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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2023

 

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: 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.)
     
433 Ascension Way, 6th Floor, Salt Lake City, Utah   84123
(Address of principal executive offices)   (Zip Code)
     

(801) 264-1060

(Registrant’s telephone number, including area code)

 

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

 

Title of each class   Trading symbol   Name of each exchange on which registered
Class A Common Stock   SNFCA   The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒ No ☐

 

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

 

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

 

As of November 3, 2023, the registrant had 20,008,016 shares of Class A Common Stock, $2.00 par value, outstanding and 2,971,854 shares of Class C Common Stock, $2.00 par value, outstanding.

 

 

 

 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

 

QUARTER ENDED SEPTEMBER 30, 2023

 

Table of Contents

 

    Page No.
  Part I - Financial Information  
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 3-4
  Condensed Consolidated Statements of Earnings for the three and nine month periods ended September 30, 2023 and 2022 (unaudited) 5
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2023 and 2022 (unaudited) 6
  Condensed Consolidated Statements of Stockholders’ Equity as of September 30, 2023 and June 30, 2022 (unaudited) 7-8
  Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2023 and 2022 (unaudited) 9-10
  Notes to Condensed Consolidated Financial Statements (unaudited) 11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 63
Item 3. Quantitative and Qualitative Disclosures about Market Risk 70
Item 4. Controls and Procedures 70
  Part II - Other Information  
Item 1. Legal Proceedings 71
Item 1A. Risk Factors 71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 71
Item 3. Defaults Upon Senior Securities 71
Item 4. Mine Safety Disclosures 71
Item 5. Other Information 71
Item 6. Exhibits 72
  Signatures 73

 

2

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

Part I - Financial Information

 

Item 1. Financial Statements.

 

   September 30,
2023
(Unaudited)
   December 31,
2022
 
Assets          
Investments:          
Fixed maturity securities, available for sale, at estimated fair value (amortized cost of $380,283,562 and $362,750,511 for 2023 and 2022, respectively; net of allowance for credit losses of $211,500 and nil for 2023 and 2022, respectively)  $356,448,259   $345,858,492 
Equity securities at estimated fair value (cost of $10,470,974 and $9,942,265 for 2023 and 2022, respectively)   12,309,544    11,682,526 
Mortgage loans held for investment (net of allowance for credit losses of $2,612,944 and $1,970,311 for 2023 and 2022, respectively)   249,307,098    308,123,927 
Real estate held for investment (net of accumulated depreciation of $28,516,470 and $23,793,204 for 2023 and 2022, respectively)   184,691,463    191,328,616 
Real estate held for sale   4,764,367    11,161,582 
Other investments and policy loans (net of allowance for credit losses of $1,555,261 and $1,609,951 for 2023 and 2022, respectively)   66,253,417    70,508,156 
Accrued investment income   12,266,695    10,299,826 
Total investments   886,040,843    948,963,125 
Cash and cash equivalents   134,751,854    120,919,805 
Loans held for sale at estimated fair value   152,546,566    141,179,620 
Receivables (net of allowance for credit losses of $1,520,801 and $2,229,791 for 2023 and 2022, respectively)   15,498,951    28,573,092 
Restricted assets (including $7,847,136 and $6,565,552 for 2023 and 2022 respectively, at estimated fair value; net of allowance for credit losses of $2,232 and nil for 2023 and 2022, respectively)   19,907,485    18,935,055 
Cemetery perpetual care trust investments (including $4,223,197 and $3,859,893 for 2023 and 2022, respectively, at estimated fair value; net of allowance for credit losses of $3,933 and nil for 2023 and 2022, respectively)   7,640,990    7,276,210 
Receivable from reinsurers   14,764,228    15,033,938 
Cemetery land and improvements   9,068,760    9,101,474 
Deferred policy and pre-need contract acquisition costs   114,422,565    108,655,128 
Mortgage servicing rights, net   3,494,723    3,039,765 
Property and equipment, net   19,580,298    20,579,649 
Value of business acquired   8,922,400    9,803,736 
Goodwill   5,253,783    5,253,783 
Other   21,878,789    23,798,512 
           
Total Assets  $1,413,772,235   $1,461,112,892 

 

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

 

3

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

   September 30,
2023
(Unaudited)
   December 31,
2022
 
Liabilities and Stockholders’ Equity          
Liabilities          
Future policy benefits and unpaid claims  $908,917,966   $889,327,303 
Unearned premium reserve   2,611,873    2,773,616 
Bank and other loans payable   108,431,028    161,712,804 
Deferred pre-need cemetery and mortuary contract revenues   17,573,212    16,226,836 
Cemetery perpetual care obligation   5,265,166    5,099,542 
Accounts payable   2,977,402    5,361,449 
Other liabilities and accrued expenses   56,431,051    57,113,888 
Income taxes   13,670,993    30,710,527 
Total liabilities   1,115,878,691    1,168,325,965 
           
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; 40,000,000 shares authorized; 20,007,611 shares issued and outstanding as of September 30, 2023 and 18,758,031 shares issued and outstanding as of December 31, 2022   40,015,222    37,516,062 
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; 6,000,000 shares authorized; 2,971,854 shares issued and outstanding as of September 30, 2023 and 2,889,859 shares issued and outstanding as of December 31, 2022   5,943,708    5,779,718 
Additional paid-in capital   72,190,361    64,767,769 
Accumulated other comprehensive loss, net of taxes   (18,282,298)   (13,070,277)
Retained earnings   204,117,486    202,160,306 
Treasury stock at cost - 870,523 Class A shares and 35,717 Class C shares as of September 30, 2023; and 525,870 Class A shares and 34,016 Class C shares as of December 31, 2022   (6,090,935)   (4,366,651)
           
Total stockholders’ equity   297,893,544    292,786,927 
           
Total Liabilities and Stockholders’ Equity  $1,413,772,235   $1,461,112,892 

 

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

 

4

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Revenues:                    
Mortgage fee income  $24,936,019   $28,607,888   $77,003,778   $118,983,231 
Insurance premiums and other considerations   28,906,803    26,237,417    85,687,394    78,491,364 
Net investment income   19,248,463    18,603,070    57,195,320    49,768,664 
Net mortuary and cemetery sales   7,234,031    6,470,363    20,874,174    20,926,587 
Losses on investments and other assets   (932,414)   (2,178,952)   (4,676)   (2,921,372)
Other   848,825    5,737,434    2,832,630    16,221,307 
Total revenues   80,241,727    83,477,220    243,588,620    281,469,781 
                     
Benefits and expenses:                    
Death benefits   14,678,251    13,996,753    46,811,922    45,720,503 
Surrenders and other policy benefits   1,467,066    1,337,507    3,550,416    3,814,442 
Increase in future policy benefits   9,476,678    7,389,732    26,031,421    20,761,276 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired   4,480,457    5,061,713    13,615,359    13,511,235 
Selling, general and administrative expenses:                    
Commissions   10,467,796    15,004,275    30,877,232    53,303,814 
Personnel   20,234,106    24,392,703    62,705,033    76,772,417 
Advertising   994,433    1,372,636    2,863,597    4,680,169 
Rent and rent related   1,677,701    1,701,164    5,285,492    5,062,696 
Depreciation on property and equipment   590,168    636,246    1,765,797    1,880,095 
Costs related to funding mortgage loans   1,563,172    1,371,315    5,246,881    6,255,415 
Other   7,124,347    11,178,276    22,308,291    34,444,040 
Interest expense   1,151,534    2,136,763    4,019,669    5,764,327 
Cost of goods and services sold-mortuaries and cemeteries   1,177,328    1,200,481    3,614,599    3,628,334 
Total benefits and expenses   75,083,037    86,779,564    228,695,709    275,598,763 
                     
Earnings (loss) before income taxes   5,158,690    (3,302,344)   14,892,911    5,871,018 
Income tax benefit (expense)   (1,117,397)   949,159    (3,258,740)   (1,421,036)
                     
Net earnings (loss)  $4,041,293   $(2,353,185)  $11,634,171   $4,449,982 
                     

Net earnings (loss) per Class A Equivalent common share (1)

  $0.18   $(0.11)  $0.53   $0.20 
                     

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

  $0.18   $(0.10)  $0.51   $0.19 
                     
Weighted-average Class A equivalent common shares outstanding (1)   22,063,495    21,976,292    22,066,243    22,213,846 
                     
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)   22,831,726    22,695,996    22,700,342    23,036,213 

 

(1)Net earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted-average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common stock basis. Net earnings per common share represent net earnings per equivalent Class A common share.

 

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

 

5

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Net earnings (loss)  $4,041,293   $(2,353,185)  $11,634,171   $4,449,982 
Other comprehensive income:                    
Unrealized losses on fixed maturity securities
available for sale
  $(6,805,602)   (13,523,240)   (6,580,750)   (41,845,274)
Unrealized gains (losses) on restricted assets (1)   (12,284)   27,060    (14,340)   (88,058)
Unrealized gains (losses) on cemetery perpetual care trust investments (1)   (2,487)   28,931    (3,299)   (24,294)
Other comprehensive loss, before income tax   (6,820,373)   (13,467,249)   (6,598,389)   (41,957,626)
Income tax benefit   1,432,846    2,825,936    1,386,368    8,815,498 
Other comprehensive loss, net of income tax   (5,387,527)   (10,641,313)   (5,212,021)   (33,142,128)
Comprehensive income (loss)  $(1,346,234)  $(12,994,498)  $6,422,150   $(28,692,146)

 

 

(1) Fixed maturity securities available for sale

 

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

 

6

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

                             
   Nine Months Ended September 30, 2023 
   Class A Common Stock   Class C Common Stock   Additional Paid-in Capital   Accumulated Other Comprehensive Income (Loss)   Retained Earnings   Treasury Stock   Total 
                             
January 1, 2023  $37,516,062   $5,779,718   $64,767,769   $(13,070,277)  $202,160,306   $(4,366,651)  $292,786,927 
                                    
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13)   -    -    -    -    (671,506)   -    (671,506)
Net earnings   -    -    -    -    1,240,172    -    1,240,172 
Other comprehensive income   -    -    -    4,127,558    -    -    4,127,558 
Stock-based compensation expense   -    -    143,671    -    -    -    143,671 
Exercise of stock options   96,092    -    (62,073)   -    -    -    34,019 
Sale of treasury stock   -    -    (43,493)   -    -    620,651    577,158 
Purchase of treasury stock   -    -    -    -    -    (1,204,357)   (1,204,357)
Conversion Class C to Class A   1,872    (1,872)   -    -    -    -    - 
March 31, 2023  $37,614,026   $5,777,846   $64,805,874   $(8,942,719)  $202,728,972   $(4,950,357)  $297,033,642 
                                    
Net earnings   -    -    -    -    6,352,706    -    6,352,706 
Other comprehensive loss   -    -    -    (3,952,052)   -    -    (3,952,052)
Stock-based compensation expense   -    -    141,954    -    -    -    141,954 
Exercise of stock options   159,284    -    (154,424)   -    -    -    4,860 
Vesting of restricted stock units   810    -    (810)   -    -    -    - 
Sale of treasury stock   -    -    (54,350)   -    -    623,056    568,706 
Purchase of treasury stock   -    -    126,990    -    -    (1,514,049)   (1,387,059)
Conversion Class C to Class A   113,930    (113,930)   -    -    -    -    - 
Stock dividends   1,899,350    283,188    6,820,431    -    (9,002,969)   -    - 
June 30, 2023  $39,787,400   $5,947,104   $71,685,665   $(12,894,771)  $200,078,709   $(5,841,350)  $298,762,757 
                                    
Net earnings   -    -    -    -    4,041,293    -    4,041,293 
Other comprehensive loss   -    -    -    (5,387,527)   -    -    (5,387,527)
Stock-based compensation expense   -    -    145,973    -    -    -    145,973 
Exercise of stock options   223,006    -    (196,926)   -    -    -    26,080 
Vesting of restricted stock units   810    -    (810)   -    -    -    - 
Sale of treasury stock   -    -    98,387    -    -    458,530    556,917 
Purchase of treasury stock   -    -    456,166    -    -    (708,115)   (251,949)
Conversion Class C to Class A   3,396    (3,396)   -    -    -    -    - 
Stock dividends   610    -    1,906    -    (2,516)   -    - 
September 30, 2023  $40,015,222   $5,943,708   $72,190,361   $(18,282,298)  $204,117,486   $(6,090,935)  $297,893,544 

 

7

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(Unaudited)

 

                             
   Nine Months Ended September 30, 2022 
   Class A Common Stock   Class C Common Stock   Additional Paid-in Capital   Accumulated Other Comprehensive Income (Loss)   Retained Earnings   Treasury Stock   Total 
                             
January 1, 2022  $35,285,444   $5,733,130   $57,985,947   $18,070,448   $184,537,489   $(1,845,624)  $299,766,834 
                                    
Net earnings   -    -    -    -    3,228,718    -    3,228,718 
Other comprehensive loss   -    -    -    (12,190,330)   -    -    (12,190,330)
Stock-based compensation expense   -    -    271,747    -    -    -    271,747 
Exercise of stock options   100,446    -    (8,487)   -    -    -    91,959 
Sale of treasury stock   -    -    24,055    -    -    1,880,125    1,904,180 
Purchase of treasury stock   -    -    106,176    -    -    (878,417)   (772,241)
Conversion Class C to Class A   414    (414)   -    -    -    -    - 
March 31, 2022  $35,386,304   $5,732,716   $58,379,438   $5,880,118   $187,766,207   $(843,916)  $292,300,867 
                                    
