive income, before income tax  -   31,466   1,013   144,935   (916)  109,713 
Income tax expense  -   (10,174)  (252)  (50,517)  229   (37,904)
Other comprehensive income, net of income tax  -   21,292   761   94,418   (687)  71,809 
Comprehensive income $16,925,923  $1,881,292  $2,014,507  $1,191,256  $22,177,199  $5,514,511 

See accompanying notes to condensed consolidated financial statements (unaudited).
6
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

 
Class A
 Common Stock
  
Class C
Common Stock
  
Additional
Paid-in
 Capital
  
Accumulated
 Other
 Comprehensive
 Income
  
Retained
 Earnings
  
Treasury
Stock
  Total  Nine Months Ended September 30, 2018 
                      
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, 2016 $27,638,012  $3,804,458  $34,813,246  $264,822  $67,409,204  $(1,370,611) $132,559,131 
                     
January 1, 2018 $29,071,154  $4,178,748  $38,125,042  $603,170  $77,520,951  $(931,075) $148,567,990 
                            
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)  -   -   -   (603,170)  603,170   -   - 
Net earnings  -   -   -   -   16,925,923   -   16,925,923 
Stock-based compensation expense  -   -   58,087   -   -   -   58,087 
Exercise of stock options  63,968   -   (22,115)  -   -   -   41,853 
Sale of treasury stock  -   -   88,964   -   -   222,410   311,374 
Stock dividends  3,520   (4)  5,362   -   (8,878)  -   - 
March 31, 2018  29,138,642   4,178,744   38,255,340   -   95,041,166   (708,665)  165,905,227 
                            
Net earnings  -   -   -   -   3,238,217   -   3,238,217 
Other comprehensive loss  -   -   -   (1,448)      -   (1,448)
Stock-based compensation expense  -   -   58,053   -   -   -   58,053 
Sale of treasury stock  -   -   163,335   -   -   222,420   385,755 
Conversion Class C to Class A  376   (376)  -   -   -   -   - 
June 30, 2018  29,139,018   4,178,368   38,476,728   (1,448)  98,279,383   (486,245)  169,585,804 
                                                        
Net earnings  -   -   -   -   1,860,000   -   1,860,000   -   -   -   -   2,013,746   -   2,013,746 
Other comprehensive income  -   -   -   21,292   -   -   21,292   -   -   -   761       -   761 
Grant of stock options  -   -   101,996   -   -   -   101,996 
Stock-based compensation expense  -   -   58,691   -   -   -   58,691 
Exercise of stock options  8,298   -   7,261   -   -   -   15,559 
Sale of treasury stock  -   -   178,002   -   -   146,065   324,067   -   -   168,500   -   -   242,954   411,454 
Purchase of treasury stock  -   -   -   -   -   (185,470)  (185,470)  -   -   -   -   -   (54,507)  (54,507)
Stock dividends  930   4   2,350   -   (3,284)  -   - 
Conversion Class C to Class A  1,214   (1,214)  -   -   -   -   - 
Balance at March 31, 2017 $27,640,156  $3,803,248  $35,095,594  $286,114  $69,265,920  $(1,410,016) $134,681,016 
                            
Balance at December 31, 2017 $29,071,154  $4,178,748  $38,125,042  $603,170  $77,520,951  $(931,075) $148,567,990 
                            
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)  -   -   -   (603,170)  603,170   -   - 
Net earnings  -   -   -   -   16,925,923   -   16,925,923 
Grant of stock options  -   -   58,087   -   -   -   58,087 
Exercise of stock options  63,968   -   (22,115)  -   -   -   41,853 
Sale of treasury stock  -   -   88,964   -   -   222,410   311,374 
Stock dividends  3,520   (4)  5,362   -   (8,878)  -   - 
Balance at March 31, 2018 $29,138,642  $4,178,744  $38,255,340  $-  $95,041,166  $(708,665) $165,905,227 
September 30, 2018 $29,147,316  $4,178,368  $38,711,180  $(687) $100,293,129  $(297,798) $172,031,508 


7

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(Unaudited)

  Nine Months Ended September 30, 2017 
  
Class A
Common
 Stock
  
Class C
Common
Stock
  
Additional
Paid-in
 Capital
  
Accumulated
Other
Comprehensive Income
  
Retained
 Earnings
  
Treasury
Stock
  Total 
                      
January 1, 2017 $27,638,012  $3,804,458  $34,813,246  $264,822  $67,409,204  $(1,370,611) $132,559,131 
                             
Net earnings  -   -   -   -   1,860,000   -   1,860,000 
Other comprehensive income  -   -   -   21,292   -   -   21,292 
Stock-based compensation expense  -   -   101,996   -   -   -   101,996 
Sale of treasury stock  -   -   178,002   -   -   146,065   324,067 
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)  -   -   -   -   - 
March 31, 2017  27,640,156   3,803,248   35,095,594   286,114   69,265,920   (1,410,016)  134,681,016 
                             
Net earnings  -   -   -   -   2,485,864   -   2,485,864 
Other comprehensive loss  -   -   -   (43,901)  -   -   (43,901)
Stock-based compensation expense  -   -   101,316   -   -   -   101,316 
Exercise of stock options  2   206,804   (206,806)  -   -   -   - 
Sale of treasury stock  -   -   195,383   -   -   205,092   400,475 
June 30, 2017  27,640,158   4,010,052   35,185,487   242,213   71,751,784   (1,204,924)  137,624,770 
Net earnings  -   -   -   -   1,096,838   -   1,096,838 
Other comprehensive income  -   -   -   94,418   -   -   94,418 
Stock-based compensation expense  -   -   102,429   -   -   -   102,429 
Sale of treasury stock  -   -   202,111   -   -   223,315   425,426 
September 30, 2017 $27,640,158  $4,010,052  $35,490,027  $336,631  $72,848,622  $(981,609) $139,343,881 

See accompanying notes to condensed consolidated financial statements (unaudited).
78
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Three Months Ended
March 31
  
Nine Months Ended
September 30
 
 2018  2017  2018  2017 
Cash flows from operating activities:            
Net cash provided by operating activities $8,712,560  $30,431,376 
Net cash provided by (used in) operating activities $(10,250,549) $6,030,453 
        
Cash flows from investing activities:                
Purchases of fixed maturity securities  (7,155,114)  (2,575,997)  (29,074,605)  (59,325,291)
Calls and maturities of fixed maturity securities  3,604,516   830,595   26,356,188   11,933,573 
Purchases of equity securities  (1,084,398)  (4,190,458)  (2,356,207)  (5,126,062)
Sales of equity securities  922,402   4,092,734   2,478,051   9,153,786 
Purchases of short-term investments  -   (3,053,797)  -   (27,483,124)
Sales of short-term investments  -   2,266,915   -   37,212,174 
Net changes in restricted assets  (48,832)  (77,151)  121,418   (234,807)
Net changes in perpetual care trusts  2,376,461   (23,039)  1,664,215   (195,340)
Mortgage loans, other investmensts and policy loans made  (132,321,562)  (108,649,435)
Mortgage loans, other investments and policy loans made  (376,549,887)  (340,424,956)
Payments received for mortgage loans, other investments and policy loans  131,816,474   127,506,014   403,724,354   344,278,996 
Purchase of property and equipment  (169,564)  (312,640)  (1,020,257)  (508,846)
Sale of property and equipment  48,314   -   2,014,704   9,977 
Purchase of real estate  (768,942)  (3,103,471)  (22,399,516)  (12,474,490)
Sale of real estate  58,476,379   2,891,887   65,457,047   8,612,307 
Net cash provided by investing activities  55,696,134   15,602,157 
Cash paid for purchase of subsidiaries, net of cash acquired  (3,405,783)  - 
Net cash provided by (used in) investing activities  67,009,722   (34,572,103)
                
Cash flows from financing activities:                
Investment contract receipts  2,867,412   3,051,883   8,833,639   9,457,285 
Investment contract withdrawals  (4,410,074)  (4,468,624)  (11,667,269)  (11,522,652)
Proceeds from stock options exercised  41,853   -   57,412   - 
Purchase of treasury stock  -   (185,470)  (54,507)  (185,470)
Repayment of bank loans  (27,369,431)  (673,454)  (27,873,253)  (2,142,382)
Proceeds from borrowing on bank loans  421,042   7,255,187   11,455,289   16,729,056 
Net change in warehouse line borrowings  (309,286)  (6,376,739)  14,131,782   16,022,738 
Net change in line of credit borrowings  21,250,000   1,250,000   41,250,000   - 
Net cash used in financing activities  (7,508,484)  (147,217)
Net cash provided by financing activities  36,133,093   28,358,575 
                
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents  56,900,210   45,886,316   92,892,266   (183,075)
                
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period  54,501,923   46,942,293   54,501,923   46,942,293 
                
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $111,402,133  $92,828,609  $147,394,189  $46,759,218 
                
Supplemental Disclosure of Cash Flow Information:                
Cash paid (received) during the year for:                
Interest (net of amount capitalized) $1,617,074  $1,234,420  $5,206,262  $4,188,579 
Income taxes (net of refunds)  164   (3,215)  162,327   (788,601)
                
Non Cash Operating, Investing and Financing Activities:                
Accrued real estate construction costs and retainage $26,769  $6,794,065 
Transfer of loans held for sale to mortgage loans held for investment  139,464   5,032,147 
Benefit plans funded with treasury stock  311,374   324,067  $1,108,583  $1,149,968 
Mortgage loans foreclosed into real estate  225,166   204,839   670,601   1,576,196 
Transfer of loans held for sale to mortgage loans held for investment  139,464   5,032,147 
Accrued real estate construction costs and retainage  17,433   1,932,790 
        
        


89

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

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:

  
Three Months Ended
March 31
 
  2018  2017 
Cash and cash equivalents $101,728,202  $85,069,717 
Restricted assets  7,468,609   6,837,786 
Cemetery perpetual care trust investments  2,205,322   921,106 
         
Total cash, cash equivalents, restricted cash and restricted cash equivalents $111,402,133  $92,828,609 

  
Nine Months Ended
September 30
 
  2018  2017 
Cash and cash equivalents $137,106,471  $38,593,462 
Restricted assets  8,717,416   7,263,952 
Cemetery perpetual care trust investments  1,570,302   901,804 
         
Total cash, cash equivalents, restricted cash and restricted cash equivalents $147,394,189  $46,759,218 

See accompanying notes to condensed consolidated financial statements (unaudited).
910
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)
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‑Q and Articles 8 and 10 of Regulation 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, 2017, included in the Company's Annual Report on Form 10-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 threenine months ended March 31,September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The presentation of certain amounts in the prior year have been reclassified to conform to the 2018 presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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; those used in determining the estimated future costs for pre-need sales; 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)Recent Accounting Pronouncements

Accounting Standards Adopted in 2018

Accounting Standards Update ("ASU") No. 2017-01: "Business Combinations (Topic 805): Clarifying the Definition of a Business" – Issued in January 2017, ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should 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 all 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. While the Company's acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by the Company would have been considered asset acquisitions under the new standard. As a result, transaction costs may be capitalized more often since the Company expects some of its future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill that was previously allocated to businesses that were sold or held for sale will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses. ASU 2017-01 was adopted by the Company on January 1, 2018 and it will be applied prospectively to transactions occurring after the adoption date, as applicable.   

ASU No. 2016-18: "Statement of Cash Flows (Topic 230): Restricted Cash" – Issued in November 2016, ASU 2016-18 requires restricted cash and cash equivalents to be included with cash and cash equivalents in the consolidated statement of cash flows and disclose the nature of the restrictions on cash and cash equivalents. The Company currently discloses the restrictions on cash and cash equivalents in Note 8 of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K and will continue these disclosures. Note 8 also discloses the components of the Company's restricted assets and cemetery perpetual care trust investments which include restricted cash and cash equivalents. ASU 2016-18 was adopted by the Company on January 1, 2018. The Company previously presented changes in restricted cash and cash equivalents under investing activities on the consolidated statements of cash flows. Upon adoption of ASU 2016-18, the Company amended the presentation in the consolidated statements of cash flows to include the restricted cash and cash equivalents with cash and cash equivalents and retrospectively reclassified all periods presented. The adoption of this standard does not impact the Company's total cash and cash equivalents but is a change in presentation within the consolidated statements of cash flows.

1011
 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

2)Recent Accounting Pronouncements (Continued)

ASU No. 2016-01: "Financial Instruments – Overall (Topic 825-10)" – Issued in January 2016, ASU 2016-01 changes the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. The Company adopted this standard on January 1, 2018 using the modified retrospective approach with the cumulative effect of the adoption made to the balance sheet as of the date of adoption. Thus, the adoption resulted in a reclassification of the related accumulated net unrealized gains of $603,170 included in accumulated other comprehensive income as of December 31, 2017 to retained earnings. Under previous guidance, changes in fair value for investments of this nature were 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. The Company holds equity securities that were previously measured at fair value with changes in fair value recognized through other comprehensive income. Upon adoption of ASU 2016-01 the Company now recognizes the changes in the fair value of these equity securities through earnings as part of gains on investments and other assets on the condensed consolidated statements of earnings, thus increasing the volatility of the Company's earnings. The adoption of this standard does not significantly affect the Company's comprehensive income or stockholders' equity.

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 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. Premiums and related fees from insurance contracts and mortgage banking revenues are excluded from the scope of this new guidance.

The Company adopted this standard on January 1, 2018 using a modified retrospective approach. No cumulative effect adjustment was made to beginning retained earnings. The Company's revenues from contracts with customers that are subject to ASU 2014-09 include revenues on mortuary and cemetery contracts, which is less than 5% of the Company's total revenues. The recognition and measurement of these items did not change as a result of the Company's adoption of ASU 2014-09 and thus the adoption of ASU 2014-09 does not significantly impact the Company's condensed consolidated statements of earnings or condensed consolidated statements of cash flows. The Company reclassified $856,479 of amounts due from customers for unfulfilled performance obligations on cancelable pre-need contracts from Receivables, net to Deferred pre-need cemetery and mortuary contract revenues on the Company's condensed consolidated balance sheets.