Net earnings   -    -    -    -    3,574,449    -    3,574,449 
Other comprehensive loss   -    -    -    (10,310,485)   -    -    (10,310,485)
Stock-based compensation expense   -    -    220,175    -    -    -    220,175 
Exercise of stock options   37,746    -    (2,440)   -    -    -    35,306 
Sale of treasury stock   -    -    50,401    -    -    1,119,392    1,169,793 
Purchase of treasury stock   -    -    -    -    -    (6,505,050)   (6,505,050)
Conversion Class C to Class A   154,218    (154,218)   -    -    -    -    - 
Stock dividends   1,779,108    278,924    6,009,453    -    (8,067,485)   -    - 
June 30, 2022  $37,357,376   $5,857,422   $64,657,027   $(4,430,367)  $183,273,171   $(6,229,574)  $280,485,055 
                                    
Net loss   -    -    -    -    (2,353,185)   -    (2,353,185)
Other comprehensive loss   -    -    -    (10,641,313)   -    -    (10,641,313)
Stock-based compensation expense   -    -    230,853    -    -    -    230,853 
Sale of treasury stock   -    -    (47,285)   -    -    1,187,752    1,140,467 
Conversion Class C to Class A   77,704    (77,704)   -    -    -    -    - 
September 30, 2022  $37,435,080   $5,779,718   $64,840,595   $(15,071,680)  $180,919,986   $(5,041,822)  $268,861,877 

 

8

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   2023   2022 
   Nine Months Ended September 30, 
   2023   2022 
Cash flows from operating activities:          
Net cash provided by operating activities  $18,383,768   $109,318,230 
           
Cash flows from investing activities:          
Purchases of fixed maturity securities   (50,158,586)   (115,680,915)
Sales, calls and maturities of fixed maturity securities   33,160,924    11,695,675 
Purchases of equity securities   (6,464,200)   (3,591,283)
Sales of equity securities   5,891,964    2,295,931 
Purchases of restricted assets   (1,836,290)   (1,157,021)
Sales, calls and maturities of restricted assets   387,049    - 
Purchases of cemetery perpetual care trust investments   (493,833)   - 
Sales, calls and maturities of perpetual care trust investments   177,932    325,908 
Mortgage loans held for investment, other investments and policy loans made   (467,172,350)   (569,434,389)
Payments received for mortgage loans held for investment, other investments and policy loans   532,511,486    577,997,140 
Purchases of property and equipment   (791,569)   (966,375)
Sales of property and equipment   -    62,561 
Purchases of real estate   (17,219,245)   (20,892,501)
Sales of real estate   25,727,541    22,941,365 
Net cash provided by (used in) investing activities   53,720,823    (96,403,904)
           
Cash flows from financing activities:          
Investment contract receipts   9,323,700    8,853,710 
Investment contract withdrawals   (11,657,189)   (11,964,046)
Proceeds from stock options exercised   64,959    127,265 
Purchases of treasury stock   (2,843,365)   (7,277,291)
Repayment of bank loans   (69,133,305)   (48,383,522)
Proceeds from bank loans   68,500,000    59,618,050 
Net change in warehouse line borrowings for loans held for sale   (52,720,401)   (61,081,557)
Net cash used in financing activities   (58,465,601)   (60,107,391)
           
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents   13,638,990    (47,193,065)
           
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period   133,483,817    141,414,282 
           
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period  $147,122,807   $94,221,217 
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid during the year for:          
Interest  $4,182,368   $5,646,811 
Income taxes (net of refunds)   18,911,907    468,578 
           
Non Cash Operating, Investing and Financing Activities:          
Transfer from mortgage loans held for investment to restricted assets  $1,625,961   $- 
Transfer from mortgage loans held for investment to cemetery perpetual care trust investments   6,111,550    - 
Transfer from loans held for sale to mortgage loans held for investment   3,017,626    49,428,757 
Benefit plans funded with treasury stock   1,702,781    4,214,440 
Right-of-use assets obtained in exchange for operating lease liabilities   139,095    1,164,287 
Right-of-use assets obtained in exchange for finance lease liabilities   12,332    - 
Accrued real estate construction costs and retainage   -    1,401,437 

 

9

 

 

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:

 

   Nine Months Ended September 30, 
   2023   2022 
Cash and cash equivalents  $134,751,854   $84,947,720 
Restricted assets   10,946,379    8,276,613 
Cemetery perpetual care trust investments   1,424,574    996,884 
           
Total cash, cash equivalents, restricted cash and restricted cash equivalents  $147,122,807   $94,221,217 

 

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

 

10

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (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 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, 2022, 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 three and nine month periods ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to adopt policies and make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In applying these policies and estimates, the Company makes judgments that frequently require assumptions about matters that are inherently uncertain. Accordingly, significant estimates used in the preparation of the Company’s financial statements may be subject to significant adjustments in future periods. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment or sale; 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 credit losses; 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.

 

Banking Environment.

 

On March 10, 2023 and March 12, 2023, Silicon Valley Bank and Signature Bank were placed in receivership with the Federal Deposit Insurance Corporation (FDIC). Normal banking activities resumed shortly thereafter. On May 1, 2023, First Republic Bank was placed in receivership with the FDIC and was immediately purchased by a national bank.

 

The Company does not maintain any deposit or other accounts or credit facilities with Silicon Valley Bank, Signature Bank or First Republic Bank. The Company may periodically transfer funds to these banks to pay for services rendered by third party vendors that continue to maintain banking relationships with these banks. The Company continues to monitor the banking industry and its relationships with regional and community banks.

 

11

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

2) Recent Accounting Pronouncements

 

Accounting Standards Adopted in 2023

 

ASU No. 2016-13: “Financial Instruments – Credit Losses (Topic 326)” — Issued in September 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans held for investment and held to maturity debt securities) and available for sale debt securities. For assets held at an amortized cost basis, Topic 326 eliminates the probable initial recognition threshold 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 Topic 326 requires that credit losses be presented as an allowance rather than as a write-down. The Company adopted this standard on January 1, 2023, and after a review of the affected assets, decreased the opening balance of retained earnings in stockholders’ equity by $671,506 on January 1, 2023. The allowances for credit losses increased (decreased) by the following amounts.

 

 Schedule of Increased (Decrease) in Allowances for Credit Losses Upon ASU

   Amount 
Mortgage loans held for investment:     
Residential  $(192,607)
Residential construction   301,830 
Commercial   555,807 
Total   665,030 
      
Restriced assets - mortgage loans held for investment:     
Residential construction   3,463 
      
Cemetery perpetual care trust investments - mortgage loans held for investment:     
Residential construction   3,013 
      
Grand Total   671,506 

 

Accounting Standards Issued But Not Yet Adopted

 

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 on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The standard is aimed at improving the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplifying amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that requires the standard to be adopted by the Company commencing on January 1, 2025. The Company is nearing completion of its analysis and implementation of the new standard, including the identification of cohorts, system updates, design and a preliminary analysis of the Company’s “Cold Start.” The Company has engaged its team of actuaries, accountants, and systems specialists and consulted external system providers as part of the implementation. The Company is in the process of estimating the impact of the new guidance on the consolidated financial statements.

 

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

September 30, 2023 (Unaudited)

 

3) Investments

 

The Company’s investments as of September 30, 2023 are summarized as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses (1)   Allowance for Credit Losses   Estimated Fair Value 
September 30, 2023:                         
Fixed maturity securities, available for sale, at estimated fair value:                         
U.S. Treasury securities and obligations of U.S. Government agencies  $108,680,913   $5,981   $(2,498,554)  $-   $106,188,340 
                          
Obligations of states and political subdivisions   6,649,289    218    (586,789)   -    6,062,718 
                          
Corporate securities including public utilities   231,814,067    600,075    (15,412,932)   (211,500)   216,789,710 
                          
Mortgage-backed securities   32,889,293    13,422    (5,755,224)   -    27,147,491 
                          
Redeemable preferred stock   250,000    10,000    -    -    260,000 
                          
Total fixed maturity securities available for sale  $380,283,562   $629,696   $(24,253,499)  $(211,500)  $356,448,259 
                          
Equity securities at estimated fair value:                         
                          
Common stock:                         
                          
Industrial, miscellaneous and all other  $10,470,974   $2,684,920   $(846,350)       $12,309,544 
                          
Total equity securities at estimated fair value  $10,470,974   $2,684,920   $(846,350)       $12,309,544 
                          
Mortgage loans held for investment at amortized cost:                         
Residential  $96,591,643                     
Residential construction   101,295,751                     
Commercial   55,991,027                     
Less: Unamortized deferred loan fees, net   (1,629,546)                    
Less: Allowance for credit losses   (2,612,944)                    
Less: Net discounts   (328,833)                    
                          
Total mortgage loans held for investment  $249,307,098                     
                          
Real estate held for investment - net of accumulated depreciation:                         
Residential  $38,034,997                     
Commercial   146,656,466                     
                          
Total real estate held for investment  $184,691,463                     
                          
Real estate held for sale:                         
Residential  $2,285,707                     
Commercial   2,478,660                     
                          
Total real estate held for sale  $4,764,367                     
                          
Other investments and policy loans at amortized cost:                         
Policy loans  $13,154,845                     
Insurance assignments   42,624,001                     
Federal Home Loan Bank stock (2)   2,699,300                     
Other investments   9,330,532                     
Less: Allowance for credit losses for insurance assignments   (1,555,261)                    
                          
Total other investments and policy loans  $66,253,417                     
                          
Accrued investment income  $12,266,695                     
                          
Total investments  $886,040,843                     

 

 

 

(1)Gross unrealized losses are net of allowance for credit losses
(2)Includes $978,600 of Membership stock and $1,720,700 of Activity stock attributable to short-term borrowings and letters of credit.

 

13

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

The Company’s investments as of December 31, 2022 are summarized as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair Value 
December 31, 2022:                    
Fixed maturity securities, available for sale, at estimated fair value:                    
U.S. Treasury securities and obligations of U.S. Government agencies  $93,182,210   $180,643   $(2,685,277)  $90,677,576 
                     
Obligations of states and political subdivisions   6,675,071    13,869    (458,137)   6,230,803 
                     
Corporate securities including public utilities   229,141,544    1,909,630    (11,930,773)   219,120,401 
                     
Mortgage-backed securities   33,501,686    168,700    (4,100,674)   29,569,712 
                     
Redeemable preferred stock   250,000    10,000    -    260,000 
                     
Total fixed maturity securities available for sale  $362,750,511   $2,282,842   $(19,174,861)  $345,858,492 
                     
Equity securities at estimated fair value:                    
                     
Common stock:                    
                     
Industrial, miscellaneous and all other  $9,942,265   $2,688,375   $(948,114)  $11,682,526 
                     
Total equity securities at estimated fair value  $9,942,265   $2,688,375   $(948,114)  $11,682,526 
                     
Mortgage loans held for investment at amortized cost:                    
Residential  $93,355,623                
Residential construction   172,516,125                
Commercial   46,311,955                
Less: Unamortized deferred loan fees, net   (1,746,605)               
Less: Allowance for credit losses   (1,970,311)               
Less: Net discounts   (342,860)               
                     
Total mortgage loans held for investment  $308,123,927                
                     
Real estate held for investment - net of accumulated depreciation:                    
Residential  $38,437,960                
Commercial   152,890,656                
                     
Total real estate held for investment  $191,328,616                
                     
Real estate held for sale:                    
Residential  $11,010,029                
Commercial   151,553                
                     
Total real estate held for sale  $11,161,582                
                     
Other investments and policy loans at amortized cost:                    
Policy loans  $13,095,473                
Insurance assignments   46,942,536                
Federal Home Loan Bank stock (1)   2,600,300                
Other investments   9,479,798                
Less: Allowance for credit losses for insurance assignments   (1,609,951)               
                     
Total other investments and policy loans  $70,508,156                
                     
Accrued investment income  $10,299,826                
                     
Total investments  $948,963,125                

 

 

 

(1) Includes $938,500 of Membership stock and $1,661,800 of Activity stock attributable to short-term borrowings and letters of credit.

 

14

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

Fixed Maturity Securities

 

The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of September 30, 2023, and December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations. 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. The table below sets 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   Combined Fair Value 
September 30, 2023                              
U.S. Treasury Securities And Obligations of U.S. Government Agencies  $331,740   $36,115,986   $2,166,815   $69,967,155   $2,498,555   $106,083,141 
Obligations of States and Political Subdivisions   155,458    1,469,753    431,331    4,142,748    586,789    5,612,501 
Corporate Securities   4,092,910    86,409,480    11,320,021    106,047,158    15,412,931    192,456,638 
Mortgage and other asset-backed securities   123,790    4,627,445    5,631,434    22,003,452    5,755,224    26,630,897 
Totals  $4,703,898   $128,622,664   $19,549,601   $202,160,513   $24,253,499   $330,783,177 
                               
December 31, 2022                              
U.S. Treasury Securities And Obligations of U.S. Government Agencies  $2,685,277   $79,400,753   $-   $-   $2,685,277   $79,400,753 
Obligations of States and Political Subdivisions   378,067    5,467,910    80,070    429,020    458,137    5,896,930 
Corporate Securities   10,935,114    162,995,969    995,659    5,781,822    11,930,773    168,777,791 
Mortgage and other asset-backed securities   2,884,731    19,909,907    1,215,943    6,978,745    4,100,674    26,888,652 
Totals  $16,883,189   $267,774,539   $2,291,672   $13,189,587   $19,174,861   $280,964,126 

 

Relevant holdings were comprised of 816 securities with fair values aggregating 93.2% of the aggregate amortized cost as of September 30, 2023. Relevant holdings were comprised of 703 securities with fair values aggregating 93.1% of the aggregate amortized cost as of December 31, 2022. Credit loss provision (release) of $(1,741) and nil have been recognized for the three month periods ended September 30, 2023 and 2022, respectively. Credit loss provision (release) of $222,264 and nil have been recognized for the nine month periods ended September 30, 2023 and 2022, respectively. Credit losses are included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. Other unrealized losses for which no credit loss was recognized are primarily the result of the recent increases in interest rates.