The standard primarily impacts the manner in which the Company recognizes a) certain nonrefundable up-front fees and b) incremental costs to acquire new pre-need funeral trust contracts and pre-need and at-need cemetery contracts (i.e., selling costs). The nonrefundable fees will continue to be deferred and recognized as revenue when the underlying goods and services are delivered to the customer. The incremental selling costs will continue to be deferred and amortized by specific identification to the delivery of the underlying goods and services. Additionally, the amounts due from customers for undelivered performance obligations on cancelable pre-need contracts represent contract assets, which are required to be netted with deferred pre-need cemetery and mortuary contract revenues, instead of receivables on the Company's consolidated balance sheets.
1112
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

2)Recent Accounting Pronouncements (Continued)
 
Accounting Standards Issued But Not Yet Adopted

ASU No. 2016-13: "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 general accepted accounting principles ("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, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. The new authoritative guidance will be effective for the Company on January 1, 2020. The Company is in the process of evaluating the potential impact of this standard.

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 by recognizing right-of-use lease assets and lease liabilities on the balance sheet and disclosingbased on the present value of future lease payments. Disclosures of key information about leasing arrangements.arrangements will also be required. The new authoritative guidance will be effective for the Company on January 1, 2019. The Company has compiled an inventory of its leases, has determined the appropriate discount rates and is in the process of evaluatingreviewing preliminary reports to determine the potential impact of this standard which is not expected to be material to the Company's results of operations, but will have an effect on the balance sheet presentation for leased assets and obligations.  The Company is also currently implementing a third party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets.

ASU No. 2018-13: "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required 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. This new authoritative guidance will be effective for the Company on January 1, 2020. The Company is in the process of evaluating the potential impact of this standard, which is not expected to materially impact the Company's financial statements.

ASU No. 2018-12: "Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts" – Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. This new authoritative guidance will be effective for the Company on January 1, 2021. The Company is in the process of evaluating the potential impact of this standard.

The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company's results of operations or financial position.
12
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)


3)  Investments

The Company's investments as of March 31, 2018 are summarized as follows:

  

Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
 
March 31, 2018
            
             
Fixed maturity securities held to maturity carried at amortized cost:            
Bonds:            
U.S. Treasury securities and obligations of U.S. Government agencies $54,286,773  $178,830  $(960,777) $53,504,826 
Obligations of states and political subdivisions  6,742,875   71,014   (145,551)  6,668,338 
Corporate securities including public utilities  157,715,073   10,498,181   (1,305,125)  166,908,129 
Mortgage-backed securities  12,105,727   268,842   (249,019)  12,125,550 
Redeemable preferred stock  623,635   28,808   (344)  652,099 
Total fixed maturity securities held to maturity $231,474,083  $11,045,675  $(2,660,816) $239,858,942 
                 
Equity securities at estimated fair value:                
                 
Common stock:                
                 
Industrial, miscellaneous and all other $6,230,113  $498,655  $(839,617) $5,889,151 
                 
Total equity securities at estimated fair value $6,230,113  $498,655  $(839,617) $5,889,151 
                 
Mortgage loans held for investment at amortized cost:                
Residential $101,665,364             
Residential construction  54,254,054             
Commercial  52,384,376             
Less: Unamortized deferred loan fees, net  (1,617,517)            
Less: Allowance for loan losses  (1,696,371)            
Total mortgage loans held for investment $204,989,906             
                 
Real estate held for investment net of accumulated depreciation:                
Residential $31,874,263             
Commercial  73,189,068             
Total real estate held for investment $105,063,331             
                 
Policy loans and other investments at amortized cost:                
Policy loans $6,403,888             
Insurance assignments  35,088,585             
Federal Home Loan Bank stock  708,700             
Other investments  4,280,651             
Less: Allowance for doubtful accounts  (931,029)            
                 
Total policy loans and other investments $45,550,795             
                 
Accrued investment income $3,886,170             
                 
Total investments $596,853,436             
13
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)


3)Investments (Continued)

The Company's investments as of December 31, 2017September 30, 2018 are summarized as follows:

 Cost  
Gross
Unrealized
 Gains
  
Gross
Unrealized
Losses
  
Estimated
 Fair
Value
  

Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
 
December 31, 2017:
            
            
September 30, 2018
            
Fixed maturity securities held to maturity carried at amortized cost:                        
Bonds:                        
U.S. Treasury securities and obligations of U.S. Government agencies $54,077,069  $211,824  $(579,423) $53,709,470  $53,683,435  $142,299  $(1,248,029) $52,577,705 
Obligations of states and political subdivisions  5,843,176   112,372   (71,013)  5,884,535   6,987,405   40,224   (190,262)  6,837,367 
Corporate securities including public utilities  158,350,727   14,336,452   (1,007,504)  171,679,675   155,372,733   7,544,943   (2,299,844)  160,617,832 
Mortgage-backed securities  9,503,016   210,652   (162,131)  9,551,537   13,731,279   135,074   (323,564)  13,542,789 
Redeemable preferred stock  623,635   49,748   (191)  673,192   612,023   36,437   -   648,460 
Total fixed maturity securities held to maturity $228,397,623  $14,921,048  $(1,820,262) $241,498,409  $230,386,875  $7,898,977  $(4,061,699) $234,224,153 
                                
Equity securities at estimated fair value:                                
                                
Common stock:                                
                                
Industrial, miscellaneous and all other $6,002,931  $667,593  $(632,669) $6,037,855  $5,891,712  $786,960  $(689,754) $5,988,918 
                                
Total equity securities at estimated fair value $6,002,931  $667,593  $(632,669) $6,037,855  $5,891,712  $786,960  $(689,754) $5,988,918 
                                
Mortgage loans held for investment at amortized cost:                                
Residential $102,527,111              $79,930,807             
Residential construction  50,157,533               71,330,891             
Commercial  54,954,865               32,869,447             
Less: Unamortized deferred loan fees, net  (1,659,828)              (1,279,465)            
Less: Allowance for loan losses  (1,768,796)              (1,470,158)            
                
Total mortgage loans held for investment $204,210,885              $181,381,522             
                                
Real estate held for investment net of accumlated depreciation:                
Real estate held for investment net of accumulated depreciation:                
Residential $68,329,917              $26,988,179             
Commercial  72,968,789               92,088,430             
Total real estate held for investment $141,298,706              $119,076,609             
                                
Policy loans and other investments at amortized cost:                
Other investments and policy loans at amortized cost:                
Policy loans $6,531,352              $6,389,122             
Insurance assignments  36,301,739               32,166,750             
Federal Home Loan Bank stock  689,400               2,308,700             
Other investments  3,219,622               4,220,893             
Less: Allowance for doubtful accounts  (846,641)              (1,046,840)            
                                
Total policy loans and other investments $45,895,472             
                
Total other investments and policy loans $44,038,625             
                                
Accrued investment income $3,644,077              $3,751,942             
                                
Total investments $629,484,618              $584,624,491             


 
14
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)
The Company's investments as of December 31, 2017 are summarized as follows:

  Cost  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
 
December 31, 2017:
            
             
Fixed maturity securities held to maturity carried at amortized cost:            
Bonds:            
U.S. Treasury securities and obligations of U.S. Government agencies $54,077,069  $211,824  $(579,423) $53,709,470 
Obligations of states and political subdivisions  5,843,176   112,372   (71,013)  5,884,535 
Corporate securities including public utilities  158,350,727   14,336,452   (1,007,504)  171,679,675 
Mortgage-backed securities  9,503,016   210,652   (162,131)  9,551,537 
Redeemable preferred stock  623,635   49,748   (191)  673,192 
Total fixed maturity securities held to maturity $228,397,623  $14,921,048  $(1,820,262) $241,498,409 
                 
Equity securities at estimated fair value:                
                 
Common stock:                
                 
Industrial, miscellaneous and all other $6,002,931  $667,593  $(632,669) $6,037,855 
                 
Total equity securities at estimated fair value $6,002,931  $667,593  $(632,669) $6,037,855 
                 
Mortgage loans held for investment at amortized cost:                
Residential $102,527,111             
Residential construction  50,157,533             
Commercial  54,954,865             
Less: Unamortized deferred loan fees, net  (1,659,828)            
Less: Allowance for loan losses  (1,768,796)            
                 
Total mortgage loans held for investment $204,210,885             
                 
Real estate held for investment  net of accumulated depreciation:                
Residential $68,329,917             
Commercial  72,968,789             
Total real estate held for investment $141,298,706             
                 
Other investments and policy loans at amortized cost:                
Policy loans $6,531,352             
Insurance assignments  36,301,739             
Federal Home Loan Bank stock  689,400             
Other investments  3,219,622             
Less: Allowance for doubtful accounts  (846,641)            
                 
Total other investments and policy loans $45,895,472             
                 
Accrued investment income $3,644,077             
                 
Total investments $629,484,618             


15
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

3)Investments (Continued)
Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities held to maturity, which are carried at amortized cost, at March 31,September 30, 2018 and December 31, 2017. The unrealized losses were primarily related to interest rate fluctuations. 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  
Unrealized
Losses for
Less than
Twelve
Months
  Fair Value  
Unrealized
Losses for
More than
Twelve
Months
  Fair Value  
Total
Unrealized
Loss
  Fair Value 
At March 31, 2018
                  
U.S. Treasury Securities and Obligations of U.S. Government Agencies $897,420  $51,456,932  $63,356  $623,360  $960,776  $52,080,292 
At September 30, 2018
                  
U.S. Treasury securities and obligations of U.S. Government Agencies $104,070  $9,996,147  $1,143,956  $41,197,425  $1,248,029  $51,193,572 
Obligations of states and political subdivisions  46,178   2,447,348   144,084   2,644,649   190,262   5,091,997 
Corporate securities  1,738,234   59,982,599   561,610   8,915,794   2,299,844   68,898,393 
Mortgage and other asset-backed securities  51,253   6,780,302   272,311   2,352,453   323,564   9,132,755 
Total unrealized losses $1,939,735  $79,206,396  $2,121,961  $55,110,321  $4,061,699  $134,316,717 
                        
At December 31, 2017
                        
U.S. Treasury securities and obligations of U.S. Government Agencies $532,010  $51,606,699  $47,413  $643,380  $579,423  $52,250,079 
Obligations of states and political subdivisions  17,903   1,419,010   127,648   2,690,329   145,551   4,109,339   296   214,882   70,717   2,225,021   71,013   2,439,903 
Corporate securities  620,598   33,678,083   684,528   11,365,056   1,305,126   45,043,139   167,786   11,551,865   839,718   13,193,258   1,007,504   24,745,123 
Mortgage and other asset-backed securities  107,265   2,102,664   141,754   1,658,340   249,019   3,761,004   56,756   2,516,660   105,375   1,676,494   162,131   4,193,154 
Redeemable preferred stock  344   11,268   -   -   344   11,268   191   11,421   -   -   191   11,421 
Total unrealized losses $1,643,530  $88,667,957  $1,017,286  $16,337,085  $2,660,816  $105,005,042  $757,039  $65,901,527  $1,063,223  $17,738,153  $1,820,262  $83,639,680 
                        
At December 31, 2017
                        
U.S. Treasury Securities and Obligations of U.S. Government Agencies $532,010  $51,606,699  $47,413  $643,380  $579,423  $52,250,079 
Obligations of states and political subdivisions  296   214,882   70,717   2,225,021   71,013   2,439,903 
Corporate securities  167,786   11,551,865   839,718   13,193,258   1,007,504   24,745,123 
Mortgage and other asset-backed securities  56,756   2,516,660   105,375   1,676,494   162,131   4,193,154 
Redeemable preferred stock  191   11,421   -   -   191   11,421 
Total unrealized losses $757,039  $65,901,527  $1,063,223  $17,738,153  $1,820,262  $83,639,680 

There were 238364 securities with fair value of 97.5%97.1% of amortized cost at March 31,September 30, 2018. There were 141 securities with fair value of 97.9% of amortized cost at December 31, 2017. During the three months ended March 31,September 30, 2018 and 2017, an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $-0- and $52,139,$100,000, respectively, and for the nine months ended September 30, 2018 and 2017, an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $-0- and $418,366, respectively.

On a quarterly basis, the Company evaluates its fixed maturity securities held to maturity. This evaluation includes a review of current ratings by the National Association of Insurance Commissions ("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.
1516
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)

The amortized cost and estimated fair value of fixed maturity securities held to maturity, at March 31,September 30, 2018, 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
  
Amortized
Cost
  
Estimated Fair
Value
 
Held to Maturity:            
Due in 1 year $17,978,827  $18,098,867  $2,899,715  $2,964,076 
Due in 2-5 years  67,126,658   67,514,026   66,428,822   66,259,870 
Due in 5-10 years  53,791,068   55,097,433   69,688,359   69,760,698 
Due in more than 10 years  79,848,168   86,370,967   77,026,677   81,048,260 
Mortgage-backed securities  12,105,727   12,125,550   13,731,279   13,542,789 
Redeemable preferred stock  623,635   652,099   612,023   648,460 
Total held to maturity $231,474,083  $239,858,942  $230,386,875  $234,224,153 

The Company is a member of the Federal Home Loan Bank of Des Moines ("FHLB"). In June through August of 2017, theThe Company purchasedcurrently has deposited a total of $50,000,000, par value, of United States Treasury fixed maturity securities that it deposited with the FHLB. These securities will generate interest income for the Company and will beare available to use as collateral on any cash borrowings from the FHLB. As of March 31,September 30, 2018, the Company owed $20,000,000$40,000,000 to the FHLB. This amount owed was paid on April 2,in October 2018.

Equity Securities

The following tables summarize unrealized losses on equity securities that were carried at estimated fair value based on quoted trading prices at December 31, 2017. The unrealized losses were primarily the result of decreases in fair value in the retail, industrial and energy sectors. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities in a loss position:

 
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 December 31, 2017
          
Industrial, miscellaneous and all other $213,097   98  $419,572   81  $632,669 
Total unrealized losses $213,097   98  $419,572   81  $632,669 
Fair Value $847,718      $1,329,213      $2,176,931 

 
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 December 31, 2017
          
Industrial, miscellaneous and all other $213,097   98  $419,572   81  $632,669 
Total unrealized losses $213,097   98  $419,572   81  $632,669 
Fair Value $847,718      $1,329,213      $2,176,931 

The average fair value of the equity securities was 77.5% of the original investment as of December 31, 2017. 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.