 

15

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

Evaluation of Allowance for Credit Losses

 

See Note 2 regarding the adoption of ASU 2016-13.

 

On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale to identify any potential credit losses. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”) and other industry rating agencies. Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for credit loss, unless current market data or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. The evaluation involves assessing all facts and circumstances surrounding each security including, but not limited 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. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings.

 

Where the decline in fair value of fixed maturity securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and the Company anticipates recovery of all contractual or expected cash flows, the Company does not consider these securities to have credit loss because the Company does not intend to sell these securities and it is not more likely than not the Company will be required to sell these securities before a recovery of amortized cost, which may be at maturity.

 

If the Company intends to sell a fixed maturity security or if it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis, a credit loss has occurred and the difference between the amortized cost and the fair value that relates to the expected credit loss is recognized as a loss in earnings, included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings.

 

If the Company does not intend to sell a debt security and it is less likely than not that the Company will be required to sell the debt security but the Company also does not expect to recover the entire amortized cost basis of the security, a credit loss is recognized in earnings for the amount of the expected credit loss with a corresponding allowance for credit losses as a contra-asset account. The credit loss is included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. The recognized credit loss is limited to the total unrealized loss on the security due to a change in credit.

 

Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if the Company intends to sell a security or when it is more likely than not that the Company will be required to sell the security before the recovery of its amortized cost.

 

The Company does not measure a credit loss allowance on accrued interest receivable, included in accrued investment income on the condensed consolidated balance sheets, as the Company writes off any accrued interest receivable balance to net investment income in a timely manner (after 90 days) when the Company has concerns regarding collectability.

 

16

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

Credit Quality Indicators

 

The NAIC assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 are considered investment grade while the NAIC Class 3 through 6 designations are considered non-investment grade. Based on the NAIC designations, the Company had 98.2% and 97.7% of its fixed maturity securities rated investment grade as of September 30, 2023 and December 31, 2022, respectively.

 

The following table summarizes the credit quality, by NAIC designation, of the Company’s fixed maturity securities available for sale, excluding redeemable preferred stock.

 

   September 30, 2023   December 31, 2022 

NAIC

Designation

  Amortized
Cost
   Estimated Fair
Value
   Amortized
Cost
   Estimated Fair
Value
 
1  $210,224,246   $198,601,878   $197,753,818   $189,691,540 
2   162,752,957    151,279,566    156,261,804    148,073,873 
3   5,329,117    4,890,504    7,080,305    6,635,786 
4   1,462,481    1,325,409    1,377,541    1,157,454 
5   263,504    90,901    25,736    39,155 
6   1,257    1    1,307    684 
Total  $380,033,562   $356,188,259   $362,500,511   $345,598,492 

 

The following tables presents a roll forward of the Company’s allowance for credit losses on fixed maturity securities available for sale:

 

                     
   Nine Months Ended September 30, 2023 
   U.S. Treasury Securities And Obligations of U.S. Government Agencies   Obligations of states and political subdivisions   Corporate securities   Mortgage-backed securities   Total 
                     
Beginning balance - December 31, 2022  $       -   $        -   $-   $             -   $- 
                          
Additions for credit losses not previously recorded   -    -    179,500    -    179,500 
Change in allowance on securities with previous allowance   -    -    42,764    -    42,764 
Reductions for securities sold during the period   -    -    (10,764)   -    (10,764)
Reductions for securities with credit losses due to intent to sell   -    -    -    -    - 
Write-offs charged against the allowance   -    -    -    -    - 
Recoveries of amounts previously written off   -    -    -    -    - 
                          
Ending Balance - September 30, 2023  $-   $-   $211,500   $-   $211,500 

 

17

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

                     
   Three Months Ended September 30, 2023 
   U.S. Treasury Securities And Obligations of U.S. Government Agencies   Obligations of states and political subdivisions   Corporate securities   Mortgage-backed securities   Total 
                     
Beginning balance - June 30, 2023  $        -   $         -   $224,005   $               -   $224,005 
                          
Additions for credit losses not previously recorded   -    -    -    -    - 
Change in allowance on securities with previous allowance   -    -    (1,741)   -    (1,741)
Reductions for securities sold during the period   -    -    (10,764)   -    (10,764)
Reductions for securities with credit losses due to intent to sell   -    -    -    -    - 
Write-offs charged against the allowance   -    -    -    -    - 
Recoveries of amounts previously written off   -    -    -    -    - 
                          
Ending Balance - September 30, 2023  $-   $-   $211,500   $-   $211,500 

 

The following table presents a roll forward of the Company’s cumulative other than temporary credit impairments (“OTTI”) recognized in earnings on fixed maturity securities available for sale which was required to be presented prior to the adoption of ASU 2016-13:

 

   2022 
Balance of credit-related OTTI at January 1  $264,977 
      
Additions for credit impairments recognized on:     
Securities not previously impaired   - 
Securities previously impaired   - 
      
Reductions for credit impairments previously recognized on:     
Securities that matured or were sold during the period (realized)   (39,502)
Securities due to an increase in expected cash flows   - 
      
Balance of credit-related OTTI at September 30  $225,475 

 

The table below presents the amortized cost and the estimated fair value of fixed maturity securities available for sale as of September 30, 2023, by contractual maturity. Actual or 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
 
Due in 1 year  $6,818,008   $6,812,398 
Due in 2-5 years   160,874,392    155,802,499 
Due in 5-10 years   93,763,663    88,297,470 
Due in more than 10 years   85,688,206    78,128,401 
Mortgage-backed securities   32,889,293    27,147,491 
Redeemable preferred stock   250,000    260,000 
Total  $380,283,562   $356,448,259 

 

18

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company had pledged a total of $92,437,113, at estimated fair value, of fixed maturity securities with the FHLB as of September 30, 2023. These pledged securities are used as collateral for any FHLB cash advances. As of September 30, 2023, the Company owed nil to the FHLB and its estimated maximum borrowing capacity was $85,218,402.

 

Information regarding sales of fixed maturity securities available for sale is presented as follows:

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Proceeds from sales  $207,522   $1,198,240   $1,163,132   $1,886,891 
Gross realized gains   -    21,926    11,257    24,281 
Gross realized losses   (3,368)   (24,811)   (57,472)   (32,656)

 

Assets on deposit with life insurance regulatory authorities as required by law were as follows:

 Schedule of Assets on Deposit With Life Insurance

  

As of

September 30,

2023

  

As of

December 31,

2022

 
Fixed maturity securities available for sale  $6,248,114   $8,817,959 
Cash and cash equivalents   1,956,777    2,214,206 
Total  $8,204,891   $11,032,165 

 

There were no investments, aggregated by issuer, of more than 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) as of September 30, 2023, other than investments issued or guaranteed by the United States Government.

 

Real Estate Held for Investment and Held for Sale

 

The Company strategically deploys resources into real estate assets 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 and Held for Sale

 

The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party resources. The geographic locations and asset classes of investments are 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 where the geographic location does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets that are in regions expected to have high growth in employment and population and that provide operational efficiencies.

 

The Company currently owns and operates nine commercial properties in three states. These properties include office buildings, flex office space, and the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company uses bank debt in strategic cases, primarily where it is anticipated to improve yields, or facilitate the acquisition of higher quality assets or asset class diversification.

 

19

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

The aggregated net book value of commercial real estate serving as collateral for bank loans was $125,641,402 and $129,330,119 as of September 30, 2023, and December 31, 2022, respectively. The associated bank loan carrying values totaled $98,250,725 and $97,112,131 as of September 30, 2023, and December 31, 2022, respectively.

 

During the three and nine month periods ended September 30, 2023, and 2022, the Company did not record any impairment losses on commercial real estate held for investment or held for sale. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

During the three month periods ended September 30, 2023, and 2022, the Company recorded depreciation expense on commercial real estate held for investment of $1,572,494 and $1,604,195, respectively, and of $4,715,322 and $4,593,468 during the nine month periods ended September 30, 2023, and 2022, respectively. Commercial real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

 

The Company’s commercial real estate held for investment is summarized as follows as of the respective dates indicated:

 

   Net Book Value   Total Square Footage 
   September 30,
2023
   December 31,
2022
   September 30,
2023
   December 31,
2022
 
Utah (1)  $143,735,609   $147,627,946    625,920    625,920 
Louisiana   19,416    2,380,847    1,622    31,778 
Mississippi   2,901,441    2,881,863    19,694    19,694 
                    
   $146,656,466   $152,890,656    647,236    677,392 

 

 

 

(1) Includes Center53

 

The Company’s commercial real estate held for sale is summarized as follows as of the respective dates indicated:

 

   Net Book Value   Total Square Footage 
   September 30,
2023
   December 31,
2022
   September 30,
2023
   December 31,
2022
 
Louisiana  $2,327,107   $-    30,156         - 
Mississippi (1)   151,553    151,553    -    - 
                     
   $2,478,660   $151,553    30,156    - 

 

 

 

(1) Consists of approximately 93 acres of undeveloped land

 

These properties are being marketed with the assistance of commercial real estate brokers in Mississippi and Louisiana.

 

Residential Real Estate Held for Investment and Held for Sale

 

The Company occasionally acquires a small portfolio of residential homes primarily because of loan foreclosures. The Company has the option to sell these properties or to continue to hold them for expected cash flow and price appreciation. The Company also invests in residential subdivision development.

 

The Company established Security National Real Estate Services (“SNRE”) to manage its residential property portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the Company’s entire residential property portfolio.

 

20

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

During the three and nine month periods ended September 30, 2023, and 2022 the Company did not record any impairment losses on residential real estate held for sale or held for investment. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

During the three month periods ended September 30, 2023, and 2022, the Company recorded depreciation expense on residential real estate held for investment of $2,648 and $2,648, respectively, and of $7,944 and $7,944 during the nine month periods ended September 30, 2023, and 2022, respectively. Residential real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

 

The Company’s residential real estate held for investment is summarized as follows as of the respective dates indicated:

 

   Net Book Value 
   September 30,
2023
   December 31,
2022
 
Utah (1)  $38,034,997   $38,437,960 
   $38,034,997   $38,437,960 

 

 

 

(1) Includes residential subdivision development

 

The following table presents additional information regarding the Company’s residential subdivision development in Utah:

 

   September 30,
2023
   December 31,
2022
 
Lots developed   50    80 
Lots to be developed   1,080    1,131 
Book Value  $37,846,685   $38,241,705 

 

The Company’s residential real estate held for sale is summarized as follows as of the respective dates indicated:

 

   Net Book Value 
   September 30,
2023
   December 31,
2022
 
Utah    $ 2,285,707(1)  $11,010,029 
   $2,285,707   $11,010,029 

 

 

 

(1) Unimproved land

 

The net book value of foreclosed residential real estate included in residential real estate held for sale was nil and $11,010,029 as of September 30, 2023, and December 31, 2022, respectively.

 

21

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

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. As of September 30, 2023, real estate owned and occupied by the Company is summarized as follows:

 

  

Location  Business Segment  Approximate Square Footage   Square Footage Occupied by the Company 
433 Ascension Way, Floors 4, 5 and 6, Salt Lake City, UT - Center53 Building 2 (1)  Corporate Offices, Life Insurance, Cemetery/Mortuary Operations, and Mortgage Operations and Sales   221,000    50%
1044 River Oaks Dr., Flowood, MS (1)  Life Insurance Operations   19,694    28%
1818 Marshall Street, Shreveport, LA (2)  Life Insurance Operations   12,274    100%
909 Foisy Street, Alexandria, LA (2)  Life Insurance Sales   8,059    100%
812 Sheppard Street, Minden, LA (2)  Life Insurance Sales   1,560    100%
1550 N 3rd Street, Jena, LA (2)  Life Insurance Sales   1,737    100%

 

 

 

(1) Included in real estate held for investment on the condensed consolidated balance sheets
(2) Included in property and equipment on the condensed consolidated balance sheets

 

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 nine months to 30 years and the loans 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 the relevant debtors’ ability to honor obligations is dependent upon the economic stability of the geographic region in which the debtors do business or are employed. As of September 30, 2023, the Company had 45%, 12%, 9%, 7% and 6%, of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, and Arizona, respectively. As of December 31, 2022, the Company had 64%, 10%, 5% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, California, and Texas, respectively.

 

Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs, premiums, discounts, and the related allowance for credit 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 terms 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 requires that loans not exceed 80% of the fair market value of the respective loan collateral. For loans of more than 80% of the fair market value of the respective loan collateral, additional collateral or mortgage insurance by an approved third-party insurer is required.

 

22

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

Evaluation of Allowance for Credit Losses

 

See Note 2 regarding the adoption of ASU 2016-13.

 

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the Company’s mortgage loans held for investment to present the net amount expected to be collected. The Company reports in net earnings, as a credit loss expense, the amount necessary to adjust the allowance for credit losses for the Company’s current estimate of expected credit losses on mortgage loans held for investment. This credit loss expense is included in other expenses on the condensed consolidated statements of earnings.