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

See Note 2 regarding the adoption of ASU 2016-01 on January 1, 2018. The Company now recognizes the changes (unrealized gains and losses) in the fair value of these equity securities through earnings as part of realized gains on investments and other assets on the condensed consolidated statements of earnings instead of other comprehensive income on the condensed consolidated balance sheets.
1617
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)

The Company's net gains from investments and other assets, including net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments are summarized as follows:

  
Three Months Ended
September 30
  
Nine Months Ended
 September 30
 
  2018  2017  2018    2017 
Fixed maturity securities held to maturity:              
Gross realized gains $109,554  $110,529  $397,190    $163,950 
Gross realized losses  (31,670)  (651,754)  (601,303)    (686,819)
Other than temporary impairments  -   (100,000)  -     (418,366)
                   
Equity securities:                  
Gross realized gains  -   25,898   -     132,350 
Gross realized losses  -   (26)  -     (58,464)
Other than temporary impairments  -   (63,375)  -     (63,375)
Gains and (losses) during 2018 on securities sold in 2018  11,214   -   (13,933)    - 
Unrealized gains and (losses) on securities held at the end of the period  284,192   -   71,143     - 
                   
Other assets:                  
Gross realized gains  814,471   225,022   26,060,598 (1)  2,006,721 
Gross realized losses  (165,334)  (29,335)  (542,100)    (844,672)
Total $1,022,427  $(483,041) $25,371,595    $231,325 
                   
(1) Includes a one-time gain of $22,252,000 from the sale of Dry Creek at East Village apartments. 
  
Three Months Ended
March 31
 
  2018  2017 
Fixed maturity securities held to maturity:      
Gross realized gains $28,133  $2,434 
Gross realized losses  (308,931)  - 
Other than temporary impairments  -   (52,139)
         
Equity securities:        
Gross realized gains  -   60,978 
Gross realized losses  -   (4,556)
Gains and losses during 2018 on securities sold in 2018  14,650   - 
Unrealized gains and losses on securities held at the end of the period  (372,042)  - 
         
Other assets:        
Gross realized gains  22,951,723   456,275 
Gross realized losses  (292,594)  (369,801)
Total $22,020,939  $93,191 
         
(1) Includes a one-time gain of $22,252,000 from the sale of Dry Creek at East Village apartments. 

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.

The carrying amount of held to maturity securities sold was $472,883$4,998,249 and $28,073$2,240,249 for the threenine months March 31,ended September 30, 2018 and 2017, respectively.  The net realized loss related to these sales was $306,851$243,023 and $385,484 for the threenine months ended March 31,September 30, 2018 and the net realized gain related to these sales was $2,434 for the three months ended March 31, 2017.2017, respectively. 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.

Major categories of net investment income are as follows:
  
Three Months Ended
 September 30
  
Nine Months Ended
 September 30
 
  2018  2017  2018  2017 
Fixed maturity securities held to maturity $2,481,202  $2,692,586  $7,521,884  $7,475,156 
Equity securities  64,214   66,320   176,126   209,517 
Mortgage loans held for investment  4,240,624   2,973,349   14,016,985   8,803,257 
Real estate held for investment  2,124,138   2,818,672   6,423,996   8,540,756 
Policy loans  85,044   195,098   296,540   621,854 
Insurance assignments  3,583,964   3,234,520   10,956,651   9,943,561 
Other investments  57,050   16,051   186,594   36,041 
Cash and cash equivalents  375,310   109,939   752,339   311,989 
Gross investment income  13,011,546   12,106,535   40,331,115   35,942,131 
Investment expenses  (3,370,050)  (3,886,105)  (10,873,223)  (10,383,018)
Net investment income $9,641,496  $8,220,430  $29,457,892  $25,559,113 
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $81,486 and $129,235 for the three months ended September 30, 2018 and 2017, respectively, and $287,545 and $369,721 for the nine months ended September 30, 2018 and 2017, respectively.
1718
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)
Major categories of net investment income are as follows:

  
Three Months Ended
March 31
 
  2018  2017 
Fixed maturity securities held to maturity $2,529,841  $2,424,805 
Equity securities  58,292   54,786 
Mortgage loans held for investment  4,531,927   3,410,761 
Real estate held for investment  2,670,440   2,894,331 
Policy loans  102,866   116,845 
Insurance assignments  3,860,937   3,364,642 
Other investments  53,673   7,543 
Cash and cash equivalents  137,368   91,012 
Gross investment income  13,945,344   12,364,725 
Investment expenses  (3,870,913)  (3,348,349)
Net investment income $10,074,431  $9,016,376 
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $110,802 and $115,501 for the three months ended March 31, 2018 and 2017, 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 $9,247,333$9,204,288 at March 31,September 30, 2018 and $9,264,977 at December 31, 2017. 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) at March 31,September 30, 2018, other than investments issued or guaranteed by the United States Government.

Real Estate Held for Investment
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 mortgage foreclosures.
Commercial Real Estate Held for Investment
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'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 87 states. These properties include industrial warehouses, office buildings, retail centers, and undeveloped land, and the redevelopment and expansion of its corporate campus ("Center53") in Salt Lake City, Utah. The Company does useuses bank debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.
18
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)

3)  Investments (Continued)
The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $64,864,000$84,976,000 and $64,704,000 as of March 31,September 30, 2018 and December 31, 2017, respectively. The associated bank loan carrying values totaled approximately $41,309,000$52,139,000 and $40,994,000 as of March 31,September 30, 2018 and December 31, 2017, respectively.
19
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

3)Investments (Continued)

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

 Net Ending Balance   Total Square Footage  Net Ending Balance   Total Square Footage 
 March 31   December 31   March 31  December 31  September 30   December 31   September 30  December 31 
 2018   2017   2018  2017  2018   2017   2018  2017 
Arizona $4,000 (1) $4,000  (1)  -   -  $4,000 (1)$4,000 (1) -   - 
Arkansas  95,118    96,169    3,200   3,200   -    96,169    -   3,200 
Kansas  7,264,086    7,200,000    222,679   222,679   6,086,759    7,200,000    222,679   222,679 
Louisiana  486,821    493,197    7,063   7,063   474,069    493,197    7,063   7,063 
Mississippi  3,701,754    3,725,039    33,821   33,821   3,655,283    3,725,039    33,821   33,821 
New Mexico  7,000 (1)  7,000  (1)  -   -   7,000 (1) 7,000 (1) -   - 
Texas  335,000 (1)  335,000  (1)  -   23,470   335,000 (1) 335,000 (1) -   23,470 
Utah  61,295,289 (1)  61,108,384  (2)  433,244   433,244   81,526,319 (2) 61,108,384 (2) 502,129   433,244 
                                    
 $73,189,068   $72,968,789    700,007   723,477  $92,088,430   $72,968,789    765,692   723,477 
                                    
(1) Includes undeveloped land               
(1) Undeveloped land(1) Undeveloped land               
                                    
(2) Includes Center53 completed in July 2017. The Company is currently in the process of leasing the building.(2) Includes Center53 completed in July 2017. The Company is currently in the process of leasing the building. (2) Includes Center53 completed in July 2017. The Company is currently in the process of leasing the building. 
 
Residential Real Estate Held for Investment

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 established Security National Real Estate Services ("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 March 31,September 30, 2018, SNRE manages 10190 residential properties in 78 states across the United States.
The net ending balance of residential real estate that serves as collateral for a bank borrowing was approximately    $-0- and $34,431,000, as of March 31,September 30, 2018 and December 31, 2017, respectively. The associated bank loan carrying value was approximately $-0- and $26,773,000 as of March 31,September 30, 2018 and December 31, 2017, respectively. This real estate relates to the Company's Dry Creek at East Village apartment complex sold in March 2018.
The net ending balance of foreclosed residential real estate included in residential real estate held for investment is $31,349,678$26,747,000 and $33,372,228$33,372,000 as of March 31,September 30, 2018 and December 31, 2017, respectively.
1920
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)

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

  Net Ending Balance 
  March 31  December 31 
  2018  2017 
Arizona $-  $217,105 
California  5,407,203   5,463,878 
Florida  6,839,021   7,000,684 
Hawaii  712,286   712,286 
Ohio  10,000   10,000 
Oklahoma  -   17,500 
Texas  554,486   509,011 
Utah  18,065,086   54,113,272 
Washington  286,181   286,181 
  $31,874,263  $68,329,917 

  Net Ending Balance 
  September  December 31 
  2018  2017 
Arizona $-  $217,105 
California  4,064,197   5,463,878 
Florida  6,677,953   7,000,684 
Hawaii  -   712,286 
Ohio  10,000   10,000 
Oklahoma  -   17,500 
Tennesse  105,260   - 
Texas  552,615   509,011 
Utah  14,951,798   54,113,272 
Virginia  150,175   - 
Washington  476,181   286,181 
  $26,988,179  $68,329,917 

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 70,000 square feet, or approximately 10% of the overall commercial real estate holdings.

As of March 31,September 30, 2018, real estate owned and occupied by the Company is summarized as follows:

LocationBusiness Segment 
Approximate
 Square Footage
  Square Footage Occupied by the Company Business 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%Corporate Offices, Life Insurance and Cemetery/Mortuary Operations  36,000   100%
5201 Green Street, Salt Lake City, UTMortgage Operations  36,899   34%Mortgage Operations  36,899   34%
1044 River Oaks Dr., Flowood, MSLife Insurance Operations  21,521   27%Life Insurance Operations  21,521   27%
121 West Election Road, Draper, UTMortgage Sales  78,978   19%Mortgage Sales  78,978   19%
                  
(1) This asset is included in property and equipment on the condensed consolidated balance sheets(1) This asset is included in property and equipment on the condensed consolidated balance sheets     (1) This asset is included in property and equipment on the condensed consolidated balance sheets     

20
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)

3)   Investments (Continued)

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' ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At March 31,September 30, 2018, the Company had 42%51%, 16%11%, 12%13%, 10%5%, 6%4%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, Nevada, California, Nevada, Arizona, and Tennessee, respectively.

21
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

3)Investments (Continued)
Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs 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'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'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 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.

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'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'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's policies to determine the borrower'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'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") of 80% or less.

Residential construction (including land acquisition and development) – Underwritten in accordance with the Company'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'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.
2122
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)

The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:

Allowance for Credit Losses and Recorded Investment in Mortgage Loans 
             
  Commercial  Residential  Residential Construction  Total 
March 31, 2018            
Allowance for credit losses:            
Beginning balance - January 1, 2018 $187,129  $1,546,447  $35,220  $1,768,796 
   Charge-offs  -   -   -   - 
   Provision  -   (72,425)  -   (72,425)
Ending balance - March 31, 2018 $187,129  $1,474,022  $35,220  $1,696,371 
                 
Ending balance: individually evaluated for impairment $-  $292,220  $-  $292,220 
                 
Ending balance: collectively evaluated for impairment $187,129  $1,181,802  $35,220  $1,404,151 
                 
Mortgage loans:                
Ending balance $52,384,376  $101,665,364  $54,254,054  $208,303,794 
                 
Ending balance: individually evaluated for impairment $-  $5,362,963  $-  $5,362,963 
                 
Ending balance: collectively evaluated for impairment $52,384,376  $96,302,401  $54,254,054  $202,940,831 
                 
December 31, 2017                
Allowance for credit losses:                
Beginning balance - January 1, 2017 $187,129  $1,461,540  $100,114  $1,748,783 
   Charge-offs  -   (351,357)  (64,894)  (416,251)
   Provision  -   436,264   -   436,264 
Ending balance - December 31, 2017 $187,129  $1,546,447  $35,220  $1,768,796 
                 
Ending balance: individually evaluated for impairment $-  $237,560  $-  $237,560 
                 
Ending balance: collectively evaluated for impairment $187,129  $1,308,887  $35,220  $1,531,236 
                 
Mortgage loans:                
Ending balance $54,954,865  $102,527,111  $50,157,533  $207,639,509 
                 
Ending balance: individually evaluated for impairment $-  $4,923,552  $461,834  $5,385,386 
                 
Ending balance: collectively evaluated for impairment $54,954,865  $97,603,559  $49,695,699  $202,254,123 
Allowance for Credit Losses and Recorded Investment in Mortgage Loans 
             
  Commercial  Residential  Residential Construction  Total 
September 30, 2018            
Allowance for credit losses:            
Beginning balance - January 1, 2018 $187,129  $1,546,447  $35,220  $1,768,796 
   Charge-offs  -   (84,902)  -   (84,902)
   Provision  -   (213,736)  -   (213,736)
Ending balance - September 30, 2018 $187,129  $1,247,809  $35,220  $1,470,158 
                 
Ending balance: individually evaluated for impairment $-  $75,064  $-  $75,064 
                 
Ending balance: collectively evaluated for impairment $187,129  $1,172,745  $35,220  $1,395,094 
                 
Mortgage loans:                
Ending balance $32,869,447  $79,930,807  $71,330,891  $184,131,145 
                 
Ending balance: individually evaluated for impairment $195,911  $3,088,265  $1,078,529  $4,362,705 
                 
Ending balance: collectively evaluated for impairment $32,673,536  $76,842,542  $70,252,362  $179,768,440 
                 
December 31, 2017                
Allowance for credit losses:                
Beginning balance - January 1, 2017 $187,129  $1,461,540  $100,114  $1,748,783 
   Charge-offs  -   (351,357)  (64,894)  (416,251)
   Provision  -   436,264   -   436,264 
Ending balance - December 31, 2017 $187,129  $1,546,447  $35,220  $1,768,796 
                 
Ending balance: individually evaluated for impairment $-  $237,560  $-  $237,560 
                 
Ending balance: collectively evaluated for impairment $187,129  $1,308,887  $35,220  $1,531,236 
                 
Mortgage loans:                
Ending balance $54,954,865  $102,527,111  $50,157,533  $207,639,509 
                 
Ending balance: individually evaluated for impairment $-  $4,923,552  $461,834  $5,385,386 
                 
Ending balance: collectively evaluated for impairment $54,954,865  $97,603,559  $49,695,699  $202,254,123 

2223
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)

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

Age Analysis of Mortgage Loans Held for InvestmentAge Analysis of Mortgage Loans Held for Investment 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
  
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
 
March 31, 2018
                            
September 30, 2018September 30, 2018                            
Commercial $5,211,276  $-  $-  $-  $5,211,276  $47,173,100  $52,384,376  $(187,129) $(67,717) $52,129,530  $3,745,013  $-  $195,911  $-  $3,940,924  $28,928,523  $32,869,447  $(187,129) $(20,919) $32,661,399 
Residential  7,223,352   1,150,067   2,800,231   2,562,732   13,736,382   87,928,982   101,665,364   (1,474,022)  (1,125,974)  99,065,368   10,783,020   1,769,338   2,019,323   1,068,942   15,640,623   64,290,184   79,930,807   (1,247,809)  (678,985)  78,004,013 
Residential Construction  441,310   -   -   -   441,310   53,812,744   54,254,054   (35,220)  (423,826)  53,795,008   -   -   1,078,529   -   1,078,529   70,252,362   71,330,891   (35,220)  (579,561)  70,716,110 
                                                                                
Total $12,875,938  $1,150,067  $2,800,231  $2,562,732  $19,388,968  $188,914,826  $208,303,794  $(1,696,371) $(1,617,517) $204,989,906  $14,528,033  $1,769,338  $3,293,763  $1,068,942  $20,660,076  $163,471,069  $184,131,145  $(1,470,158) $(1,279,465) $181,381,522 
                                                                                
December 31, 2017
December 31, 2017
                                     December 31, 2017                                     
Commercial $1,943,495  $-  $-  $-  $1,943,495  $53,011,370  $54,954,865  $(187,129) $(67,411) $54,700,325  $1,943,495  $-  $-  $-  $1,943,495  $53,011,370  $54,954,865  $(187,129) $(67,411) $54,700,325 
Residential  6,613,479   495,347   3,591,333   1,332,219   12,032,378   90,494,733   102,527,111   (1,546,447)  (1,164,130)  99,816,534   6,613,479   495,347   3,591,333   1,332,219   12,032,378   90,494,733   102,527,111   (1,546,447)  (1,164,130)  99,816,534 
Residential Construction  -   -   461,834   -   461,834   49,695,699   50,157,533   (35,220)  (428,287)  49,694,026   -   -   461,834   -   461,834   49,695,699   50,157,533   (35,220)  (428,287)  49,694,026 
                                                                                
Total $8,556,974  $495,347  $4,053,167  $1,332,219  $14,437,707  $193,201,802  $207,639,509  $(1,768,796) $(1,659,828) $204,210,885  $8,556,974  $495,347  $4,053,167  $1,332,219  $14,437,707  $193,201,802  $207,639,509  $(1,768,796) $(1,659,828) $204,210,885 
                                                                                
(1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure.(1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure. (1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure. 