 

Once a mortgage loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and reverse any interest income that had been accrued. Given this policy, the Company does not measure a credit loss allowance on accrued interest receivable. Accrued interest receivable is included in accrued investment income on the condensed consolidated balance sheets. Payments received for mortgage loans on a non-accrual status are recognized when received. The interest income recognized from payments received for mortgage loans on a non-accrual status was immaterial. Accrual of interest resumes if a mortgage loan is brought current. Interest not accrued on these loans totaled approximately $249,000 and $226,000 as of September 30, 2023, and December 31, 2022, respectively.

 

The Company measures expected credit losses based on the fair value of the collateral when the Company determines that foreclosure is probable. When a mortgage loan becomes delinquent, the Company proceeds to foreclose and all expenses for foreclosure are expensed as incurred. Once foreclosed, the property is classified as real estate held for investment or held for sale.

 

To determine the allowance for credit 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 secondarily on the borrower’s (or guarantor’s) ability to repay.

 

Commercial loans are evaluated for credit loss by analyzing loan attributes that are predictors for future credit losses. The Company uses a combination of the debt service coverage ratio (“DSCR”) and loan to value (“LTV”) to group similar loans. The Company applies a future loss factor to the outstanding balance of each group to arrive at the allowance for credit loss.

 

Residential — These loans are secured by first and second mortgages on single-family dwellings. The borrower’s ability to repay is sensitive to the life events and the general economic condition of the region. Where loan to value exceeds 80%, the loan is generally guaranteed by private mortgage insurance, the FHA, or VA.

 

The Company uses a third-party to provide a monthly analysis of its residential portfolio for credit losses. The third party uses the Company’s current loan data and runs it through various models to project cash flows and provide a projected life of loan loss. The models consider loan features such as loan type, loan to value, payment status, age, and current property values. The Company also considers historical delinquency rates and current unemployment trends.

 

23

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

Residential construction (including land acquisition and development) – These loans are 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, and factor in estimates of the value of construction projects upon completion. 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 acquisition and development loans are underwritten in accordance with the Company’s underwriting policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These loans are 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.

 

To determine the allowance for credit losses on residential construction mortgage loans, the Company considers historical activity and housing market trends. Given the continued volatility in the housing market, the Company has adjusted its credit loss analysis.

 

The following table presents a roll forward of the allowance for credit losses as of the dates indicated:

 

   Commercial   Residential   Residential Construction   Total 
September 30, 2023                    
Allowance for credit losses:                    
Beginning balance - January 1, 2023  $187,129   $1,739,980   $43,202   $1,970,311 
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13) (1)   555,807    (192,607)   301,830    665,030 
Change in provision for credit losses (2)   67,246    52,797    (142,440)   (22,397)
Charge-offs   -    -    -    - 
Ending balance - September 30, 2023  $810,182   $1,600,170   $202,592   $2,612,944 
                     
December 31, 2022                    
Allowance for credit losses:                    
Beginning balance - January 1, 2022  $187,129   $1,469,571   $43,202   $1,699,902 
Change in provision for credit losses (2)   -    270,409    -    270,409 
Charge-offs   -    -    -    - 
Ending balance - December 31, 2022  $187,129   $1,739,980   $43,202   $1,970,311 

 

 

 

(1) See Note 2 of the notes to the condensed consolidated financial statements
(2) Included in other expenses on the condensed consolidated statements of earnings

 

24

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

The following table presents the aging of mortgage loans held for investment by loan type as of the dates indicated:

 

   Commercial   Residential   Residential
Construction
   Total 
September 30, 2023                    
30-59 days past due  $3,139,403   $3,816,822   $805,766   $7,761,991 
60-89 days past due   -    1,795,326    -    1,795,326 
Over 90 days past due (1)   1,646,508    3,778,582    1,005,417    6,430,507 
In process of foreclosure (1)   -    276,580    -    276,580 
Total past due   4,785,911    9,667,310    1,811,183    16,264,404 
Current   51,205,116    86,924,333    99,484,568    237,614,017 
Total mortgage loans   55,991,027    96,591,643    101,295,751    253,878,421 
Allowance for credit losses   (810,182)   (1,600,170)   (202,592)   (2,612,944)
Unamortized deferred loan fees, net   (145,572)   (1,129,517)   (354,457)   (1,629,546)
Unamortized discounts, net   (220,276)   (108,557)   -    (328,833)
Net mortgage loans held for investment  $54,814,997   $93,753,399   $100,738,702   $249,307,098 
                     
December 31, 2022                    
30-59 days past due  $1,000,000   $3,553,390   $-   $4,553,390 
60-89 days past due   -    814,184    -    814,184 
Over 90 days past due (1)   -    1,286,211    -    1,286,211 
In process of foreclosure (1)   405,000    876,174    -    1,281,174 
Total past due   1,405,000    6,529,959    -    7,934,959 
Current   44,906,955    86,825,664    172,516,125    304,248,744 
Total mortgage loans   46,311,955    93,355,623    172,516,125    312,183,703 
Allowance for credit losses   (187,129)   (1,739,980)   (43,202)   (1,970,311)
Unamortized deferred loan fees, net   (199,765)   (1,212,994)   (333,846)   (1,746,605)
Unamortized discounts, net   (230,987)   (111,873)   -    (342,860)
Net mortgage loans held for investment  $45,694,074   $90,290,776   $172,139,077   $308,123,927 

 

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

 

25

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

Credit Quality Indicators

 

The Company evaluates and monitors the credit quality of its commercial loans by analyzing loan to value (“LTV”) and debt service coverage ratios (“DSCR”). Monitoring a commercial mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

 

The aggregate unpaid principal balance of commercial mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023:

 

Credit Quality Indicator  2023   2022   2021   2020   2019   Prior   Total   % of Total 
LTV:                                        
Less than 65%  $17,525,000   $13,396,458   $3,800,378   $-   $2,989,026   $6,796,621   $44,507,483    79.49%
65% to 80%   -    4,585,706    1,050,000    4,913,313    -    -    10,549,019    18.84%
Greater than 80%   -    529,525    405,000    -    -    -    934,525    1.67%
                                         
Total  $17,525,000   $18,511,689   $5,255,378   $4,913,313   $2,989,026   $6,796,621   $55,991,027    100.00%
                                         
DSCR                                        
>1.20x  $5,725,000   $1,000,000   $1,750,000   $4,913,313   $2,989,026   $2,754,604   $19,131,943    34.17%
1.00x - 1.20x   5,300,000    8,496,130    3,505,378    -    -    4,042,017    21,343,525    38.12%
<1.00x   6,500,000    9,015,559(1)(1)   -    -    -    -    15,515,559    27.71%
                                         
Total  $17,525,000   $18,511,689   $5,255,378   $4,913,313   $2,989,026   $6,796,621   $55,991,027    100.00%

 

 

 

(1) Commercial construction loan

 

The Company evaluates and monitors the credit quality of its residential mortgage loans by analyzing loan performance. The Company defines non-performing mortgage loans as loans more than 90 days past due and on a non-accrual status. Monitoring a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

 

The aggregate unpaid principal balance of residential mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023:

 

Credit Quality Indicator  2023   2022   2021   2020   2019   Prior   Total   % of Total 
Performance Indicators:                                        
Performing  $7,788,450   $55,306,009   $7,249,701   $7,495,836   $2,808,390   $11,888,093   $92,536,479    95.80%
Non-performing (1)   324,111    838,669    741,534    800,486    -    1,350,364    4,055,164    4.20%
                                         
Total  $8,112,561   $56,144,678   $7,991,235   $8,296,322   $2,808,390   $13,238,457   $96,591,643    100.00%

 

 

 

(1) Includes residential mortgage loans in the process of foreclosure of $276,580 as of September 30, 2023

 

26

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

The company evaluates and monitors the credit quality of its residential construction loans (including land acquisition and development loans) by analyzing LTV and loan performance. Monitoring a residential construction mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

 

The aggregate unpaid principal balance of residential construction mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023:

 

Credit Quality Indicator  2023   2022   2021   Total   % of Total 
Performance Indicators:                         
Performing  $48,525,276   $27,213,555   $24,551,503   $100,290,334    99.01%
Non-performing   -    1,005,417    -    1,005,417    0.99%
                          
Total  $48,525,276   $28,218,972   $24,551,503   $101,295,751    100.00%
                          
LTV:                         
Less than 65%  $29,476,916   $8,675,281   $17,117,181   $55,269,378    54.56%
65% to 80%   19,048,360    19,543,691    7,434,322    46,026,373    45.44%
Greater than 80%   -    -    -    -    0.00%
                          
Total  $48,525,276   $28,218,972   $24,551,503   $101,295,751    100.00%

 

Insurance Assignments

 

The following table presents the aging of insurance assignments, included in other investments and policy loans on the condensed consolidated balance sheets:

 

   As of September 30,
2023
   As of December 31,
2022
 
30-59 days past due  $9,374,806   $10,621,443 
60-89 days past due   3,591,685    3,997,484 
Over 90 days past due   4,611,748    5,813,013 
Total past due   17,578,239    20,431,941 
Current   25,045,762    26,510,594 
Total insurance assignments   42,624,001    46,942,536 
Allowance for credit losses   (1,555,261)   (1,609,951)
Net insurance assignments  $41,068,740   $45,332,585 

 

The Company records an allowance for credit losses when the insurance assignment is funded. Once an insurance assignment moves to 90 days or legal proceedings, it is monitored for write-off and collectability, and any adjustments to the allowance are recorded at that time. See Note 2 regarding the adoption of ASU 2016-13.

 

27

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

The following table presents a roll forward of the allowance for credit losses for insurance assignments as of the dates indicated:

 

   Allowance 
Beginning balance - January 1, 2023  $1,609,951 
Change in provision for credit losses (1)   667,260 
Charge-offs   (721,950)
Ending balance - September 30, 2023  $1,555,261 
      
Beginning balance - January 1, 2022  $1,686,218 
Change in provision for credit losses (1)   889,480 
Charge-offs   (965,747)
Ending balance - December 31, 2022  $1,609,951 

 

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

 

Investment Related Earnings

 

The following table presents the realized gains and losses from sales, calls, and maturities, and unrealized gains and losses on equity securities from investments and other assets:

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Fixed maturity securities:                    
Gross realized gains  $37,565   $30,121   $54,619   $205,755 
Gross realized losses   (10,383)   (26,203)   (102,182)   (36,961)
Net credit loss (provision) release   1,740    -    (222,264)   - 
                     
Equity securities:                    
Gains (losses) on securities sold   324,009    (131,472)   277,057    (60,154)
Unrealized losses on securities held at the end of the period   (1,321,511)   (1,383,627)   (423,448)   (4,097,049)
                     
Real estate held for investment and sale:                    
Gross realized gains   36,166    -    197,194    1,260,548 
Gross realized losses   -   (727,370)   -    (825,593)
                     
Other assets, including call and put option derivatives:                    
Gross realized gains   -    59,599    214,348    632,082 
Gross realized losses   -    -    -    - 
Total  $(932,414)  $(2,178,952)  $(4,676)  $(2,921,372)

 

The 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.

 

Net realized gains and losses includes gains and losses by the restricted assets and cemetery perpetual care trust investments of the cemeteries and mortuaries of $452,115 and $640,593 in net losses for the three month periods ended September 30, 2023, and 2022, respectively, and of $200,605 and $1,636,469 in net losses for the nine month periods ended September 30, 2023, and 2022, respectively.

 

28

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

3) Investments (Continued)

 

Major categories of net investment income were as follows:

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Fixed maturity securities available for sale  $4,242,185   $3,188,521   $12,398,685   $8,636,387 
Equity securities   167,348    139,412    448,564    382,246 
Mortgage loans held for investment   9,842,845    10,477,672    27,797,908    27,682,315 
Real estate held for investment and sale   3,291,047    3,918,310    11,553,643    10,970,535 
Policy loans   191,843    213,520    599,498    727,103 
Insurance assignments   4,340,644    4,218,184    13,570,659    13,708,894 
Other investments   213,560    181,597    555,720    350,603 
Cash and cash equivalents   1,083,241    514,869    2,651,148    698,601 
Gross investment income   23,372,713    22,852,085    69,575,825    63,156,684 
Investment expenses   (4,124,250)   (4,249,015)   (12,380,505)   (13,388,020)
Net investment income  $19,248,463   $18,603,070   $57,195,320   $49,768,664 

 

Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $372,277 and $675,259 for the three month periods ended September 30, 2023 and 2022, respectively, and of $2,224,629 and $1,882,502 for the nine month periods ended September 30, 2023 and 2022, 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.

 

Accrued Investment Income

 

Accrued investment income consists of the following:

 

   As of September 30,
2023
   As of December 31,
2022
 
Fixed maturity securities available for sale  $4,343,327   $3,563,767 
Equity securities   12,729    14,496 
Mortgage loans held for investment   4,732,717    3,220,709 
Real estate held for investment   3,158,708    3,455,305 
Policy Loans   4,463    37,951 
Cash and cash equivalents   14,751    7,598 
Total accrued investment income  $12,266,695   $10,299,826 

 

29

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

4) Loans Held for Sale

 

The Company’s loans held for sale portfolio is valued using the fair value option. Changes in the fair value of the loans are included in mortgage fee income. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on recognition of mortgage loan interest income and is included in mortgage fee income on the condensed consolidated statement of earnings. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

 

The following table presents the aggregate fair value and the aggregate unpaid principal balance of loans held for sale:

 

   As of September 30,
2023
   As of December 31,
2022
 
         
Aggregate fair value  $152,546,566   $141,179,620 
Unpaid principal balance   153,420,558    141,337,811 
Unrealized loss   (873,992)   (158,191)

 

Mortgage Fee Income

 

Mortgage fee income consists of origination fees, processing fees, interest income and 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 summarized as follows:

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
Loan fees  $6,033,227   $4,729,445   $16,408,443   $19,766,856 
Interest income   2,637,971    2,570,511    7,265,516    7,525,826 
Secondary gains   17,625,394    28,940,898    54,884,965    103,336,118 
Change in fair value of loan commitments   (1,504,286)   (3,271,282)   (977,716)   (2,843,155)
Change in fair value of loans held for sale   (108,676)   (4,131,363)   (715,799)   (7,973,171)
Provision (release) for loan loss reserve   252,389    (230,321)   138,369    (829,243)
Mortgage fee income  $24,936,019   $28,607,888   $77,003,778   $118,983,231 

 

Loan Loss Reserve

 

Repurchase demands from third party investors that correspond to mortgage loans previously held for sale and sold are reviewed and relevant data is captured so that an estimated future loss can be calculated. The key factors that are used in the estimated future 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 can resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor.

 

30

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

4) Loans Held for Sale (Continued)

 

The loan loss reserve, which is included in other liabilities and accrued expenses, is summarized as follows:

 

   As of September 30,
2023
   As of December 31,
2022
 
Balance, beginning of period  $1,725,667   $2,447,139 
Provision on current loan originations (1)   770,220    1,078,812 
Charge-offs, net of recaptured amounts   (1,804,134)   (1,800,284)
Balance, end of period  $691,753   $1,725,667 

 

 
(1)Included in mortgage fee income

 

The Company maintains reserves for estimated losses on current production volumes. For the nine month period ended September 30, 2023, $770,220 in reserves were added at a rate of 4.5 basis points per loan, the equivalent of $450 per $1,000,000 in loans originated. This is an increase over the nine month period ended September 30, 2022, when reserves of $829,243 were added at a rate of 2.9 basis points per loan originated, the equivalent of $290 per $1,000,000 in loans originated. The Company monitors market data and trends, economic conditions (including forecasts) and its own experience to maintain adequate loss reserves on current production.

 

31

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

5) Stock Compensation Plans

 

The Company has equity incentive plans (the “2013 Plan”, the “2014 Director Plan” and the “2022 Plan”).

 

Stock Options

 

Stock based compensation expense for stock options issued of $145,973 and $230,853 has been recognized for these plans for the three month periods ended September 30, 2023, and 2022, respectively, and $430,856 and $722,775 has been recognized for these plans for the nine month periods ended September 30, 2023 and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of September 30, 2023, the total unrecognized compensation expense related to the options issued was $102,775, which is expected to be recognized over the remaining vesting period.

 

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.

 

Activity of the stock option plans during the nine month period ended September 30, 2023, is summarized as follows:

 

   Number of
Class A Shares
   Weighted Average Exercise Price (2)   Number of
Class C Shares
   Weighted Average Exercise Price (2) 
                 
Outstanding at January 1, 2023   976,605   $4.56    1,157,203   $5.31 
Adjustment for the effect of stock dividends   38,266         57,859      
Granted   16,000         -      
Exercised   (233,180)        -      
Cancelled   -         -      
Outstanding at September 30, 2023   797,691   $4.78    1,215,062   $5.31 
                     
As of September 30, 2023:                    
Options exercisable   770,066   $4.73    1,141,312   $5.25 
                     
As of September 30, 2023:                    
Available options for future grant   171,386         834,750      
                     
Weighted average contractual term of options                    
outstanding at September 30, 2023   4.69 years         6.15 years      
                     
Weighted average contractual term of options                    
exercisable at September 30, 2023   4.53 years         6.03 years      
                     
Aggregated intrinsic value of options                    
outstanding at September 30, 2023 (1)  $2,438,675        $3,074,037      
                     
Aggregated intrinsic value of options                    
exercisable at September 30, 2023 (1)  $2,398,360        $2,955,012      

 

 
(1)The Company used a stock price of $7.84 as of September 30, 2023 to derive intrinsic value.
(2)Adjusted for the effect of annual stock dividends.

 

32

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

5) Stock Compensation Plans (Continued)

 

Activity of the stock option plans during the nine month period ended September 30, 2022, is summarized as follows:

 

   Number of
Class A Shares
   Weighted Average Exercise Price (2)   Number of
Class C Shares
   Weighted Average Exercise Price (2) 
                 
Outstanding at January 1, 2022   1,024,351   $4.38    821,146   $5.26 
Adjustment for the effect of stock dividends   47,780         41,057      
Granted   4,000         -      
Exercised   (71,330)        -      
Cancelled   (1,591)        -      
Outstanding at September 30, 2022   1,003,210   $4.58    862,203   $5.26 
                     
As of September 30, 2022:                    
Options exercisable   978,835   $4.49    804,703   $5.04 
                     
As of September 30, 2022:                    
Available options for future grant   1,239,795       17,523    
                   
Weighted average contractual term of options outstanding at September 30, 2022   4.32 years         6.75 years      
                     
Weighted average contractual term of options exercisable at September 30, 2022   4.19 years         6.63 years      
                     
Aggregated intrinsic value of options outstanding at September 30, 2022 (1)  $1,775,100      $939,395    
                   
Aggregated intrinsic value of options exercisable at September 30, 2022 (1)  $1,819,950      $1,055,445    

 

 
(1)The Company used a stock price of $6.35 as of September 30, 2022 to derive intrinsic value.
(2)Adjusted for the effect of annual stock dividends.

 

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the nine month periods ended September 30, 2023 and 2022 was $454,923 and $521,527, respectively.

 

33

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

5) Stock Compensation Plans (Continued)

 

Restricted Stock Units (“RSUs”)

 

Stock based compensation expense for RSUs issued of nil has been recognized under these plans for each of the three month periods ended September 30, 2023 and 2022, and of $742 and nil has been recognized under these plans for the nine month periods ended September 30, 2023 and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of September 30, 2023, the total unrecognized compensation expense related to the RSUs issued was nil. The fair value of each RSU granted is determined based on the Company’s stock price on the date of grant. Prior to December 2022, the Company did not grant any RSUs.

 

Activity of the RSUs during the nine month period ended September 30, 2023 is summarized as follows:

 

   Number of
Class A Shares
   Weighted Average Grant Date Fair Value 
Non-vested at January 1, 2023   1,620   $6.48 
Granted   -      
Vested   (810)     
Non-vested at September 30, 2023   810   $6.48 
           
Available RSUs for future grant  $18,380      
          
Aggregated intrinsic value of RSUs outstanding at September 30, 2023 (1)  $1,102      

 

 

(1)The Company used a stock price of $7.84 as of September 30, 2023 to derive intrinsic value.

 

34

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

6) Earnings Per Share

 

Earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. In accordance with GAAP, the basic and diluted earnings per share amounts were calculated as follows:

 

   2023   2022   2023   2022 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2023   2022   2023   2022 
Numerator:                    
Net earnings (loss)  $4,041,293   $(2,353,185)  $11,634,171   $4,449,982 
Denominator:                    
Basic weighted-average shares outstanding   22,063,495    21,976,292    22,066,243    22,213,846 
Effect of dilutive securities:                    
Employee stock options   768,231    719,704    634,099    822,367 
                     
Diluted weighted-average shares outstanding   22,831,726    22,695,996    22,700,342    23,036,213 
                     
Basic net earnings (loss) per share  $0.18   $(0.11)  $0.53   $0.20 
                     
Diluted net earnings (loss) per share  $0.18   $(0.10)  $0.51   $0.19 

 

For the nine month periods ended September 30, 2023, and 2022, there were 55,125 and 339,150 anti-dilutive 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. Basic and diluted earnings per share amounts are the same for each class of common stock.

 

The following table summarizes the activity in shares of capital stock.

 

   Class A   Class C 
Outstanding shares at December 31, 2021   17,642,722    2,866,565 
           
Exercise of stock options   69,096    - 
Stock dividends   889,554    139,462 
Conversion of Class C to Class A   116,168    (116,168)
           
Outstanding shares at September 30, 2022   18,717,540    2,889,859 
           
Outstanding shares at December 31, 2022   18,758,031    2,889,859 
           
Exercise of stock options   239,191    - 
Vesting of restricted stock units   810    - 
Stock dividends   949,980    141,594 
Conversion of Class C to Class A   59,599    (59,599)
           
Outstanding shares at September 30, 2023   20,007,611    2,971,854 

 

35

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

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, 2022. 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.

 

36

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

7) Business Segment Information (Continued)

 

   Life Insurance   Cemetery/
Mortuary
   Mortgage   Intercompany
Eliminations
   Consolidated 
For the Three Months Ended September 30, 2023                         
Revenues from external customers  $47,199,169   $7,416,423   $25,626,135   $-   $80,241,727 
Intersegment revenues   2,330,292    85,699    133,639    (2,549,630)   - 
Segment profit (loss) before income taxes   7,175,181    1,469,592    (3,486,083)   -    5,158,690 
                          
For the Nine Months Ended September 30, 2023                         
Revenues from external customers  $140,685,555   $23,427,327   $79,475,738   $-   $243,588,620 
Intersegment revenues   6,357,810    254,302    393,145    (7,005,257)   - 
Segment profit (loss) before income taxes   20,017,102    6,082,343    (11,206,534)   -    14,892,911 
                          
Identifiable Assets  $1,299,027,212   $92,299,022   $107,800,781   $(90,608,563)  $1,408,518,452 
Goodwill   2,765,570    2,488,213    -    -    5,253,783 
Total Assets  $1,301,792,782   $94,787,235   $107,800,781   $(90,608,563)  $1,413,772,235 
                          
For the Three Months Ended September 30, 2022                         
Revenues from external customers  $43,118,076   $6,691,998   $33,667,146   $-   $83,477,220 
Intersegment revenues   1,723,812    91,699    101,019    (1,916,530)   - 
Segment profit (loss) before income taxes   4,233,619    901,084    (8,437,047)   -    (3,302,344)
                          
For the Nine Months Ended September 30, 2022                         
Revenues from external customers  $125,786,154   $21,446,210   $134,237,417   $-   $281,469,781 
Intersegment revenues   5,495,578    359,439    253,554    (6,108,571)   - 
Segment profit (loss) before income taxes   8,981,888    4,407,339    (7,518,209)   -    5,871,018 
                          
Identifiable Assets  $1,222,265,692   $80,402,663   $239,915,479   $(87,763,750)  $1,454,820,084 
Goodwill   2,765,570    2,488,213    -    -    5,253,783 
Total Assets  $1,225,031,262   $82,890,876   $239,915,479   $(87,763,750)  $1,460,073,867 

 

37

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (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.
 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 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.

 

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

 

Fixed Maturity Securities Available for Sale: 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 (considered Level 3 financial assets), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

 

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

 

Restricted Assets: A portion of these assets include mutual funds and equity securities and fixed maturity 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 Perpetual Care Trust Investments: A portion of these assets include equity securities and fixed maturity 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 Option Derivatives: The fair values for call and put options are based on quoted market prices.

 

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

 

38

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The items shown under Level 3 are valued as follows:

 

Loans Held for Sale: The Company has elected the fair value option for loans held for sale. The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets. Fair value is often difficult to determine in volatile markets and may contain significant unobservable inputs.

 

Loan Commitments and Forward Sale Commitments: The Company’s mortgage segment enters loan commitments with potential borrowers and forward sale commitments to sell loans with 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, 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 be funded 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 comparable sales in the area, property condition, and 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 a provider of building cost information to the real estate construction.

 

Impaired 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 real estate held for investment, the Company uses a provider of building cost information to the real estate construction industry. For the investment analysis, the Company uses 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 comparable properties and property condition when determining fair value.

 

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

 

Mortgage Servicing Rights: The Company initially recognizes Mortgage Servicing Rights (“MSRs”) 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.