2324
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

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:

Impaired LoansImpaired Loans Impaired Loans 
                              
 
Recorded
Investment
  
Unpaid
 Principal
Balance
  
Related
 Allowance
  
Average
 Recorded
 Investment
  
Interest
Income
Recognized
  
Recorded
Investment
  
Unpaid
Principal
 Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
March 31, 2018
               
September 30, 2018               
With no related allowance recorded:                              
Commercial $-  $-  $-  $-  $-  $195,911  $195,911  $-  $65,304  $- 
Residential  3,653,126   3,653,126   -   3,653,126   -   1,592,174   1,592,174   -   2,693,459   - 
Residential construction  -   -   -   -   -   1,078,529   1,078,529   -   733,603   - 
                                        
With an allowance recorded:                                        
Commercial $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
Residential  1,709,837   1,709,837   292,220   1,709,837   -   1,496,091   1,496,091   75,064   1,615,392   - 
Residential construction  -   -   -   -   -   -   -   -   -   - 
                                        
Total:                                        
Commercial $-  $-  $-  $-  $-  $195,911  $195,911  $-  $65,304  $- 
Residential  5,362,963   5,362,963   292,220   5,362,963   -   3,088,265   3,088,265   75,064   4,308,851   - 
Residential construction  -   -   -   -   -   1,078,529   1,078,529   -   733,603   - 
                                        
December 31, 2017
                                        
With no related allowance recorded:                                        
Commercial $-  $-  $-  $365,220  $-  $-  $-  $-  $365,220  $- 
Residential  3,322,552   3,322,552   -   3,290,094   -   3,322,552   3,322,552   -   3,290,094   - 
Residential construction  461,834   461,834   -   277,232   -   461,834   461,834   -   277,232   - 
                                        
With an allowance recorded:                                        
Commercial $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
Residential  1,601,000   1,601,000   237,560   1,350,115   -   1,601,000   1,601,000   237,560   1,350,115   - 
Residential construction  -   -   -   -   -   -   -   -   -   - 
                                        
Total:                                        
Commercial $-  $-  $-  $365,220  $-  $-  $-  $-  $365,220  $- 
Residential  4,923,552   4,923,552   237,560   4,640,209   -   4,923,552   4,923,552   237,560   4,640,209   - 
Residential construction  461,834   461,834   -   277,232   -   461,834   461,834   -   277,232   - 

Credit Risk Profile Based on Performance Status

The Company'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.
2425
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

3)Investments (Continued)

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

Mortgage Loans Held for Investment Credit ExposureMortgage Loans Held for Investment Credit Exposure Mortgage Loans Held for Investment Credit Exposure 
Credit Risk Profile Based on Payment ActivityCredit Risk Profile Based on Payment Activity Credit Risk Profile Based on Payment Activity 
                                                
 Commercial  Residential  Residential Construction  Total  Commercial  Residential  Residential Construction  Total 
 
March 31,
2018
  
December 31,
2017
  
March 31,
2018
  
December 31,
2017
  
March 31,
2018
  
December 31,
2017
  
March 31,
2018
  
December 31,
2017
  
September
30, 2018
  
December
31, 2017
  
September
30, 2018
  
December
31, 2017
  
September
30, 2018
  
December
31, 2017
  
September
30, 2018
  
December
31, 2017
 
                                                
Performing $52,384,376  $54,954,865  $96,302,401  $97,603,559  $54,254,054  $49,695,699  $202,940,831  $202,254,123  $32,673,536  $54,954,865  $76,842,542  $97,603,559  $70,252,362  $49,695,699  $179,768,440  $202,254,123 
Non-performing  -   -   5,362,963   4,923,552   -   461,834   5,362,963   5,385,386   195,911   -   3,088,265   4,923,552   1,078,529   461,834   4,362,705   5,385,386 
                                                                
Total $52,384,376  $54,954,865  $101,665,364  $102,527,111  $54,254,054  $50,157,533  $208,303,794  $207,639,509  $32,869,447  $54,954,865  $79,930,807  $102,527,111  $71,330,891  $50,157,533  $184,131,145  $207,639,509 


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 $223,000$200,000 and $204,083$204,000 as of March 31,September 30, 2018 and December 31, 2017, 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 March 31
2018
  
As of December 31
2017
 
Residential $5,362,963  $4,923,552 
Residential construction  -   461,834 
Total $5,362,963  $5,385,386 

25
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)


  Mortgage Loans on Non-Accrual Status 
    
  
As of
 September 30
2018
  
As of
 December 31
2017
 
Commercial $195,911  $- 
Residential  3,088,265   4,923,552 
Residential construction  1,078,529   461,834 
Total $4,166,794  $5,385,386 

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 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 changes in the fair value of the related derivatives used for these assets.

Interest income is recorded based on the contractual terms of the loan and in accordance with the Company's policy on mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings. None of these loans are 90 or more days past due nor on nonaccrual status as of March 31,September 30, 2018. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.
26
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

4)Loans Held for Sale (Continued)

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

  
As of
March 31
 2018
 
    
Aggregate fair value $124,866,313 
Unpaid principal balance  121,111,768 
Unrealized gain  3,754,545 

  
As of
 September 30,
 2018
 
    
Aggregate fair value $165,507,394 
Unpaid principal balance  160,124,093 
Unrealized gain  5,383,301 

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
March 31
 
  2018   2017 
Loan fees $5,745,309   $9,304,925 
Interest income  1,116,454    1,734,527 
Secondary gains  15,578,495    26,194,350 
Change in fair value of loan commitments  440,958    2,167,593 
Change in fair value of loans held for sale  2,929,996 (1)  - 
Provision for loan loss reserve  (351,051)   (426,634)
Mortgage fee income $25,460,160   $38,974,760 
          
(1) See Fair Value Option Election         

  
Three Months Ended
 September 30
  
Nine Months Ended
 September 30
 
  2018  2017  2018  2017 
Loan fees $7,758,284  $15,086,168  $21,347,320  $33,149,877 
Interest income  1,993,895   2,097,249   4,698,899   5,679,868 
Secondary gains  22,315,022   28,667,234   58,633,363   87,307,806 
Change in fair value of loan commitments  94,569   (4,833,268)  537,696   (3,677,554)
Change in fair value of loans held for sale (1)  (203,623)  1,061,917   4,563,222   1,061,917 
Provision for loan loss reserve  (293,443)  (481,727)  (946,556)  (1,435,180)
Mortgage fee income $31,664,704  $41,597,573  $88,833,944  $122,086,734 
                 
(1) See Fair Value Option Election                

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.
26
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (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
March 31
2018
  
As of
 December 31
2017
  
As of
September 30
2018
  
As of
 December 31
2017
 
Balance, beginning of period $2,571,524  $627,733  $2,571,524  $627,733 
Provision on current loan originations (1)  351,051   1,851,187   946,556   1,851,187 
Charge-offs, net of recaptured amounts  (10,420)  92,604   (10,061)  92,604 
Balance, end of period $2,912,155  $2,571,524  $3,508,019  $2,571,524 
                
(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.
27
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)


5)Stock Compensation Plans

The Company has four fixed option plans (the "2003 Plan", the "2006 Director Plan", the "2013 Plan" and the "2014 Director Plan"). Compensation expense for options issued of $58,087$58,691 and $101,996$102,429 has been recognized for these plans for the three months ended March 31,September 30, 2018 and 2017, respectively, and $174,831 and $305,741 has been recognized for these plans for the nine months ended September 30, 2018 and 2017, respectively. As of March 31,September 30, 2018, the total unrecognized compensation expense related to the options issued was $155,658,$38,915, 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 estimates the expected life of the options using the simplified method. Future volatility is estimated based upon the weighted historical volatility of the Company's Class A common stock over a period equal to the expected life of the options. The risk-free interest rate for the expected life of the options is based upon the Federal Reserve Board's daily interest rates in effect at the time of the grant.

A summary of the status of the Company's stock compensation plans as of March 31,September 30, 2018, and the changes during the threenine months ended March 31,September 30, 2018, 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, 2017  880,426  $4.35   523,603  $5.24 
Granted  -       -     
Exercised  (31,984)      -     
Cancelled  (5,704)      -     
Outstanding at March 31, 2018  842,738  $4.48   523,603  $5.24 
                 
As of March 31, 2018:                
Options exercisable  744,686  $4.40   468,477  $5.29 
                 
As of March 31, 2018:                
Available options for future grant  421,241       165,638     
                 
Weighted average contractual term of options outstanding at March 31, 2018
 6.55 years      3.19 years     
                
Weighted average contractual term of options exercisable at March 31, 2018
 6.53 years      2.43 years     
                 
Aggregated intrinsic value of options outstanding at March 31, 2018 (1)
 $850,528      $251,961     
                
Aggregated intrinsic value of options exercisable at March 31, 2018 (1)
 $836,882      $232,667     
                 
(1) The Company used a stock price of $5.15 as of March 31, 2018 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, 2017  880,426  $4.35   523,603  $5.24 
Granted  -       -     
Exercised  (36,133)      -     
Cancelled  (5,704)      -     
Outstanding at September 30, 2018  838,589  $4.48   523,603  $5.24 
                 
As of September 30, 2018:                
Options exercisable  805,902  $4.46   505,227  $5.26 
                 
As of September 30, 2018:                
Available options for future grant  421,241       165,638     
                
Weighted average contractual term of options outstanding at September 30, 2018
 6.05 years      2.69 years     
                
Weighted average contractual term of options exercisable at September 30, 2018
 6.05 years      2.45 years     
                 
Aggregated intrinsic value of options outstanding at September 30, 2018 (1)
 $867,356      $267,943     
                 
Aggregated intrinsic value of options exercisable at September 30, 2018 (1)
 $862,157      $260,592     
                 
(1) The Company used a stock price of $5.20 as of September 30, 2018 to derive intrinsic value. 

28
 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

5)Stock Compensation Plans (Continued)

A summary of the status of the Company's stock compensation plans as of March 31,September 30, 2017, and the changes during the threenine months ended March 31,September 30, 2017, 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, 2016  741,973  $4.33   556,298  $4.61 
Granted  -       -     
Exercised  -       -     
Cancelled  -       -     
Outstanding at March 31, 2017  741,973  $4.33   556,298  $4.61 
                 
As of March 31, 2017:                
Options exercisable  636,764  $3.94   493,298  $4.26 
                 
As of March 31, 2017:                
Available options for future grant  253,432       -     
                
Weighted average contractual term of options outstanding at March 31, 2017
 7.12 years      2.42 years     
                
Weighted average contractual term of options exercisable at March 31, 2017
 6.70 years      2.13 years     
                 
Aggregated intrinsic value of options outstanding at March 31, 2017 (1)
 $1,837,828      $1,264,540     
                
Aggregated intrinsic value of options exercisable at March 31, 2017 (1)
 $1,824,086      $1,264,540     
                 
(1) The Company used a stock price of $6.80 as of March 31, 2017 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)    
Cancelled  -       (24,227)    
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. 

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 threenine months March 31,September 30, 2018 and 2017 was $111,157$118,003 and $-0-,$578,017, respectively.
29
 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

6)Earnings Per Share

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

  
Three Months Ended
March 31
 
  2018  2017 
       
Net earnings $16,925,923  $1,860,000 
         
Basic weighted-average shares outstanding  16,171,412   15,827,495 
         
Employee stock options  176,365   493,335 
         
Diluted weighted-average shares outstanding  16,347,777   16,320,830 
         
Basic net earnings per share $1.05  $0.12 
         
Diluted net earnings per share $1.04  $0.11 

   
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
  2018  2017  2018  2017 
Numerator:            
Net earnings $2,013,746  $1,096,838  $22,177,886  $5,442,702 
Denominator:                
Basic weighted-average shares outstanding  16,330,839   16,026,199   16,250,714   15,928,911 
Effect of dilutive securities:                
Employee stock options  223,495   300,093   212,163   331,020 
                 
Diluted weighted-average shares outstanding  16,554,334   16,326,292   16,462,877   16,259,931 
                 
Basic net earnings per share $0.12  $0.07  $1.36  $0.34 
                 
Diluted net earnings per share $0.12  $0.07  $1.35  $0.33 

Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the threenine months March 31,September 30, 2018 and 2017, there were 589,822 and 89,250486,725 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)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's life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company's independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company'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'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 for the year ended December 31, 2017. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.