 

39

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (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 as of September 30, 2023:

 

   Total   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
Assets accounted for at fair value on a
recurring basis
                    
Fixed maturity securities available for sale  $356,448,259   $-   $355,216,072   $1,232,187 
Equity securities   12,309,544    12,309,544    -    - 
Loans held for sale   152,546,566    -    -    152,546,566 
Restricted assets (1)   1,534,526    -    1,534,526    - 
Restricted assets (2)   6,312,610    6,312,610    -    - 
Cemetery perpetual care trust investments (1)   367,392    -    367,392    - 
Cemetery perpetual care trust investments (2)   3,855,805    3,855,805    -    - 
Derivatives - loan commitments (3)   4,817,703    -    -    4,817,703 
Total assets accounted for at fair value on a
recurring basis
  $538,192,405   $22,477,959   $357,117,990   $158,596,456 
                     
Liabilities accounted for at fair value on a
recurring basis
                    
Derivatives - loan commitments (4)   (3,088,542)   -    -    (3,088,542)
Total liabilities accounted for at fair value
on a recurring basis
  $(3,088,542)  $-   $-   $(3,088,542)

 

 
(1)Fixed maturity securities available for sale
(2)Equity securities
(3)Included in other assets on the consolidated balance sheets
(4)Included in other liabilities and accrued expenses on the consolidated balance sheets

 

40

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (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 as of December 31, 2022:

 

   Total   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
Assets accounted for at fair value on a recurring basis                    
Fixed maturity securities available for sale  $345,858,492   $-   $344,422,973   $1,435,519 
Equity securities   11,682,526    11,682,526    -    - 
Loans held for sale   141,179,620    -    -    141,179,620 
Restricted assets (1)   1,217,308    -    1,217,308    - 
Restricted assets (2)   5,348,244    5,348,244    -    - 
Cemetery perpetual care trust investments (1)   254,731    -    254,731    - 
Cemetery perpetual care trust investments (2)   3,605,162    3,605,162    -    - 
Derivatives - loan commitments (3)   4,089,856    -    -    4,089,856 
Total assets accounted for at fair value on a recurring basis  $513,235,939   $20,635,932   $345,895,012   $146,704,995 
                     
Liabilities accounted for at fair value on a recurring basis                    
Derivatives - call options (4)  $(29,715)  $(29,715)  $-   $- 
Derivatives - put options (4)   (13,888)   (13,888)   -    - 
Derivatives - loan commitments (4)   (1,382,979)   -    -    (1,382,979)
Total liabilities accounted for at fair value on a recurring basis  $(1,426,582)  $(43,603)  $-   $(1,382,979)

 

 
(1)Fixed maturity securities available for sale
(2)Equity securities
(3)Included in other assets on the consolidated balance sheets
(4)Included in other liabilities and accrued expenses on the consolidated balance sheets

 

41

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2023, the significant unobservable inputs used in the fair value measurements were as follows:

 

          Significant  Range of Inputs     
   Fair Value at   Valuation  Unobservable  Minimum   Maximum   Weighted 
   September 30, 2023   Technique  Input(s)  Value   Value   Average 
Loans held for sale  $152,546,566   Market approach  Investor contract pricing as a percentage of unpaid principal balance   70.0%   107.0%   99.0%
                           
Derivatives - loan commitments (net)   1,729,161   Market approach  Pull-through rate   70.0%   95.0%   88.0%
           Initial-Value   N/A    N/A    N/A 
           Servicing   0 bps    138 bps    61 bps 
                           
Fixed maturity securities available for sale   1,232,187   Broker quotes  Pricing quotes  $98.40   $100.00   $99.32 

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

 

          Significant  Range of Inputs     
   Fair Value at   Valuation  Unobservable  Minimum   Maximum   Weighted 
   December 31, 2022   Technique  Input(s)  Value   Value   Average 
Loans held for sale  $141,179,620   Market approach  Investor contract pricing as a percentage of unpaid principal balance   69.9%   106.1%   99.8%
                           
Derivatives - loan commitments (net)   2,706,877   Market approach  Pull-through rate   65.0%   95.0%   82.2%
           Initial-Value   N/A    N/A    N/A 
           Servicing   0 bps    153 bps    73 bps 
                           
Fixed maturity securities available for sale   1,435,519   Broker quotes  Pricing quotes  $100.00   $111.11   $104.97 

 

42

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the nine month period ended September 30, 2023:

 

   Net Loan Commitments   Loans Held for Sale   Fixed Maturity Securities Available for Sale 
Balance - December 31, 2022  $2,706,877   $141,179,620   $1,435,519 
Originations and purchases   -    1,708,831,185    - 
Sales, maturities and paydowns   -    (1,726,023,095)   (129,521)
Transfer to mortgage loans held for investment   -    (3,017,626)   - 
Total gains (losses):               
Included in earnings   (977,716)(1)   31,576,482(1)   (109)(2)
Included in other comprehensive income   -    -    (73,702)
                
Balance - September 30, 2023  $1,729,161   $152,546,566   $1,232,187 

 

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

 

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the nine month period ended September 30, 2022:

 

   Net Loan Commitments   Loans Held for Sale   Fixed Maturity Securities Available for Sale 
Balance - December 31, 2021  $7,015,515   $302,776,827   $2,023,348 
Originations and purchases   -    2,837,349,328    - 
Sales, maturities and paydowns   -    (2,987,906,269)   (368,980)
Transfer to mortgage loans held for investment   -    (49,428,757)   - 
Total gains (losses):               
Included in earnings   (2,843,155)(1)   59,190,794(1)   1,957(2)
Included in other comprehensive income   -    -    (31,127)
                
Balance - September 30, 2022  $4,172,360   $161,981,923   $1,625,198 

 

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

 

43

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month period ended September 30, 2023:

 

   Net Loan Commitments   Loans Held for Sale   Fixed Maturity Securities Available for Sale 
Balance - June 30, 2023  $3,233,447   $161,310,060   $1,431,874 
Originations and purchases   -    569,095,944    - 
Sales, maturities and paydowns   -    (585,545,472)   (129,521)
Transfer to mortgage loans held for investment   -    (1,867,552)     
Total gains (losses):               
Included in earnings   (1,504,286)(1)   9,553,586(1)   (109)(2)
Included in other comprehensive income   -    -    (70,057)
                
Balance - September 30, 2023  $1,729,161   $152,546,566   $1,232,187 

 

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

 

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month period ended September 30, 2022:

 

   Net Loan Commitments   Loans Held for Sale   Fixed Maturity Securities Available for Sale 
Balance - June 30, 2022  $7,443,642   $209,860,409   $1,962,789 
Originations and purchases   -    787,389,868    - 
Sales, maturities and paydowns   -    (800,430,402)   (344,630)
Transfer to mortgage loans held for investment   -    (49,428,757)   - 
Total gains (losses):               
Included in earnings   (3,271,282)(1)   14,590,805(1)   -(2)
Included in other comprehensive income   -    -    7,039 
                
Balance - September 30, 2022  $4,172,360   $161,981,923   $1,625,198 

 

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

 

44

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The Company did not have any financial assets and financial liabilities measured at fair value on a nonrecurring basis as of September 30, 2023.

 

The following table summarizes 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 as of December 31, 2022:

 

   Total   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
Assets accounted for at fair value on a nonrecurring basis                    
Impaired mortgage loans held for investment  $471,786   $-   $-   $471,786 
Total assets accounted for at fair value on a nonrecurring basis  $471,786   $-   $-   $471,786 

 

45

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (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 as of September 30, 2023 and December 31, 2022.

 

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of September 30, 2023:

 

   Carrying Value   Level 1   Level 2   Level 3   Total Estimated Fair Value 
Assets                         
Mortgage loans held for investment                         
Residential  $93,753,399   $-   $-   $91,471,266   $91,471,266 
Residential construction   100,738,702    -    -    100,740,713    100,740,713 
Commercial   54,814,997    -    -    53,928,941    53,928,941 
Mortgage loans held for investment, net  $249,307,098   $-   $-   $246,140,920   $246,140,920 
Policy loans   13,154,845    -    -    13,154,845    13,154,845 
Insurance assignments, net (1)   41,068,740    -    -    41,068,740    41,068,740 
Restricted assets (2)   1,113,970    -    -    1,113,970    1,113,970 
Cemetery perpetual care trust investments (2)   1,962,587    -    -    1,962,587    1,962,587 
Mortgage servicing rights, net   3,494,723    -    -    5,012,375    5,012,375 
                          
Liabilities                         
Bank and other loans payable  $(108,431,028)  $-   $-   $(108,431,028)  $(108,431,028)
Policyholder account balances (3)   (39,988,385)   -    -    (41,141,921)   (41,141,921)
Future policy benefits - annuities (3)   (106,278,388)   -    -    (123,165,600)   (123,165,600)

 

 
(1)Included in other investments and policy loans on the condensed consolidated balance sheets
(2)Mortgage loans held for investment
(3)Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets

 

46

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (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, 2022:

 

   Carrying Value   Level 1   Level 2   Level 3   Total Estimated Fair Value 
Assets                         
Mortgage loans held for investment                         
Residential  $90,290,776   $-   $-   $88,575,293   $88,575,293 
Residential construction   172,139,077    -    -    172,139,077    172,139,077 
Commercial   45,694,074    -    -    44,079,537    44,079,537 
Mortgage loans held for investment, net  $308,123,927   $-   $-   $304,793,907   $304,793,907 
Policy loans   13,095,473    -    -    13,095,473    13,095,473 
Insurance assignments, net (1)   45,332,585    -    -    45,332,585    45,332,585 
Restricted assets (2)   1,731,469    -    -    1,731,469    1,731,469 
Cemetery perpetual care trust investments (2)   1,506,517    -    -    1,506,517    1,506,517 
Mortgage servicing rights, net   3,039,765    -    -    3,927,877    3,927,877 
                          
Liabilities                         
Bank and other loans payable  $(161,712,804)  $-   $-   $(161,712,804)  $(161,712,804)
Policyholder account balances (3)   (41,146,171)   -    -    (42,181,089)   (42,181,089)
Future policy benefits - annuities (3)   (106,637,094)   -    -    (126,078,031)   (126,078,031)

 

 
(1)Included in other investments and policy loans on the consolidated balance sheets
(2)Mortgage loans held for investment
(3)Included in future policy benefits and unpaid claims on the consolidated balance sheets

 

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

 

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 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, 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 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.

 

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.

 

47

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

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

 

Policyholder Account Balances and Future Policy Benefits-Annuities: Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period of more than 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) 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 several 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 consider all 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 net of estimated commission expense. 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 related 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. 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 be funded within the terms of the commitments.

 

48

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

9) Derivative Instruments (Continued)

 

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 Derivatives

 

The Company discontinued its use of selling “out of the money” call options on its equity securities and the use of selling put options as a source of revenue in the first quarter of 2023. The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets.

 

The following table shows the fair value and notional amounts of derivative instruments:

 

      September 30, 2023   December 31, 2022 
   Balance Sheet Location  Notional Amount   Asset Fair Value   Liability Fair Value   Notional Amount   Asset Fair Value   Liability Fair Value 
Derivatives not designated as hedging instruments:                                 
Loan commitments  Other assets and Other liabilities  $268,292,962   $4,817,703   $3,088,542   $453,371,808   $4,089,859   $1,382,979 
Call options  Other liabilities   -    -    -    868,600    -    29,715 
Put options  Other liabilities   -    -    -    654,500    -    13,888 
Total     $268,292,962   $4,817,703   $3,088,542   $454,894,908   $4,089,859   $1,426,582 

 

The table below presents the gains (losses) on derivatives. There were no gains or losses reclassified from accumulated other comprehensive income into income or gains or losses recognized in income on derivatives ineffective portion, or any amounts excluded from effective testing.

 

      Net Amount Gain (Loss)   Net Amount Gain (Loss) 
      Three Months Ended September 30,   Nine Months Ended September 30, 
Derivative  Classification  2023   2022   2023   2022 
Loan commitments  Mortgage fee income  $(1,504,286)  $(3,271,282)  $(977,716)  $(2,843,155)
                        
Call and put options  Gains on investments and other assets  $-   $50,045   $49,963   $176,274 

 

49

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

10) Reinsurance, Commitments and Contingencies

 

Reinsurance

 

The Company follows the procedure of reinsuring risks of more than a specified limit, which ranges from $25,000 to $100,000 on newly issued policies. The Company has also assumed various reinsurance agreements through acquisition of various life companies. The Company is ultimately liable for these reinsured amounts in the event such reinsurers are unable to pay their portion of the claims. The Company evaluates the financial condition of reinsurers and monitors the concentration of credit risk. The Company is also a reinsurer of insurance with other companies.

 

Mortgage Loan Loss Settlements

 

Future loan losses can be extremely difficult to estimate. However, the Company believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. See Note 4 to the condensed consolidated financial statements for additional information about the Company’s loan loss reserve.

 

Debt Covenants for Mortgage Warehouse Lines of Credit

 

The Company, through its subsidiary SecurityNational Mortgage, has a line of credit with Wells Fargo Bank N.A. This agreement allows SecurityNational Mortgage to borrow up to $100,000,000 for the sole purpose of funding mortgage loans (the “Wells Fargo Bank Warehouse Line of Credit”). charges interest at the 1-Month Secured Overnight Financing Rate (“SOFR”) rate plus 2.1% and expired and was not renewed on October 31, 2023 and will not be renewed because of the lender exiting the marketplace. SecurityNational Mortgage is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and the liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.00.

 

The Company, through its subsidiary SecurityNational Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement allows SecurityNational Mortgage to borrow up to $100,000,000 for the sole purpose of funding mortgage loans (the “Texas Capital Bank Warehouse Line of Credit”). The agreement charges interest at the 1-Month SOFR rate plus 2.0% and matures on November 30, 2024. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

 

The Company through its subsidiary SecurityNational Mortgage, has a line of credit with U.S Bank. This agreement allows SecurityNational Mortgage to borrow up to $25,000,000 for the sole purpose of funding mortgage loans (the “U.S. Bank Warehouse Line of Credit” and, together with the Wells Fargo Bank Warehouse Line of Credit and the Texas Capital Bank Warehouse Line of Credit, the “Warehouse Lines of Credit”). The agreement charges interest at 2.10% plus the greater of (i) 0%, and (ii) the one-month forward-looking term rate based on SOFR and matures on December 1, 2023. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months.

 

50

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

10) Reinsurance, Commitments and Contingencies (Continued)

 

The agreements for the Warehouse Lines of Credit include cross default provisions where certain events of default under other of SecurityNational Mortgage’s obligations constitute events of default under the Warehouse Lines of Credit. As of September 30, 2023, the Company was not in compliance with the net income covenant of the Warehouse Lines of Credit and has received or is in the process of receiving waivers under the Warehouse Lines of Credit from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately $10,200,000 on the warehouse line of credit that has not provided a covenant waiver, the Company has sufficient cash and borrowing capacity on the warehouse lines of credit that have provided covenant waivers to fund its origination activities. The Company has performed an internal analysis of its funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its business model. The Company continues to negotiate other warehouse lines of credit with other lenders.