Factors Management Used to Identify the Enterprise's Reportable Segments

The Company'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.
30
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

7)Business Segment Information (Continued)

 Life Insurance  
Cemetery/
Mortuary
  Mortgage  
Intercompany
Eliminations
  Consolidated  Life Insurance  
Cemetery/
Mortuary
  Mortgage  
Intercompany
Eliminations
  Consolidated 
For the Three Months Ended                              
March 31, 2018
               
September 30, 2018
               
Revenues from external customers $28,962,288  $4,008,943  $34,251,862  $-  $67,223,093 
Intersegment revenues  1,108,093   106,637   117,746   (1,332,476)  - 
Segment profit before income taxes  2,192,036   781,875   (762,113)  -   2,211,798 
      -             
For the Three Months Ended                    
September 30, 2017
                    
Revenues from external customers $25,078,051  $2,998,809  $43,753,955  $-  $71,830,815 
Intersegment revenues  1,880,160   108,190   85,391   (2,073,741)  - 
Segment profit before income taxes  496,902   247,780   393,335   -   1,138,017 
                    
For the Nine Months Ended                    
September 30, 2018
                    
Revenues from external customers $50,860,529  $3,775,745  $27,439,835  $-  $82,076,109  $109,198,662  $13,060,357  $95,905,309  $-  $218,164,328 
Intersegment revenues  2,408,163   117,117   133,597   (2,658,877)  -   2,915,379   322,675   383,625   (3,621,679)  - 
Segment profit before income taxes  23,711,810   860,763   (3,385,391)  -   21,187,182   28,840,882   3,714,304   (4,993,976)  -   27,561,210 
      -                                 
Identifiable Assets  873,263,596   92,747,811   163,896,491   (134,701,132)  995,206,766   920,458,422   91,084,393   178,089,215   (128,148,062)  1,061,483,968 
Goodwill  2,765,570   -   -   -   2,765,570   2,765,570   -   -   -   2,765,570 
Total Assets  876,029,166   92,747,811   163,896,491   (134,701,132)  997,972,336   923,223,992   91,084,393   178,089,215   (128,148,062)  1,064,249,538 
                                        
For the Three Months Ended                    
March 31, 2017
                    
For the Nine Months Ended                    
September 30, 2017
                    
Revenues from external customers $26,158,701  $3,604,897  $41,065,699  $-  $70,829,297  $77,112,117  $9,907,037  $128,953,552  $-  $215,972,706 
Intersegment revenues  2,988,651   109,351   95,770   (3,193,772)  -   4,930,266   314,445   267,575   (5,512,286)  - 
Segment profit before income taxes  1,483,480   758,911   655,379   -   2,897,770   4,779,656   1,331,894   1,918,536   -   8,030,086 
                                        
Identifiable Assets  831,233,557   99,554,821   164,990,647   (139,027,232)  956,751,793   853,298,860   94,716,098   190,202,990   (133,079,207)  1,005,138,741 
Goodwill  2,765,570   -   -   -   2,765,570   2,765,570   -   -       2,765,570 
Total Assets  833,999,127   99,554,821   164,990,647   (139,027,232)  959,517,363   856,064,430   94,716,098   190,202,990   (133,079,207)  1,007,904,311 
31
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)


8)Fair Value of Financial Instruments

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:

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:  Financial assets and financial liabilities whose values are based on the following:
a) Quoted prices for similar assets or liabilities in active markets;
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.
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's estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

The Company utilizes a combination of third 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:
31
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)instruments.

8)  Fair Value of Financial Instruments (Continued)

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

Equity Securities: The fair values of investments in equity securities along with methods used to estimate such values are disclosed in Note 3 of the Notes to the condensed consolidated financial statements.Condensed Consolidated Financial Statements.

Restricted Assets: A portion of these assets include mutual funds and equity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.

Cemetery Endowment Care Trust Investments:  A portion of these assets include equity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.

Call and Put Options: The Company uses quoted market prices to value its call and put options.

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

The items shown under Level 3 are valued as follows:

Loans Held for Sale: 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.
32
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

8)Fair Value of Financial Instruments (Continued)

Loan Commitments and Forward Sale Commitments: The Company'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'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'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, 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.
32
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)

8)  Fair Value of Financial Instruments (Continued)

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") 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.
33
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (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 March 31,September 30, 2018.


 Total  
Quoted
Prices in
Active
 Markets for
Identical Assets
(Level 1)
  
Significant
 Observable
 Inputs
(Level 2)
  
Significant Unobservable
 Inputs
(Level 3)
  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 $5,889,151  $5,889,151  $-  $-  $5,988,918  $5,988,918  $-  $- 
Total equity securities $5,889,151  $5,889,151  $-  $-  $5,988,918  $5,988,918  $-  $- 
                                
Loans held for sale $124,866,313  $-  $-  $124,866,313  $165,507,394  $-  $-  $165,507,394 
Restricted assets (1)  800,510   800,510   -   -   810,056   810,056   -   - 
Cemetery perpetual care trust investments (1)  648,381   648,381   -   -   677,699   677,699   -   - 
Derivatives - loan commitments (2)  2,786,371   -   -   2,786,371   2,595,146   -   -   2,595,146 
                                
Total assets accounted for at fair value on a recurring basis $134,990,726  $7,338,042  $-  $127,652,684  $175,579,213  $7,476,673  $-  $168,102,540 
                                
Liabilities accounted for at fair value on a recurring basis                                
Derivatives - call options (3) $(13,277) $(13,277) $-  $-  $(38,020) $(38,020) $-  $- 
Derivatives - put options (3)  (128,598)  (128,598)  -   -   (23,393)  (23,393)  -   - 
Derivatives - loan commitments (3)  (348,824)  -   -   (348,824)  (60,861)  -   -   (60,861)
                                
Total liabilities accounted for at fair value on a recurring basis $(490,699) $(141,875) $-  $(348,824) $(122,274) $(61,413) $-  $(60,861)
                                
(1) Mutual funds and equity securities                                
(2) Included in other assets on the condensed consolidated balance sheets(2) Included in other assets on the condensed consolidated balance sheets         (2) Included in other assets on the condensed consolidated balance sheets         
(3) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets(3) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets     (3) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets     

33
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (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
  Net Loan Commitments  
Loans Held
 for Sale
 
Balance - December 31, 2017 $1,996,589  $133,414,188  $1,996,589  $133,414,188 
Originations      479,953,484       1,692,673,286 
Sales      (505,586,040)      (1,719,346,884)
Transfer to mortgage loans held for investment      (139,464)      (139,464)
Total gains (losses):                
Included in earnings (1)  440,958   17,224,145   537,696   58,906,268 
                
Balance - March 31, 2018 $2,437,547  $124,866,313 
Balance - September 30, 2018 $2,534,285  $165,507,394 
                
(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings (1) As a component of Mortgage fee income on the condensed consolidated statements of earnings 


34
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (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 nonrecurring basis by their classification in the condensed consolidated balance sheet at March 31,September 30, 2018.

    Quoted Prices       
    in Active  Significant  Significant 
    Markets for  Observable  Unobservable 
    Identical Assets  Inputs  Inputs     
Quoted Prices
in Active
Markets for
Identical
Assets
  
Significant
Observable
Inputs
  
Significant
Unobservable
Inputs
 
 Total  (Level 1)  (Level 2)  (Level 3)  Total  (Level 1)  (Level 2)  (Level 3) 
Assets accounted for at fair value on a nonrecurring basis                        
Impaired mortgage loans held for investment $1,417,617  $-  $-  $1,417,617  $1,421,028  $-  $-  $1,421,028 
Impaired real estate held for investment  1,005,866   -   -   1,005,866   7,079,822   -   -   7,079,822 
Mortgage servicing rights additions  997,497   -   -   997,497   1,922,230   -   -   1,922,230 
Total assets accounted for at fair value on a nonrecurring basis $3,420,980  $-  $-  $3,420,980  $10,423,080  $-  $-  $10,423,080 

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, 2017.

  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 $6,037,855  $6,037,855  $-  $- 
Total equity securities $6,037,855  $6,037,855  $-  $- 
                 
Loans held for sale $133,414,188  $-  $-  $133,414,188 
Restricted assets (1)  809,958   809,958   -   - 
Cemetery perpetual care trust investments (1)  682,315   682,315   -   - 
Derivatives - loan commitments (2)  2,032,782   -   -   2,032,782 
                 
Total assets accounted for at fair value on a recurring basis $9,562,910  $7,530,128  $-  $2,032,782 
Liabilities accounted for at fair value on a recurring basis                
Derivatives - call options (3)  (64,689)  (64,689)  -   - 
Derivatives - put options (3)  (20,568)  (20,568)  -   - 
Derivatives - loan commitments (3)  (36,193)  -   -   (36,193)
                 
Total liabilities accounted for at fair value on a recurring basis $(121,450) $(85,257) $-  $(36,193)
                 
(1) Mutual funds and equity securities                
(2) Included in other assets on the condensed consolidated balance sheets         
(3) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets     

3435
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

8)Fair Value of Financial Instruments (Continued)

  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 $6,037,855  $6,037,855  $-  $- 
Total equity securities $6,037,855  $6,037,855  $-  $- 
                 
Loans held for sale $133,414,188  $-  $-  $133,414,188 
Restricted assets (1)  809,958   809,958   -   - 
Cemetery perpetual care trust investments (1)  682,315   682,315   -   - 
Derivatives - loan commitments (2)  2,032,782   -   -   2,032,782 
                 
Total assets accounted for at fair value on a recurring basis $9,562,910  $7,530,128  $-  $2,032,782 
Liabilities accounted for at fair value on a recurring basis                
Derivatives - call options (3)  (64,689)  (64,689)  -   - 
Derivatives - put options (3)  (20,568)  (20,568)  -   - 
Derivatives - loan commitments (3)  (36,193)  -   -   (36,193)
                 
Total liabilities accounted for at fair value on a recurring basis $(121,450) $(85,257) $-  $(36,193)
                 
(1) Mutual funds and equity securities                
(2) Included in other assets on the condensed consolidated balance sheets         
(3) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets     


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
  
Loans
Held for Sale
  Net Loan Commitments  
Bank Loan
 Interest
 Rate Swaps
  
Loans Held
 for Sale
 
Balance - December 31, 2016 $6,809,332  $(3,308) $-  $6,809,332  $(3,308) $- 
Originations         $1,233,683,666           1,233,683,666 
Sales          (1,151,031,388)          (1,151,031,388)
Total gains (losses):                        
Included in earnings (1)  (4,812,743)  -   50,761,910   (4,812,743)  -   50,761,910 
Included in other comprehensive income (2)  -   3,308   -   -   3,308   - 
Balance - December 31, 2017 $1,996,589  $-  $133,414,188  $1,996,589  $-  $133,414,188 
                        
(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings     (1) As a component of Mortgage fee income on the condensed consolidated statements of earnings 
(2) As a component of Unrealized gains on derivative instruments on the condensed consolidated statements of comprehensive income(2) As a component of Unrealized gains on derivative instruments on the condensed consolidated statements of comprehensive income     (2) As a component of Unrealized gains on derivative instruments on the condensed consolidated statements of comprehensive income 

35
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (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 nonrecurring basis by their classification in the condensed consolidated balance sheet at December 31, 2017.

    Quoted Prices       
    in Active  Significant  Significant 
    Markets for  Observable  Unobservable     
Quoted Prices
in Active
Markets for
Identical
Assets
  
Significant
Observable
Inputs
  
Significant
Unobservable
Inputs
 
    Identical Assets  Inputs  Inputs  Total  (Level 1)  (Level 2)  (Level 3) 
 Total  (Level 1)  (Level 2)  (Level 3)             
Assets accounted for at fair value on a nonrecurring basis                        
Impaired mortgage loans held for investment $1,363,440  $-  $-  $1,363,440  $1,363,440  $-  $-  $1,363,440 
Mortgage servicing rights additions  6,085,352   -   -   6,085,352   6,085,352   -   -   6,085,352 
Impaired real estate held for investment  8,500,000   -   -   8,500,000   8,500,000   -   -   8,500,000 
Impaired fixed maturity securities, held to maturity  426,984   -   426,984   -   426,984   -   426,984   - 
                                
Total assets accounted for at fair value on a nonrecurring basis $16,375,776  $-  $426,984  $15,948,792  $16,375,776  $-  $426,984  $15,948,792 

36
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

8)Fair Value of Financial Instruments (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'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 March 31,September 30, 2018 and December 31, 2017.

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 March 31,September 30, 2018:

 Carrying Value  Level 1  Level 2  Level 3  
Total
Estimated
 Fair Value
  Carrying Value  Level 1  Level 2  Level 3  
Total
 Estimated
Fair Value
 
Assets
                              
Fixed maturity securities held to maturity $231,474,083  $-  $232,634,878  $7,224,064  $239,858,942  $230,386,875  $-  $201,221,369  $33,002,784  $234,224,153 
Mortgage loans held for investment:                                        
Residential  99,065,368   -   -   104,999,136   104,999,136   78,004,013   -   -   82,516,040   82,516,040 
Residential construction  53,795,008   -   -   53,795,008   53,795,008   70,716,110   -   -   70,716,110   70,716,110 
Commercial  52,129,530   -   -   53,487,729   53,487,729   32,661,399   -   -   33,475,276   33,475,276 
Mortgage loans held for investment, net $204,989,906  $-  $-  $212,281,873  $212,281,873  $181,381,522  $-  $-  $186,707,426  $186,707,426 
Policy loans  6,403,888   -   -   6,403,888   6,403,888   6,389,122   -   -   6,389,122   6,389,122 
Insurance assignments, net (1)  34,157,556   -   -   34,157,556   34,157,556   31,119,910   -   -   31,119,910   31,119,910 
Restricted assets (2)  1,142,355   -   1,146,584   -   1,146,584   1,199,301   -   1,201,983   -   1,201,983 
Restricted assets (3)  1,735,066   -   -   1,819,012   1,819,012   1,500,000   -   -   1,500,000   1,500,000 
Cemetery perpetual care trust investments (2)  948,735   -   941,823   -   941,823   973,821   -   963,621   -   963,621 
Cemetery perpetual care trust investments (3)  4,209   -   -   4,475   4,475 
Mortgage servicing rights, net  21,554,050   -   -   30,086,162   30,086,162   20,875,905   -   -   32,327,266   32,327,266 
                                        
Liabilities
                                        
Bank and other loans payable $(151,451,152) $-  $-  $(151,451,152) $(151,451,152) $(196,422,645) $-  $-  $(196,422,645) $(196,422,645)
Policyholder account balances (4)  (47,448,620)  -   -   (33,948,014)  (33,948,014)  (46,706,179)  -   -   (34,223,082)  (34,223,082)
Future policy benefits - annuities (4)  (98,569,032)  -   -   (97,549,438)  (97,549,438)  (98,558,234)  -   -   (96,511,305)  (96,511,305)
                                        
(1) Included in other investments and policy loans on the condensed consolidated balance sheet.(1) Included in other investments and policy loans on the condensed consolidated balance sheet.         (1) Included in other investments and policy loans on the condensed consolidated balance sheet.         
(2) Fixed maturity securities held to maturity                                        
(3) Participation in mortgage loans held for investment (commercial)             
(3) Participation in mortgage loans held for investment (residential construction)(3) Participation in mortgage loans held for investment (residential construction)             
(4) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.(4) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.     (4) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.     