 

Other Contingencies and Commitments

 

The Company has commitments to fund existing construction and land development loans pursuant to the various loan agreements. As of September 30, 2023, the Company’s commitments were approximately $157,247,000 for these loans, of which $104,378,000 had been funded. The Company advances funds in accordance with the loan agreements 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 at 5.25% to 8.50% per annum. Maturities range between six and eighteen months.

 

The Company belongs to a captive insurance group (“the captive group”) for certain casualty insurance, worker compensation and general liability programs. The captive group maintains insurance reserves 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 group considers several 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 from the Company and its members. 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, if adversely determined, 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.

 

51

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

11) Mortgage Servicing Rights

 

The Company initially records its MSRs at fair value as discussed in Note 8.

 

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.

 

The Company periodically reviews the various loan strata to determine whether the value of the MSRs in each stratum is impaired and likely to recover. If the Company 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.

 

The following table presents the MSR activity:

 

   As of September 30,
2023
   As of December 31,
2022
 
Amortized cost:          
Balance before valuation allowance at beginning of year  $3,039,765   $53,060,455 
MSR additions resulting from loan sales (1)   907,546    10,243,922 
Amortization (2)   (452,588)   (9,078,706)
Sale of MSRs   -    (51,185,906)
Application of valuation allowance to write down MSRs with other than temporary impairment   -    - 
Balance before valuation allowance at end of period  $3,494,723   $3,039,765 
           
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  $3,494,723   $3,039,765 
           
Estimated fair value of MSRs at end of period  $5,012,375   $3,927,877 

 

 

(1) Included in mortgage fee income on the condensed consolidated statements of earnings
(2) Included in other expenses on the condensed consolidated statements of earnings

 

52

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

11) Mortgage Servicing Rights (Continued)

 

The table below summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the Company’s assumptions in its September 30, 2023 valuation of MSRs. The assumptions used in the following table are likely to change as market conditions, portfolio composition and borrower behavior change, causing both actual and projected amortization levels to change over time.

 

   Estimated MSR Amortization 
2023   351,687 
2024   317,526 
2025   293,311 
2026   265,639 
2027   240,113 
Thereafter   2,026,447 
Total  $3,494,723 

 

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

 

                     
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Contractual servicing fees  $249,050   $4,644,397   $892,668   $13,845,626 
Late fees   21,037    107,219    84,358    288,854 
Total  $270,087   $4,751,616   $977,026   $14,134,480 

 

The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio.

  

   As of September 30,
2023
   As of December 31, 2022 
Servicing UPB  $411,911,166   $360,023,384 

 

The following key assumptions were used in determining MSR value:

  

   Prepayment
Speeds
   Average
Life (Years)
   Discount
Rate
 
September 30, 2023   8.00    8.59    12.22 
December 31, 2022   8.12    8.49    11.95 

 

On October 31, 2022, the Company sold certain of its MSRs. The MSRs related to mortgage loans previously originated by the Company in aggregate unpaid principal amount of approximately $7.02 billion. As a result of the sale, the book value of the Company’s MSRs decreased $51,185,906 and generated a gain of $34,051,938 included in mortgage fee income on the consolidated statements of earnings. Substantially all the consideration was received by the Company with the remainder subject to certain holdbacks during transfer of the MSRs. The Company completed the physical transfer of files prior to its deadline. The holdbacks have been received in 2023.

 

53

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

12) Income Taxes

 

The Company’s overall effective tax rate for the three month periods ended September 30, 2023 and 2022 was 21.7% and 28.7%, respectively, which resulted in a provision for income taxes of $1,117,397 and $(949,159), respectively, and for the nine month periods ended September 30, 2023 and 2022 was 21.9% and 24.2%, respectively, which resulted in a provision for income taxes of $3,258,740 and $1,421,036, respectively The Company’s effective tax rate is higher than the U.S. federal statutory rate of 21% due to, among other factors, state taxes as offset by certain state income tax benefits, along with certain permanent tax adjustments, such as meals and entertainment and stock-based compensation. The decrease in the effective tax rate when compared to the prior year was primarily due to a smaller increase in the valuation allowance.

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although the Company believes its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals.

 

13) Revenues from Contracts with Customers

 

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

 

Information about Performance Obligations and Contract Balances

 

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

 

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

 

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

 

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

 

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

 

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

 

54

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

13) Revenues from Contracts with Customers (Continued)

 

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

  

   Contract Balances 
   Receivables (1)   Contract Asset   Contract Liability 
Opening (January 1, 2023)  $5,392,779   $-   $16,226,836 
Closing (September 30, 2023)   6,088,152    -    17,573,212 
Increase/(decrease)   695,373    -    1,346,376 
                
   Contract Balances 
    Receivables (1)     Contract Asset    Contract Liability 
Opening (January 1, 2022)  $5,298,636   $-   $14,508,022 
Closing (December 31, 2022)   5,392,779    -    16,226,836 
Increase/(decrease)   94,143    -    1,718,814 

 

 

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

 

The amount of revenue recognized and included in the opening contract liability balance for the three month periods ended September 30, 2023 and 2022 was $1,279,750 and $1,034,035, respectively, and for the nine month periods ended September 30, 2023 and 2022 was $3,516,215 and $3,624,463, respectively.

 

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

 

Disaggregation of Revenue

 

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

  

                     
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Major goods/service lines                    
At-need  $4,832,352   $4,839,289   $14,985,838   $16,304,276 
Pre-need   2,401,679    1,631,074    5,888,336    4,622,311 
Net mortuary and cemetery sales    $7,234,031   $6,470,363   $20,874,174   $20,926,587 
                     
Timing of Revenue Recognition                    
Goods transferred at a point in time  $4,762,777   $4,040,381   $13,321,412   $12,815,582 
Services transferred at a point in time   2,471,254    2,429,982    7,552,762    8,111,005 
Net mortuary and cemetery sales  $7,234,031   $6,470,363   $20,874,174   $20,926,587 

 

55

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

13) 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 periods presented:

  

                     
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Net mortuary and cemetery sales  $7,234,031   $6,470,363   $20,874,174   $20,926,587 
Losses on investments and other assets   (452,120)   (640,593)   (200,610)   (1,615,253)
Net investment income   516,094    681,239    2,460,859    1,916,970 
Other revenues   118,418    180,989    292,904    217,906 
Revenues from external customers   7,416,423    6,691,998    23,427,327    21,446,210 

 

14) Receivables

 

Receivables consist of the following:

  

   As of September 30, 2023   As of December 31, 2022 
Contracts with customers  $6,088,152   $5,392,779 
Receivables from sales agents   2,527,586    2,209,185 
Other   8,404,014    23,200,919 
Total receivables   17,019,752    30,802,883 
Allowance for doubtful accounts   (1,520,801)   (2,229,791)
Net receivables  $15,498,951   $28,573,092 

 

The Company records an allowance for credit losses for its receivables in accordance with GAAP. See Note 2 regarding the adoption of ASU 2016-13.

 

The following table presents a roll forward of the allowance for credit losses:

  

   Allowance 
Beginning balance - January 1, 2023  $2,229,791 
Change in provision for credit losses (1)   (597,430)
Charge-offs   (111,560)
Ending balance - September 30, 2023  $1,520,801 
      
Beginning balance - January 1, 2022  $1,800,725 
Change in provision for credit losses (1)   799,888 
Charge-offs   (370,822)
Ending balance - December 31, 2022  $2,229,791 

 

 

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

 

56

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets

 

Cemetery Perpetual Care Trust Investments and Obligation

 

State law requires the Company to pay into endowment care trusts a portion of the proceeds from the sale of certain cemetery property interment rights for cemeteries that have established an endowment care trust. These endowment care trusts are defined as Variable Interest Entities pursuant to GAAP. The Company is the primary beneficiary of these trusts, as it absorbs both the losses and any expenses associated with the trusts. The Company has consolidated cemetery endowment care trust investments with a corresponding amount recorded as Cemetery Perpetual Care Obligation in the accompanying consolidated balance sheets.

 

The components of the cemetery perpetual care investments and obligation as of September 30, 2023, are as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Allowance for Credit Losses   Estimated Fair Value 
September 30, 2023:                         
Fixed maturity securities, available for sale, at estimated fair value:                         
U.S. Treasury securities and obligations of U.S. Government agencies  $208,568   $668   $(2,297)  $-   $206,939 
Obligations of states and political subdivisions   129,509    -    (9,169)   -    120,340 
Corporate securities including public utilities   41,086    -    (973)   -    40,113 
Total fixed maturity securities available for sale  $379,163   $668   $(12,439)  $-   $367,392 
                          
Equity securities at estimated fair value:                         
Common stock:                         
Industrial, miscellaneous and all other  $3,507,720   $624,037   $(275,952)       $3,855,805 
Total equity securities at estimated fair value  $3,507,720   $624,037   $(275,952)       $3,855,805 
                          
Mortgage loans held for investment at amortized cost:                         
Residential construction  $1,966,520                     
Less: Allowance for credit losses   (3,933)                    
Total mortgage loans held for investment  $1,962,587                     
                          
Real estate held for investment: Residential  $30,632                     
                          
Cash and cash equivalents  $1,424,574                     
                          
Total cemetery perpetual care trust investments  $7,640,990                     
                          
Cemetery perpetual care obligation  $(5,265,166)                    
                          
Trust investments in excess of trust obligations  $2,375,824                     

 

57

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

15) Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

The components of the cemetery perpetual care investments and obligation as of December 31, 2022, are as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair Value 
December 31, 2022:                    
Fixed maturity securities, available for sale, at estimated fair value:                    
U.S. Treasury securities and obligations of U.S. Government agencies  $89,004   $42   $(38)  $89,008 
Obligations of states and political subdivisions   174,201    -    (8,478)   165,723 
Total fixed maturity securities available for sale  $263,205   $42   $(8,516)  $254,731 
                     
Equity securities at estimated fair value:                    
Common stock:                    
Industrial, miscellaneous and all other  $3,195,942   $584,383   $(175,163)  $3,605,162 
Total equity securities at estimated fair value  $3,195,942   $584,383   $(175,163)  $3,605,162 
Mortgage loans held for investment at amortized cost:                     
Residential construction  $1,506,517                
                     
Real estate held for investment: Residential  $(16,178)               
                     
Cash and cash equivalents  $1,925,978                
                     
Total cemetery perpetual care trust investments  $7,276,210                
                     
Cemetery perpetual care obligation  $(5,099,542)               
                     
Trust investments in excess of trust obligations  $2,176,668                

 

Fixed Maturity Securities

 

The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of September 30, 2023 and December 31, 2022. 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 
September 30, 2023                              
U.S. Treasury securities and obligations of U.S. Government agencies  $2,297   $139,633   $-   $-   $2,297   $139,633 
Obligations of states and political subdivisions   -    -    9,169    120,340    9,169    120,340 
Corporate securities including public utilities   -    -    973    40,113    973    40,113 
Total unrealized losses  $2,297   $139,633   $10,142   $160,453   $12,439   $300,086 
                               
December 31, 2022                              
U.S. Treasury securities and obligations of U.S. Government agencies  $38   $59,392   $-   $-   $38   $59,392 
Obligations of states and political subdivisions   1,845    94,612    6,633    71,112    8,478    165,724 
Total unrealized losses  $1,883   $154,004   $6,633   $71,112   $8,516   $225,116 

 

58

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

15) Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

Relevant holdings were comprised of four securities with fair values aggregating 96.0% of the aggregate amortized cost as of September 30, 2023. Relevant holdings were comprised of five securities with fair values aggregating 96.4% of aggregate amortized cost as of December 31, 2022. No credit losses have been recognized for the three and nine month periods ended September 30, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent increases in interest and inflation rates. See Note 3 for additional information regarding the Company’s evaluation of the allowance for credit losses for fixed maturity securities available for sale.

 

The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of September 30, 2023, by contractual maturity. 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   Estimated Fair 
   Cost   Value 
Due in 1 year  $29,573   $30,000 
Due in 2-5 years   254,242    245,011 
Due in 5-10 years   41,086    40,113 
Due in more than 10 years   54,262    52,268 
Total  $379,163   $367,392 

 

Restricted Assets

 

The Company has also established certain restricted assets to provide for future merchandise and service obligations incurred in connection with its pre-need sales for its cemetery and mortuary segment.

 

Restricted cash also represents escrows held for borrowers and investors under servicing and appraisal agreements relating to mortgage loans, funds held by warehouse banks in accordance with loan purchase agreements and funds held in escrow for certain real estate construction development projects. Additionally, the Company elected to maintain its medical benefit fund without change from the prior year and has included this amount as a component of restricted cash. These restricted cash items are for the Company’s life insurance and mortgage segments.

 

59

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

15) Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

Restricted assets as of September 30, 2023, are summarized as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Allowance for Credit Losses   Estimated Fair Value 
September 30, 2023:                         
Fixed maturity securities, available for sale, at estimated fair value:                         
U.S. Treasury securities and obligations of U.S. Government agencies  $389,641   $924   $(4,002)  $-   $386,563 
Obligations of states and political subdivisions   771,564    201    (19,526)   -    752,239 
Corporate securities including public utilities   405,171    -    (9,447)   -    395,724 
Total fixed maturity securities available for sale  $1,566,376   $1,125   $(32,975)  $-   $1,534,526 
                          
Equity securities at estimated fair value:                         
Common stock:                         
Industrial, miscellaneous and all other  $6,011,816   $739,197   $(438,403)       $6,312,610 
Total equity securities at estimated fair value  $6,011,816   $739,197   $(438,403)       $6,312,610 
                          
Mortgage loans held for investment at amortized cost:                         
Residential construction  $1,116,202                     
Less: Allowance for credit losses   (2,232)                    
Total mortgage loans held for investment  $1,113,970                     
                          
Cash and cash equivalents (1)  $10,946,379                     
                          
Total restricted assets  $19,907,485                     

 

 

(1) Including cash and cash equivalents of $8,224,592 for the life insurance and mortgage segments.