3637
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

8)Fair Value of Financial Instruments (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, 2017:

  Carrying Value  Level 1  Level 2  Level 3  
Total
 Estimated
 Fair Value
 
Assets
               
Fixed maturity securities held to maturity $228,397,623  $-  $233,806,219  $7,692,190  $241,498,409 
Mortgage loans held for investment:                    
Residential  99,816,535   -   -   106,050,169   106,050,169 
Residential construction  49,694,025   -   -   49,694,025   49,694,025 
Commercial  54,700,325   -   -   56,473,156   56,473,156 
Mortgage loans held for investment, net $204,210,885  $-  $-  $212,217,350  $212,217,350 
Policy loans  6,531,352   -   -   6,531,352   6,531,352 
Insurance assignments, net (1)  35,455,098   -   -   35,455,098   35,455,098 
Restricted assets (2)  1,130,088   -   1,152,324   -   1,152,324 
Restricted assets (3)  1,701,811   -   -   1,796,910   1,796,910 
Cemetery perpetual care trust investments (2)  943,211   -   953,404   -   953,404 
Cemetery perpetual care trust investments (3)  4,128   -   -   4,411   4,411 
Mortgage servicing rights, net  21,376,937   -   -   27,427,174   27,427,174 
                     
Liabilities
                    
Bank and other loans payable $(157,450,925) $-  $-  $(157,450,925) $(157,450,925)
Policyholder account balances (4)  (47,867,037)  -   -   (34,557,111)  (34,557,111)
Future policy benefits - annuities (4)  (99,474,392)  -   -   (98,827,107)  (98,827,107)
                     
(1) Included in other investments and policy loans on the condensed consolidated balance sheet.         
(2) Fixed maturity securities held to maturity                    
(3) Participation in mortgage loans held for investment (commercial)             
(4) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.         


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's mortgage loans held for investment is determined using various methods. The Company'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 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.

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.

3738
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

8)Fair Value of Financial Instruments (Continued)

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.

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'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's overall management of interest rate risk, such that the Company'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'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.
3839
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (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'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.

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-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 loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee 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 of the money" call options on its 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 of the equity security enhanced by the value of the option that was sold. If the option expires unexercised, the Company realizes a gain from the sale of the 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 traded as a normal equity security in the Company's portfolio. The net changes in the fair value of call and put options are shown in current earnings as a component of 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.
3940
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

10)          Derivative Instruments (Continued)

The following table shows the notional amount and fair value of derivatives as of March 31,September 30, 2018 and December 31, 2017.

Fair Values and Notional Values of Derivative Instruments Fair Values and Notional Values of Derivative Instruments 
   March 31, 2018  December 31, 2017    September 30, 2018  December 31, 2017 
Balance Sheet Location Notional Amount  Asset Fair Value  Liability Fair Value  Notional Amount  Asset Fair Value  Liability Fair Value 
 
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: Derivatives not designated as hedging instruments:                                   
Loan commitmentsOther assets and Other liabilities $170,365,863  $2,786,371  $348,824  $105,679,107  $2,032,782  $36,193 Other assets and Other liabilities $150,947,240  $2,595,146  $60,861  $105,679,107  $2,032,782  $36,193 
Call optionsOther liabilities  1,266,050   --   13,277   1,488,550   --   64,689 Other liabilities  1,758,900   --   38,020   1,488,550   --   64,689 
Put optionsOther liabilities  5,128,950   --   128,598   2,265,900   --   20,568 Other liabilities  2,888,400   --   23,393   2,265,900   --   20,568 
Total  $176,760,863  $2,786,371  $490,699  $109,433,557  $2,032,782  $121,450   $155,594,540  $2,595,146  $122,274  $109,433,557  $2,032,782  $121,450 


The following table shows the gains and losses on derivatives for the periods presented.

    
Three Months Ended
 March 31
 
DerivativeClassification 2018  2017 
Loan commitmentsMortgage fee income $440,958  $2,167,593 
          
Call and put optionsGains on investments and other assets $79,171  $134,563 

    Net Amount Gain (Loss)  Net Amount Gain (Loss) 
    
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
DerivativeClassification 2018  2017  2018  2017 
Loan commitmentsMortgage fee income $94,569  $(4,833,268) $537,696  $(3,677,554)
                  
Call and put optionsGains on investments and other assets $83,612  $27,734  $313,913  $216,561 

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'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 March 31,September 30, 2018 and December 31, 2017, the balances were $2,912,000$3,508,000 and $2,572,000, respectively.

Mortgage Loan Loss Litigation

Lehman Brothers Holdings Litigation – Delaware and New York

In January 2014, Lehman Brothers Holdings, Inc. ("Lehman 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. A settlement based on similar circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.

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.
4041
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 2018 (Unaudited)

11)Reinsurance, Commitments and Contingencies (Continued)

On January 26, 2016, SecurityNational Mortgage filed a declaratory judgment action against Lehman Holdings in the Superior Court for the State of Delaware.  In the Delaware action, SecurityNational Mortgage asserted its right to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 mortgage loans.  SecurityNational Mortgage sought a declaratory judgment as to its rights as it contends that it has no liability to Lehman Holdings as a result of Lehman Holdings' settlements with Fannie Mae and Freddie Mac.  Lehman Holdings filed a motion in the Delaware court seeking to stay or dismiss the declaratory judgment action.  On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings' motion to dismiss.

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 judgment 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' 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' 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 date foron the motion is set forwas held on June 12, 2018. No Answer

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 are permitted to file a joint reply to Lehman Holdings' response no later than November 26, 2018. The motions to file appeals were consolidated before Valerie Caproni, U.S. District Court Judge, Case No. 18-cv-8986. Case No. 18-mc-00392 is also before Judge Caproni.

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/supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization ("RMBS loans"). The RMBS loans had allegedly been sold 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 alternate 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/supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants, including SecurityNational Mortgage.

No answer to Lehman Holdings' Second Amended Complaint ishas been required, and no date has been established for response to the proposed Third Amended Complaints, which have yet to be filed by SecurityNational Mortgage pending further order of the Court.served. SecurityNational Mortgage denies that it has any liability to Lehman Holdings and intends to vigorously protect and defend its position.
42
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

11)Reinsurance, Commitments and Contingencies (Continued)

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 March 31,September 30, 2018, the Company's commitments were approximately $82,523,000$100,981,000 for these loans, of which $54,254,000$72,831,000 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 sixnine 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.

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's financial position or results of operations. Based on management's assessment and legal counsel'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.
41
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)

12)Mortgage Servicing Rights

The Company initially records these 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 in 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'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.
43
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

12)Mortgage Servicing Rights (Continued)

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

 
As of
March 31
2018
  
As of
 December 31
2017
  
As of
 September 30
2018
  
As of
 December 31
2017
 
Amortized cost:            
Balance before valuation allowance at beginning of year $21,376,937  $18,872,362  $21,376,937  $18,872,362 
MSR additions resulting from loan sales  997,497   6,085,352   1,922,230   6,085,352 
Amortization (1)  (820,384)  (3,580,777)  (2,423,262)  (3,580,777)
Application of valuation allowance to write down MSRs with other than temporary impairment  -   -   -   - 
Balance before valuation allowance at end of period $21,554,050  $21,376,937  $20,875,905  $21,376,937 
                
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 $21,554,050  $21,376,937  $20,875,905  $21,376,937 
                
Estimated fair value of MSRs at end of period $30,086,162  $27,427,174  $32,327,266  $27,427,174 
                
(1) Included in other expenses on the condensed consolidated statements of earnings(1) Included in other expenses on the condensed consolidated statements of earnings (1) Included in other expenses on the condensed consolidated statements of earnings 


42
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)

12)  Mortgage Servicing Rights (Continued)

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

  Estimated MSR Amortization 
2018  4,091,450 
2019  4,091,450 
2020  4,091,450 
2021  4,091,303 
2022  3,269,025 
Thereafter  1,919,372 
Total $21,554,050 

  Estimated MSR Amortization 
2018  1,634,568 
2019  4,469,364 
2020  4,469,364 
2021  4,469,203 
2022  3,570,974 
Thereafter  2,262,432 
Total $20,875,905 

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
March 31
  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
 2018  2017  2018  2017  2018  2017 
Contractual servicing fees $1,876,883  $1,835,873  $1,905,887  $1,848,831  $5,670,346  $5,359,425 
Late fees  111,748   86,338   106,354   99,281   334,452   266,218 
Total $1,988,631  $1,922,211  $2,012,241  $1,948,112  $6,004,798  $5,625,643 


44
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

12)Mortgage Servicing Rights (Continued)

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

  
As of
March 31,
2018
  
As of
December 31
 2017
 
Servicing UPB $2,941,337,111  $2,924,868,843 

  
As of
September 30
2018
  
As of
December 31
 2017
 
Servicing UPB $2,990,572,817  $2,924,868,843 

The following key assumptions were used in determining MSR value:

 
Prepayment
Speeds
  
Average
Life (Years)
  
Discount
Rate
  
Prepayment
Speeds
  
Average
Life (Years)
  
Discount
Rate
 
March 31, 2017  4.01%  6.92   10.01 
September 30, 2018  4.24%  7.02   9.51 
December 31, 2017  3.67%  6.34   10.01   3.67%  6.34   10.01 

13)          Income Taxes

The Company's overall effective tax rate for the three months ended March 31,September 30, 2018 and 2017 was 20.1%9.0% and 35.8%3.6%, respectively, which resulted in a provision for income taxes of $4,261,000$198,000 and $1,038,000,$41,000, respectively. The Company's overall effective tax rate for the nine months ended September 30, 2018 and 2017 was 19.5% and 32.2%, respectively, which resulted in a provision for income taxes of $5,383,000 and $2,587,000, respectively.  The Company's effective tax rates differ from the U.S. federal statutory rate of 21% largelypartly due to its provision for state income taxes.  The effective tax rate in the current period decreased when compared to the prior year period largely due to the Tax Cuts and Jobs Act reduction of the federal statutory rate from 35% to 21%.
43
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,  The decrease also includes discrete provision-to-return adjustments.  Further, the effective tax rate for the three months ended September 30, 2018 (Unaudited)increased over the three months ended September 30, 2017 as the three months ended September 30, 2017 reflected a benefit from reducing a valuation allowance.

14)          Revenues from Contracts with Customers

See Note 2 regarding the adoption of ASU No. 2014-09. The Company's cemetery and mortuary revenues are the only revenues recognized from contracts with customers, thus they are the only revenues subject to ASU No. 2014-09.

Pre-need contract sales of funeral services and caskets - revenue and costs associated with the sales of pre-need funeral services and caskets are deferred until the services are performed or the caskets are delivered.

Sales of cemetery interment rights (cemetery burial property) - revenue and costs associated with the sale of cemetery interment rights are recognized in accordance with the retail land sales provisions based on GAAP. Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be deferred until 10% of the sales price has been collected.

Pre-need contract sales of cemetery merchandise (primarily markers and vaults) - revenue and costs associated with the sale of pre-need cemetery merchandise is deferred until the merchandise is delivered.

Pre-need contract sales of cemetery services (primarily merchandise delivery and installation fees) - revenue and costs associated with the sales of pre-need cemetery services are deferred until the services are performed.

Prearranged funeral and pre-need cemetery customer acquisition costs - costs incurred related to obtaining new pre-need contract cemetery and prearranged funeral services are accounted for under the guidance of the provisions based on GAAP. Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral services, are deferred until the merchandise is delivered or services are performed.

Revenues and costs for at‑need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured and there are no significant obligations remaining.
45
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

14)          Revenues from Contracts with Customers (Continued)

The following table disaggregates revenue for the Company's cemetery and mortuary contracts.

 
Three Months
 Ended March 31
  
Three Months
Ended
September 30
  
Nine Months
Ended
September 30
 
 2018  2018  2018 
Major goods/service lines         
At-need $2,737,625  $2,772,859  $7,973,554 
Pre-need  495,104   873,431   2,456,574 
 $3,232,729  $3,646,290  $10,430,128 
            
Timing of Revenue Recognition            
Goods transferred at a point in time $2,072,481  $2,448,836  $6,934,973 
Services transferred at a point in time  1,160,248   1,197,454   3,495,155 
 $3,232,729  $3,646,290  $10,430,128 

44
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)

14) Revenues from Contracts with Customers (Continued)

The following table reconciles revenues from cemetery and mortuary contracts to Note 7 – Business Segment Information for the Cemetery/Mortuary Segment for the three and nine months ended March 31,September 30, 2018:

 
Three Months
Ended
September 30
  
Nine Months
Ended
September 30
 
 Cemetery/Mortuary Segment  2018  2018 
Net mortuary and cemetery sales $3,232,729  $3,646,290  $10,430,128 
Gains on investments and other assets  409,088   245,448   2,330,701 
Net investment income  88,078   56,284   194,425 
Other revenues  45,850   60,921   105,103 
Revenues from external customers  3,775,745   4,008,943   13,060,357 

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

  Contract Balances 
  Receivables (1)  Contract Asset (2)  Contract Liability (2) 
Opening (1/1/2018) $2,742,765  $856,479  $13,729,547 
Closing (3/31/2018)  2,595,611   731,626   12,882,550 
Increase/(decrease)  (147,154)  (124,853)  (846,997)
             
(1) Included in Receivables, net on the condensed consolidated balance sheets 
(2) The contract asset and liability are netted together in Deferred pre-need cemetery and mortuary contract revenues on the condensed consolidated balance sheets. 

  Contract Balances 
  Receivables (1)  
Contract
Asset (2)
  
Contract
 Liability (2)
 
Opening (1/1/2018) $2,742,765  $856,479  $13,729,547 
Closing (9/30/2018)  3,010,663   697,832   13,140,329 
Increase/(decrease)  267,898   (158,647)  (589,218)
             
(1) Included in Receivables, net on the condensed consolidated balance sheets 
(2) The contract asset and liability are netted together in Deferred pre-need cemetery and mortuary contract revenues on the condensed consolidated balance sheets. 

The amount of revenue recognized for the three and nine months ended March 31,September 30, 2018 that was included in the opening contract liability balance was $724,771.$724,097 and $2,079,157.

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.
4546
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018 (Unaudited)

15)          Acquisitions

On June 1, 2018, the Company completed a stock purchase transaction with Beta Capital Corp. ("Beta Capital") and Ronald D. Maxson ("Maxson"), the sole owner of all the outstanding shares of common stock of Beta Capital, to purchase all of the outstanding shares of common stock of Beta Capital.  Beta Capital is engaged in the operation of a factoring business with the principal purpose of providing funding for funeral homes and mortuaries. 

Under the terms of the transaction, as set forth in the Stock Purchase Agreement dated June 1, 2018, by and among the Company, Beta Capital and Maxson, the Company paid Maxson the purchase consideration at the closing of the transaction equal to the sum of (i) $890,000 in cash plus (ii) the accounts receivable value of $2,515,783, representing the total amount of the Company's outstanding receivables as of the closing date of June 1, 2018, for a total closing payment of $3,405,783. From the $3,405,783 closing payment, a holdback amount equal to $175,000 was deposited into an interest bearing escrow account to be held for a period of eighteen months from the closing date to pay off any uncollected accounts receivable and other liabilities of Beta Capital as of the closing date.

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

Other investments - insurance assignments $2,515,783 
Other - intangible asset  890,000 
Total assets acquired  3,405,783 
Fair value of net assets acquired/consideration paid $3,405,783 

The Company determined that the estimated fair value of the customer list intangible asset acquired was equal to the consideration paid less the insurance assignments value.
47
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company's operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company'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.

Insurance Operations

The Company'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 is 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'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.

The following table shows the condensed financial results of the insurance operations for three and nine months ended March 31,September 30, 2018 and 2017.  See Note 7 to the condensed consolidated financial statements.

  
Three months ended March 31
(in thousands of dollars)
 
  2018  2017  
% Increase
 (Decrease)
 
Revenues from external customers         
Insurance premiums $18,810  $17,357   8%
Net investment income  9,778   8,774   11%
Gains on investments and other assets  21,860   (59)  37151%
Other  412   87   374%
Total $50,860  $26,159   94%
Intersegment revenue $2,408  $2,989   (19%)
Earnings before income taxes $23,712  $1,483   1499%

  
Three months ended September 30
(in thousands of dollars)
  
Nine months ended September 30
(in thousands of dollars)
 
  2018  2017  
% Increase
(Decrease)
  2018  2017  
% Increase
(Decrease)
 
Revenues from external customers                  
Insurance premiums $18,639  $17,490   7% $56,641  $52,345   8%
Net investment income  9,376   7,974   18%  28,574   24,847   15%
Gains on investments and other assets  466   (645)  172%  22,786   (623)  3757%
Other  482   259   86%  1,198   543   121%
Total $28,963  $25,078   15% $109,199  $77,112   42%
Intersegment revenue $1,108  $1,880   (41%) $2,915  $4,930   (41%)
Earnings before income taxes $2,192  $497   341% $28,841  $4,780   503%

Intersegment revenues are primarily interest income from the warehouse line provided to SecurityNational Mortgage Company ("SecurityNational Mortgage"). Profitability in the three and nine months ended March 31,September 30, 2018 has increased due to the realized of $22,252,000 gain on the sale of Dry Creek at East Village Apartments, increases in investment income and increases in insurance premiums. These increases were partially offset by increases in benefits and expenses.

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.

48
The following table shows the condensed financial results of the cemetery and mortuary operations for the three and nine months ended March 31,September 30, 2018 and 2017. See Note 7 to the condensed consolidated financial statements.
46
  
Three months ended March 31
(in thousands of dollars)
 
  2018  2017  
% Increase
(Decrease)
 
Revenues from external customers         
Mortuary revenues $1,391  $1,406   (1%)
Cemetery revenues  1,951   2,131   (8%)
Other  434   68   538%
Total $3,776  $3,605   5%
Earnings before income taxes $861  $759   13%

  
Three months ended September 30
(in thousands of dollars)
  
Nine months ended September 30
(in thousands of dollars)
 
  2018  2017  
% Increase
 (Decrease)
  2018  2017  
% Increase
(Decrease)
 
Revenues from external customers                  
Mortuary revenues $1,422  $1,168   22% $4,071  $3,735   9%
Cemetery revenues  2,225   1,551   43%  6,359   5,622   13%
Net investment income  56   107   (48%)  194   310   (37%)
Gains on investments and other assets  245   151   62%  2,331   166   1304%
Other  61   23   165%  105   74   42%
Total $4,009  $3,000   34% $13,060  $9,907   32%
Earnings before income taxes $782  $248   215% $3,714  $1,332   179%

Included in other revenueNet investment income 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 $154,000$104,000 and $170,000$157,000 for the three months ended March 31,September 30, 2018 and 2017, respectively, and $413,000 and $490,000 for the nine months ended September 30, 2018 and 2017, respectively. Profitability in the three and nine months ended March 31,September 30, 2018 has increased due to thea realized gain on the sale of real estate.assets of Deseret Mortuary and an increase in cemetery and mortuary revenues.

Mortgage Operations

The Company'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's mortgage subsidiaries are funded through loan purchase agreements with Security National Life and unaffiliated financial institutions.

The Company'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% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

For the threenine months March 31,ended September 30, 2018 and 2017, SecurityNational Mortgage originated 2,3687,953 loans ($471,508,0001,169,071,000 total volume) and 2,9859,773 loans ($568,846,0001,913,207,000 total volume), respectively. For the threenine months March 31,ended September 30, 2018 and 2017, EverLEND Mortgage originated 31130 loans ($8,446,00033,603,000 total volume) and one loan29 loans ($310,0006,715,000 total volume), respectively.

49
The following table shows the condensed financial results of the mortgage operations for the three and nine months ended March 31,September 30, 2018 and 2017.  See Note 7 to the condensed consolidated financial statements.

 
Three months ended March 31
(in thousands of dollars)
  
Three months ended September 30
(in thousands of dollars)
  
Nine months ended September 30
(in thousands of dollars)
 
 2018  2017  
% Increase
(Decrease)
  2018  2017  
% Increase
 (Decrease)
  2018  2017  
% Increase
(Decrease)
 
Revenues from external customers                           
Income from loan originations $11,862  $14,872   (20%) $9,350  $12,931   (28%) $30,201  $34,778   (13%)
Secondary gains from investors  15,578   26,194   (41%)  22,315   28,667   (22%)  58,633   87,308   (33%)
Other  2,587   2,156   20%  7,071   6,867   3%
Total $27,440  $41,066   (33%) $34,252  $43,754   (22%) $95,905  $128,953   (26%)
Earnings before income taxes $(3,385) $655   (617%) $(762) $393   (294%) $(4,994) $1,919   (360%)


Included in other revenues is net investment income, gains on investments and other assets and service fee income. The decrease in earnings for the three and nine months ended March 31,September 30, 2018 was due to a reduction in mortgage loan originations and refinancings, and subsequent sales into the secondary market.
47

Mortgage Loan Loss Settlements
Future mortgage loan losses can be extremely difficult to estimate. However, management believes that the Company'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 March 31,September 30, 2018 and December 31, 2017, the balances were $2,912,000$3,508,000 and $2,572,000, 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 March 31,Months Ended September 30, 2018 Compared to Three Months Ended March 31,September 30, 2017

Total revenues increaseddecreased by $11,247,000,$4,608,000, or 15.9%6.4%, to $82,076,000$67,223,000 for the three months ended March 31,September 30, 2018, from $70,829,000$71,831,000 for the comparable period in 2017. Contributing to this increasedecrease in total revenues was a $21,876,000$9,933,000 decrease in mortgage fee income. This decrease in total revenues was partially offset by a $1,421,000 increase in net investment income, a $1,342,000 increase in gains on investments and other assets, a $1,453,000$1,150,000 increase in insurance premiums and other considerations, a $1,058,000$929,000 increase in net investment income,mortuary and cemetery sales, a $449,000$320,000 increase in other revenues, and a $52,000$163,000 decrease in other than temporary impairments on investments. This increase in total revenues was partially offset by a $13,515,000 decrease in mortgage fee income, and a $126,000 decrease in net mortuary and cemetery sales.

Insurance premiums and other considerations increased by $1,453,000,$1,150,000, or 8.4%6.6%, to $18,810,000$18,639,000 for the three months ended March 31,September 30, 2018, from $17,357,000$17,489,000 for the comparable period in 2017. This increase was primarily 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 $1,058,000,$1,421,000, or 11.7%17.3%, to $10,074,000$9,641,000 for the three months ended March 31,September 30, 2018, from $9,016,000$8,220,000 for the comparable period in 2017. This increase was primarily attributable to a $1,121,000$1,267,000 increase in mortgage loan interest, a $496,000$516,000 decrease in investment expenses, a $349,000 increase in insurance assignment income, a $105,000 increase in fixed maturity securities income, an $46,000$265,000 increase interest on cash and cash equivalents, and a $46,000$40,000 increase in income from other investments, and a $4,000 increase in equity securities income.investments. This increase was partially offset by a $522,000 increase in investment expenses, a $224,000$695,000 decrease in rental income from real estate owned,held for investment, a $211,000 decrease in fixed maturity securities income, and a $14,000$110,000 decrease in policy loan income.

Net mortuary and cemetery sales decreasedincreased by $126,000,$929,000, or 3.8%34.2%, to $3,233,000$3,646,000 for the three months ended March 31,September 30, 2018, from $3,359,000$2,717,000 for the comparable period in 2017. This decreaseincrease was primarily due to a decrease$402,000 increase in cemetery at-need sales, a $273,000 increase in cemetery preneed sales, and $254,000 increase in mortuary at-need sales of the cemetery operations.sales.

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Gains on investments and other assets increased by $21,876,000,$1,342,000, or 15,052.4%419.8%, to $22,021,000$1,022,000 in gains for the three months ended March 31,September 30, 2018, from $145,000$320,000 in gainslosses for the comparable period in 2017. This increase in realized gains on investments and other assets was primarily attributable to a gain of $22,252,000 realized$619,000 increase in gains on the sale of Dry Creek at East Village Apartments, andfixed maturity securities, a $274,000$453,000 increase in gains on other assets, due to the sale of various other residential real estate properties. This increase was partially offset byand a $283,000$270,000 increase in realized losses on fixed maturity securities, and a $367,000 increase in lossesgains on equity securities mostly attributable to decreasesincreases in the fair value of these securities. Due to the adoption of Accounting Standards Update ("ASU") 2016-01, these changes in fair value are now recognized in earnings instead of other comprehensive income. See the discussion of the adoption of this ASU in Note 2 of the notes to condensed consolidated financial statements.

Mortgage fee income decreased by $13,515,000,$9,933,000, or 34.7%23.9%, to $25,460,000,$31,665,000, for the three months ended March 31,September 30, 2018, from $38,975,000$41,598,000 for the comparable period in 2017.  This decrease was primarily due to a decline in mortgage loan originations that was indicative of the mortgage loan industry as a whole. The decline in mortgage loan originations was primarily caused by a national shortage of available new housing for mortgage loan origination transactions, and the decline in mortgage loan refinancings, waswhich were 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.
48

Other revenues increased by $449,000,$320,000, or 22.1%14.0%, to $2,477,000$2,609,000 for the three months ended March 31,September 30, 2018, from $2,028,000$2,289,000 for the comparable period in 2017. This increase was due to an increase in mortgage servicing fees.

Total benefits and expenses were $60,889,000,$65,011,000, or 74.2%96.7% of total revenues, for the three months ended March 31,September 30, 2018, as compared to $67,932,000,$70,693,000, or 95.9%98.4% of total revenues, for the comparable period in 2017.

Death benefits, surrenders and other policy benefits, and future policy benefits increaseddecreased by an aggregate of $783,000$60,000 or 5.1%0.4%, to $16,003,000$15,995,000 for the three months ended March 31,September 30, 2018, from $15,220,000$16,055,000 for the comparable period in 2017. This increasedecrease was primarily the result of a $813,000 increase$156,000 decrease in death benefits and a $17,000 increase in future policy benefits. This increase was partially offset by a $47,000$49,000 decrease in surrender and other policy benefits. The decrease was partially offset by a $145,000 increase in future policy benefits.

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $846,000,$507,000, or 37.4%22.7%, to $3,110,000$2,746,000 for the three months ended March 31,September 30, 2018, from $2,264,000$2,239,000 for the comparable period in 2017. This increase was primarily due to an increase in insurance sales expenses.the average outstanding balance of deferred policy and pre-need acquisition costs.

Selling, general and administrative expenses decreased by $9,172,000,$6,451,000, or 18.8%12.8%, to $39,499,000$43,839,000 for the three months ended March 31,September 30, 2018, from $48,671,000$50,290,000 for the comparable period in 2017. This decrease was primarily the result of a $5,072,000$5,380,000 decrease in commissions due to the decline in mortgage loan originations, a $2,023,000 decrease in personnel expenses, a $850,000$1,077,000 decrease in costs related to funding mortgage loans, a $536,000 decrease in other expenses, a $281,000 decrease in advertising, a $261,000$343,000 decrease in rent and rent related expenses, a $188,000 decrease in advertising, and a $149,000$60,000 decrease in depreciation on property and equipment. This decrease was partially offset by a $581,000 increase in other expenses and a $16,000 increase in personnel expenses.

Interest expense increased by $508,000,$200,000, or 40.5%12.1%, to $1,762,000$1,856,000 for the three months ended March 31,September 30, 2018, from $1,254,000$1,656,000 for the comparable period in 2017. This increase was primarily due to an increase in interest expense on mortgage warehouse lines and interest expense on bank loans for real estate held for investment.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Total revenues increased by $2,191,000, or 1.0%, to $218,164,000 for the nine months ended September 30, 2018, from $215,973,000 for the comparable period in 2017. Contributing to this increase in total revenues was a $24,659,000 increase in gains on investments and other assets, a $4,295,000 increase in insurance premiums and other considerations, a $3,899,000 increase in net investment income, a $1,073,000 increase in net mortuary and cemetery sales, a $1,036,000 increase in other revenues, and a $482,000 decrease in other than temporary impairments on investments. This increase in total revenues was mostly offset by a $33,253,000 decrease in mortgage fee income.

Insurance premiums and other considerations increased by $4,295,000, or 8.2%, to $56,640,000 for the nine months ended September 30, 2018, from $52,345,000 for the comparable period in 2017. This increase was primarily due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.
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Net investment income increased by $3,899,000, or 15.3%, to $29,458,000 for the nine months ended September 30, 2018, from $25,559,000 for the comparable period in 2017. This increase was primarily attributable to a $5,214,000 increase in mortgage loan interest, a $1,013,000 increase in insurance assignment income, a $440,000 increase in interest on cash and cash equivalents, a $151,000 increase in income from other investments, and a $17,000 increase in fixed maturity securities income. This increase was partially offset by a $2,117,000 decrease in rental income from real estate held for investment, a $490,000 increase in investment expenses, a $325,000 decrease in policy loan income and a $4,000 decrease in equity securities income.

Net mortuary and cemetery sales increased by $1,073,000, or 11.5%, to $10,430,000 for the nine months ended September 30, 2018, from $9,357,000 for the comparable period in 2017. This increase was primarily due to a $371,000 increase in cemetery at-need sales, a $360,000 increase in cemetery preneed sales, and a $342,000 increase in mortuary at-need sales.

Gains on investments and other assets increased by $24,658,000, or 3,458.1%, to $25,372,000 in gains for the nine months ended September 30, 2018, from $713,000 in gains for the comparable period in 2017. This increase in gains on investments and other assets was primarily attributable to a gain of $22,252,000 realized from the sale of Dry Creek at East Village Apartments, a gain of $1,603,000 realized on the sale of assets of Deseret Mortuary, and a $501,000 increase in gains on other assets due to the sale of various other residential real estate properties, a $319,000 increase in gains on fixed maturity securities. This increase was partially offset by a $17,000 increase in net losses on equity securities partially attributable to increases in the fair value of these securities. Due to the adoption of Accounting Standards Update ("ASU") 2016-01, these changes in fair value are now recognized in earnings instead of other comprehensive income. See the discussion of the adoption of this ASU in Note 2 of the notes to condensed consolidated financial statements.

Mortgage fee income decreased by $33,253,000, or 27.2%, to $88,834,000, for the nine months ended September 30, 2018, from $122,087,000 for the comparable period in 2017.  This decrease was primarily due to a decline in mortgage loan originations that was indicative of the mortgage loan industry as a whole. The decline in mortgage loan originations was primarily caused by a national shortage of available new housing for mortgage loan origination transactions, and the decline in mortgage loan refinancings, which were primarily caused by recent increases in interest rates on mortgage loans. Additionally, the decline in mortgage originations by SecurityNational Mortgage has resulted in a decline in fees earned from third-party investors that purchase mortgage loans from SecurityNational Mortgage.

Other revenues increased by $1,036,000, or 16.2%, to $7,430,000 for the nine months ended September 30, 2018, from $6,394,000 for the comparable period in 2017. This increase was due to an increase in mortgage servicing fees.

Total benefits and expenses were $190,603,000, or 87.4% of total revenues, for the nine months ended September 30, 2018, as compared to $207,943,000, or 96.3% of total revenues, for the comparable period in 2017.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $2,330,000 or 5.1%, to $48,198,000 for the nine months ended September 30, 2018, from $45,868,000 for the comparable period in 2017. This increase was primarily the result of a $1,466,000 increase in death benefits, a $751,000 increase in future policy benefits, and a $113,000 increase in surrender and other policy benefits.

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,695,000, or 27.0%, to $7,967,000 for the nine months ended September 30, 2018, from $6,272,000 for the comparable period in 2017. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.

Selling, general and administrative expenses decreased by $22,501,000, or 15.0%, to $127,499,000 for the nine months ended September 30, 2018, from $150,000,000 for the comparable period in 2017. This decrease was primarily the result of a $14,516,000 decrease in commissions due to the decline in mortgage loan originations, a $3,207,000 decrease in personnel expenses due to a reduction in mortgage loan originators, a $2,168,000 decrease in costs related to funding mortgage loans, a $887,000 decrease in rent and rent related expenses, a $760,000 decrease in advertising, a $665,000 decrease in other expenses, and a $298,000 decrease in depreciation on property and equipment.
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Interest expense increased by $1,002,000, or 23.3%, to $5,297,000 for the nine months ended September 30, 2018, from $4,295,000 for the comparable period in 2017. This increase was primarily due to an increase in interest expense on mortgage warehouse lines and interest expense on bank loans for real estate held for investment.

Liquidity and Capital Resources

The Company'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. 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.

During the threenine months March 31,ended September 30, 2018 and 2017, the Company's operations used cash of $10,251,000 and provided cash of $8,713,000 and $30,431,000,$6,030,000, respectively. This decrease was due primarily to a declinean increase in cash collected onused to fund mortgage loans held for sale.

The Company's liability for future policy benefits is expected to be paid out over the long-term due to the Company'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's death. A person generally will keep these policies in force and will not surrender them prior to a person'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 having to liquidate these long-term investments as a result of any sudden changes in 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's products. The Company'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'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 amounted to $230,850,000$229,775,000 and $227,774,000 as of March 31,September 30, 2018 and December 31, 2017, respectively. This represents 38.7%39.3% and 35.1% of the total investments as of March 31,September 30, 2018 and December 31, 2017, 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 sixnine categories used for rating bonds. At March 31,September 30, 2018, 5.2%3.4% (or $12,031,000)$7,782,000) and at December 31, 2017, 5.4% (or $12,293,000) of the Company's total bond investments were invested in bonds in rating categories three through six,nine, which were considered non‑investment grade.
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The Company has classified its fixed income securities 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-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At March 31,September 30, 2018 and December 31, 2017, the life insurance subsidiaries were in compliance with the regulatory criteria.

The Company's total capitalization of stockholders' equity, bank and other loans payable was $317,356,000$368,454,000 as of March 31,September 30, 2018, as compared to $306,019,000 as of December 31, 2017. Stockholders' equity as a percent of total capitalization was 52.3%46.7% and 48.5% as of March 31,September 30, 2018 and December 31, 2017, respectively.

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Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2017 was 10.6% as compared to a rate of 9.6% for 2016. The 2018 lapse rate to date has been approximately the same as 2017.

At March 31,September 30, 2018, the statutory capital and surplus of the Company's life insurance subsidiaries was $56,375,000.$56,688,000. The life insurance subsidiaries cannot pay a dividend to its parent company without approval of state insurance regulatory authorities.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4.    Controls and Procedures.

Disclosure Controls and Procedures

As of March 31,September 30, 2018, 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'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"). The Company'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's rules and forms and that such information is accumulated and communicated to management, including the Company's CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The executive officers have concluded that the Company's disclosure controls and procedures were effective as of March 31,September 30, 2018, 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'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

There have been no changes in the Company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II - Other Information

Item 1.    Legal Proceedings.

For a description of the litigation involving SecurityNational Mortgage Company ("Security National 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.
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Item 1A.    Risk Factors.

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

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

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

None.

Issuer Purchases of Equity Securities

None.On September 7, 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company's Class A Common Stock in the open market. The repurchased shares of Class A common stock will be held as treasury shares to be used as the Company's employer matching contribution to the Employee 401(k) Retirement Savings Plan.
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The following table shows the Company's repurchase activity during the three months ended September 30, 2018 under the Stock Repurchase 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 
7/1/2018-7/31/2018  -   -   -   - 
8/1/2018-8/31/2018  -   -   -   - 
9/1/2018-9/30/2018  10,000  $5.45   -   290,000 
                 
Total  10,000  $5.45   -   290,000 


Item 3.    Defaults Upon Senior Securities.

None.

Item 4.    Mine Safety Disclosures.

None.

Item 5.    Other Information.

Sale of Dry Creek at East Village Apartments

On March 29, 2018, the Company through its wholly owned subsidiary, Security National Life Insurance Company ("Security National Life"), completed the sale of the Dry Creek at East Village ("Dry Creek") apartments to a subsidiary of Dinapoli Capital Partners, LLC ("Dinapoli Capital") pursuant to the terms of the Purchase and Sale Agreement, dated February 14, 2018, between Security National Life and Dinapoli Capital. The purchase price paid for the Dry Creek apartments was $57,000,000. From the proceeds that Security National Life received from the sale of the apartment complex, $26,802,904 was used to pay off an existing loan at Zions First National Bank, N.A., which was secured by a security interest in the apartment complex. A brokerage commission of $285,000 and legal fees and related costs were also paid from the purchase proceeds. The Company's book basis in Dry Creek was approximately $34,400,000, and the Company has recognized the gain net of tax effects from the sale in the first quarter of 2018.

The Dry Creek apartments consist of 282 units, with a mixture of one, two, and three-bedroom units. The construction of Dry Creek was completed in December 2015. As of December 31, 2017, the apartments were 95% leased. Also, rental rates in the market had increased by 9.8% over pro forma rents, and effective (achieved) rates net of concessions increased. The Company had owned the land for the development since 1991, when the Company purchased the land, along with the cemetery and mortuary that are adjacent to the property. The Company continues to operate the cemetery and mortuary. The Company may use the net proceeds from the sale of the Dry Creek apartments to invest in residential and commercial real estate projects. This may include the possible use of a Section 1031 real property exchange transaction.

Acquisition of Beta Capital Corp.

On June 1, 2018, the Company completed a stock purchase transaction with Beta Capital Corp. ("Beta Capital") and Ronald D. Maxson ("Maxson"), the sole owner of all the outstanding shares of common stock of Beta Capital, to purchase all of the outstanding shares of common stock of Beta Capital.  Beta Capital is engaged in the operation of a factoring business with the principal purpose of providing funding for funeral homes and mortuaries.  For the year ended December 31, 2017, Beta Capital had revenues of $1,208,000 with a net pre-tax income of $204,000.  As of December 31, 2017, the total assets of Beta Capital were $3,270,000 and total equity was $1,832,000.
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Under the terms of the transaction, as set forth in the Stock Purchase Agreement dated September 1, 2018 (the "Purchase Agreement"), by and among the Company, Beta Capital and Maxson, the Company paid Maxson the purchase consideration at the closing of the transaction equal to the sum of (i) $890,000 in cash plus (ii)  the accounts receivable value of $2,515,783, representing the total amount of the Company's outstanding receivables as of the closing date of September 1, 2018, for a total closing payment of $3,405,783. From the $3,405,783 closing payment, a holdback amount equal to $175,000 was deposited into an interest bearing escrow account to be held for a period of eighteen months from the closing date to pay off any uncollected accounts receivable and other liabilities of Beta Capital as of the closing date.

In addition to the escrow amount, prior to closing Maxson estimated the amount of outstanding, accrued or unpaid liabilities and indebtedness owed by Beta Capital as of the closing date, including but not limited to salaries, commissions, employment taxes, and accounts payable (the "Trailing Liabilities") and left a cash balance in the Company's checking account at closing in the amount of at least 200% of such estimate (the "Cash Amount"). Ninety days after closing, Beta Capital is required to provide Maxson with an accounting of all post-closing payments by Beta Capital of the Trailing Liabilities from the Cash Amount and transfer the remaining balance of the Cash Amount to Maxson. In the event the Cash Amount is insufficient to pay the entire amount of the Trailing Liabilities, Maxson is required to reimburse the Company until the Company has been reimbursed in full for the total amount of the Trailing Liabilities.

Moreover, during the 18-month period from the closing date, the Company shall cause Beta Capital to use commercially reasonable efforts to collect all outstanding accounts receivable as of the closing date. Within 15 days after expiration of the 18-month period following the closing date, the Company shall provide written notice to Maxson of the amounts of the outstanding accounts receivables that had not been collected in full by the Company during the 18-month period. Maxson shall then be required to reimburse the Company for such uncollected accounts receivable. These payments shall be made by Maxson to the Company from the escrow funds then held in the escrow account. The balance of funds, if any, in the escrow account after disbursement of the uncollected accounts receivable payment to the Company shall be paid to Maxson by the escrow agent.

Also at closing, the Company and Beta Capital entered into a non-competition and confidentiality agreement with Maxson. Further at closing, the Company and Beta Capital entered into a lease agreement with Maxson for the use of the office space currently occupied by Beta Capital in Portsmouth, Virginia. The lease is for a period of two years payable in the amount of $3,000 per month.

Item 6.    Exhibits, Financial Statements Schedules and Reports on Form 8-K.

(a)(1) Financial Statements

See "Table of Contents – Part I – Financial 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‑X are not required under the related instructions or are inapplicable and therefore have been omitted.

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(a)(3)Exhibits

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

3.1
Articles of Amendment and Restatement to Articles of Incorporation (9)(8)
3.2
Amended and Restated Bylaws (11)(10)
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
Letter from Eide Bailly, LLP (10)(9)
10.1Amended and Restated Employee Stock Ownership Plan (ESOP) and Trust Agreement (1)
10.2
2003 Stock Option Plan (2)
10.3
2006 Director Stock Option Plan (3)
10.4
2013 Amended and Restated Stock Option and Other Equity Incentive Awards Plan (8)(7)
10.5
2014 Director Stock Option Plan (4)
10.6
Employment agreementAgreement with Scott M. Quist (6)
10.7
Purchase Agreement among Security National Financial Corporation, SNFC Subsidiary, LLC, American Funeral Financial, LLC, and Hypershop, LLC (5)
10.8
10.7
Stock Purchase Agreement among Security National Financial Corporation and Reppond Holding Company to purchase First Guaranty Insurance Company (8)(7)
10.8
Stock Purchase Agreement among Security National Financial Corporation, Beta Capital Corp., and Ronald D. Maxson (11)
10.9Stock Repurchase Plan
21
Subsidiaries of the Registrant (11)
23.1
Consent of Eide Bailly LLP (7)(6)
23.2
Consent of Mackey Price & Mecham (7)(6)
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

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(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 JuneSeptember 5, 2003, relating to the Company's Annual Meeting of Stockholders
(3)Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on JuneSeptember 1, 2007, relating to the Company's Annual Meeting of Stockholders
(4)Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on JuneSeptember 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)(5)Incorporated by reference from Report on Form 10-Q, as filed on August 14,November 15, 2015
(7)
(6)Incorporated by reference from Registration Statement on Form S-8, as filed on October 20, 2015
(8)
(7)Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016
(9)(8)
Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017
(10)
(9)Incorporated by reference from Report on Form 8-K, as filed on August 4, 2017
(11)
(10)Incorporated by reference from Report on Form 10-K,10-Q, as filed on April 2,August 25, 2017
(11)Incorporated by reference from Form 8-K, as filed on September 6, 2018

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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: May 15,November 13, 2018 
/s/ Scott M. Quist
  Scott M. Quist
  Chairman, President and Chief Executive Officer
  (Principal Executive Officer)
   

Dated: May 15,November 13, 2018 
/s/ Garrett S. Sill
  Garrett S. Sill
  Chief Financial Officer and Treasurer
  (Principal Financial Officer and Principal Accounting Officer)
 
 

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