 

Restricted assets as of December 31, 2022, are summarized as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair Value 
December 31, 2022:                    
Fixed maturity securities, available for sale, at estimated fair value:                    
Obligations of states and political subdivisions  $1,033,047   $866   $(15,360)  $1,018,553 
Corporate securities including public utilities   201,771    -    (3,016)   198,755 
Total fixed maturity securities available for sale  $1,234,818   $866   $(18,376)  $1,217,308 
                     
Equity securities at estimated fair value:                    
Common stock:                    
Industrial, miscellaneous and all other  $4,955,360   $703,049   $(310,165)  $5,348,244 
Total equity securities at estimated fair value  $4,955,360   $703,049   $(310,165)  $5,348,244 
                     
Mortgage loans held for investment at amortized cost:                    
Residential construction  $1,731,469                
                     
Cash and cash equivalents (1)  $10,638,034                
                     
Total restricted assets  $18,935,055                

 

 

(1) Including cash and cash equivalents of $8,527,620 for the life insurance and mortgage segments.

 

60

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

15) Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

Fixed Maturity Securities

 

The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of September 30, 2023 and December 31, 2022. 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 
September 30, 2023                              
U.S. Treasury securities and obligations of U.S. Government agencies  $4,002   $243,232   $-   $-   $4,002   $243,232 
Obligations of states and political subdivisions   3,189    71,811    16,337    580,227    19,526    652,038 
Corporate securities including public utilities   1,016    101,649    8,431    294,075    9,447    395,724 
Total unrealized losses  $8,207   $416,692   $24,768   $874,302   $32,975   $1,290,994 
                               
December 31, 2022                              
Obligations of states and political subdivisions  $11,891   $760,255   $3,469   $58,072   $15,360   $818,327 
Corporate securities including public utilities   3,016    198,755    -    -    3,016    198,755 
Total unrealized losses  $14,907   $959,010   $3,469   $58,072   $18,376   $1,017,082 

 

Relevant holdings were comprised of 16 securities with fair values aggregating 97.5% of the aggregate amortized cost as of September 30, 2023. Relevant holdings were comprised of 17 securities with fair values aggregating 98.2% of the aggregate amortized cost as of December 31, 2022. No credit losses have been recognized for the three and nine month periods ended September 30, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent increase in interest and inflation rates. See Note 3 for additional information regarding the Company’s evaluation of the allowance for credit losses for fixed maturity securities available for sale.

 

The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of September 30, 2023, by contractual maturity. 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   Estimated Fair 
   Cost   Value 
Due in 1 year  $-   $- 
Due in 2-5 years   702,873    692,458 
Due in 5-10 years   111,301    110,090 
Due in more than 10 years   752,202    731,978 
Total  $1,566,376   $1,534,526 

 

See Notes 3 and 8 for additional information regarding restricted assets and cemetery perpetual care trust investments.

 

61

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

 

16) Accumulated Other Comprehensive Income (loss)

 

The following table summarizes the changes in accumulated other comprehensive income (loss):

  

                     
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
                 
Unrealized losses on fixed maturity securities available for sale  $(6,725,752)  $(13,527,157)  $(6,310,923)  $(42,014,068)
Amounts reclassified into net earnings (loss)   (79,850)   3,917    (269,827)   168,794 
Net unrealized losses before taxes   (6,805,602)   (13,523,240)   (6,580,750)   (41,845,274)
Tax benefit   1,429,176    2,839,881    1,381,958    8,787,509 
Net   (5,376,426)   (10,683,359)   (5,198,792)   (33,057,765)
Unrealized gains (losses) on restricted assets (1)   (12,284)   27,060    (14,340)   (88,058)
Tax benefit (expense)   3,060    (6,741)   3,572    21,935 
Net   (9,224)   20,319    (10,768)   (66,123)
Unrealized gains (losses) on cemetery perpetual care trust investments (1)   (2,487)   28,931    (3,299)   (24,294)
Tax benefit (expense)   610    (7,204)   838    6,054 
Net   (1,877)   21,727    (2,461)   (18,240)
Other comprehensive loss changes  $(5,387,527)  $(10,641,313)  $(5,212,021)  $(33,142,128)

 

 

(1) Fixed maturity securities available for sale

 

The following table presents the accumulated balances of other comprehensive income (loss) as of September 30, 2023:

  

   Beginning Balance December 31, 2022   Change for the period   Ending Balance September 30,
2023
 
Unrealized losses on fixed maturity securities available for sale  $(13,050,767)  $(5,198,792)  $(18,249,559)
Unrealized losses on restricted assets (1)   (13,148)   (10,768)   (23,916)
Unrealized losses on cemetery perpetual care trust investments (1)   (6,362)   (2,461)   (8,823)
Other comprehensive loss  $(13,070,277)  $(5,212,021)  $(18,282,298)

 

 

(1) Fixed maturity securities available for sale

 

The following table presents the accumulated balances of other comprehensive income (loss) as of December 31, 2022:

 

   Beginning Balance December 31, 2021   Change for the period   Ending Balance December 31,
2022
 
Unrealized gains (losses) on fixed maturity securities available for sale  $18,021,265   $(31,072,032)  $(13,050,767)
Unrealized gains (losses) on restricted assets (1)   40,192    (53,340)   (13,148)
Unrealized gains (losses) on cemetery perpetual care trust investments (1)   8,991    (15,353)   (6,362)
Other comprehensive income (loss)  $18,070,448   $(31,140,725)  $(13,070,277)

 

 

(1) Fixed maturity securities available for sale

 

62

 

 

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 strategies 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) increased emphasis on the cemetery and mortuary business; and (iii) capitalizing on an 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 $30,000. 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 the three and nine month periods ended September 30, 2023, and 2022. See Note 7 to the condensed consolidated financial statements.

 

   Three months ended September 30,
(in thousands of dollars)
   Nine months ended September 30,
(in thousands of dollars)
 
   2023   2022   % Increase (Decrease)   2023   2022   % Increase (Decrease) 
Revenues from external customers                              
Insurance premiums  $28,906   $26,237    10%  $85,687   $78,491    9%
Mortgage fee income   10    -    100%   76    -    100%
Net investment income   18,434    17,562    5%   53,609    47,269    13%
Losses on investments and other assets   (516)   (1,538)   (66)%   (1)   (1,697)   (100)%
Other   365    857    (57)%   1,314    1,723    (24)%
Total  $47,199   $43,118    9%  $140,685   $125,786    12%
Intersegment revenue  $2,330   $1,724    35%  $6,358   $5,496    16%
Earnings before income taxes  $7,175   $4,234    69%  $20,017   $8,982    123%

 

Intersegment revenues are primarily interest income from the warehouse lines of credit for loans held for sale provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”). Profitability for the nine month period ended September 30, 2023 increased due to (a) a $7,081,000 increase in insurance premiums and other considerations, (b) a $6,340,000 increase in net investment income, (c) a $2,049,000 decrease in selling, general and administrative expenses, (d) a $1,696,000 increase in gains on investments and other assets, (e) a $862,000 increase in intersegment revenue, and (f) a $76,000 increase in mortgage fee income, which were partially offset by (i) a $5,270,000 increase in future policy benefits, (ii) a $827,000 increase in death, surrenders and other policy benefits, (iii) a $408,000 increase in interest expense, (iv) a $294,000 decrease in other revenues, (v) a $158,000 increase in intersegment interest expense and other expenses, and (vi) a $112,000 increase in amortization of deferred policy acquisition costs.

 

Cemetery and Mortuary Operations

 

The Company sells mortuary services and products through its nine mortuaries in Utah and three mortuaries in New Mexico. The Company also sells cemetery products and services through its five cemeteries in Utah, one cemetery in San Diego County, California, and one cemetery in Santa Fe, New Mexico. 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.

 

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The following table shows the condensed financial results of the cemetery and mortuary operations for the three and nine month periods ended September 30, 2023, and 2022. See Note 7 to the condensed consolidated financial statements.

 

   Three months ended September 30,
(in thousands of dollars)
   Nine months ended September 30,
(in thousands of dollars)
 
   2023   2022   % Increase (Decrease)   2023   2022   % Increase (Decrease) 
Revenues from external customers                              
Mortuary revenues  $2,910   $3,027    (4)%  $9,310   $9,899    (6)%
Cemetery revenues   4,324    3,443    26%   11,564    11,027    5%
Net investment income   516    681    (24)%   2,461    1,917    28%
Losses on investments and other assets   (453)   (640)   (29)%   (201)   (1,615)   (88)%
Other   119    181    (34)%   293    218    34%
Total  $7,416   $6,692    11%  $23,427   $21,446    9%
Earnings before income taxes  $1,470   $901    63%  $6,082   $4,407    38%

 

Profitability in the nine month period ended September 30, 2023 increased due to (a) a $1,415,000 increase in gains on investments and other assets, (b) a $1,266,000 increase in cemetery pre-need sales, (c) a $544,000 increase in net investment income, (d) a $75,000 increase in other revenues, (e) a $33,000 decrease in intersegment interest expense and other expenses, (f) a $14,000 decrease in cost of goods and services sold, and (g) an $8,000 decrease in amortization of deferred policy acquisition costs, which were partially offset by (i) a $729,000 decrease in cemetery at-need sales, (ii) a $589,000 decrease in mortuary at-need sales, (iii) a $256,000 increase in selling, general and administrative expenses, and (iv) a $105,000 decrease in intersegment revenues.

 

Mortgage Operations

 

The Company’s wholly owned subsidiary, SecurityNational Mortgage, is a mortgage lender 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 originates and refinances mortgage loans on a retail basis. Mortgage loans originated or refinanced by the SecurityNational Mortgage are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions.

 

SecurityNational Mortgage receives 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. Mortgage loans are generally sold with mortgage servicing rights (“MSRs”) released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 5% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer. On October 31, 2022, the Company sold certain of its MSRs. The MSRs related to mortgage loans previously originated by the Company in aggregate unpaid principal amount of approximately $7.02 billion. As a result of the sale, the book value of the Company’s MSRs decreased by $51,185,906.

 

Mortgage rates have followed the US Treasury yields up in response to the higher than expected inflation and the expectation that the Federal Reserve will continue to raise rates in the near term. As expected, the rapid increase in mortgage rates has resulted in a decrease in loan originations classified as ‘refinance.’ Higher mortgage rates have also had a negative effect on loan originations classified as ‘purchases,’ although not as significant as those in the refinance classification.

 

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For the nine month periods ended September 30, 2023 and 2022, SecurityNational Mortgage originated 5,680 loans ($1,708,831,000 total volume) and 8,886 loans ($2,837,349,000 total volume), respectively.

 

The following table shows the condensed financial results of the mortgage operations for the three and nine month periods ended September 30, 2023, and 2022. See Note 7 to the condensed consolidated financial statements.

 

   Three months ended September 30,
(in thousands of dollars)
   Nine months ended September 30,
(in thousands of dollars)
 
   2023   2022   % Increase (Decrease)   2023   2022   % Increase (Decrease) 
Revenues from external customers                              
Secondary gains from investors  $17,615   $28,825    (39)%  $54,809   $103,220    (47)%
Income from loan originations   8,924    7,069    26%   23,812    26,463    (10)%
Change in fair value of loans held for sale   (1,504)   (4,131)   64%   (978)   (7,973)   88%
Change in fair value of loan commitments   (109)   (3,271)   97%   (716)   (2,843)   75%
Net investment income   298    360    (17)%   1,125    583    93%
Gains on investments and other assets   36    -    100%   197    391    (50)%
Other   366    4,815    (92)%   1,226    14,396    (91)%
Total  $25,626   $33,667    (24)%  $79,475   $134,237    (41)%
Earnings (loss) before income taxes  $(3,486)  $(8,437)   (59)%  $(11,207)  $(7,518)   (49)%

 

Included in other revenues is service fee income. Profitability for the nine month period ended September 30, 2023 decreased due to (a) a $48,411,000 decrease in secondary gains from investors, (b) a $13,170,000 decrease in other revenues, (c) a $2,651,000 decrease in income from loan originations, (d) a $772,000 increase in intersegment interest expense and other expenses, (e) a $226,000 increase in rent and rent related expenses, and (f) a $194,000 decrease in gains on investments and other assets, which were partially offset by (i) a $22,475,000 decrease in commissions, (ii) a $14,426,000 decrease in personnel expenses, (iii) a $10,985,000 decrease in other expenses, (iv) a $7,257,000 increase in the fair value of loans held for sale, (v) a $2,152,000 decrease in interest expense, (vi) a $1,865,000 increase in the fair value of loan commitments, (vii) a $1,009,000 decrease in costs related to funding mortgage loans, (viii) an $867,000 decrease in advertising expenses, (ix) a $542,000 increase in net investment income, (x) a $140,000 increase in intersegment revenues, and (xi) an $18,000 decrease in depreciation on property and equipment.

 

Consolidated Results of Operations

 

Three month period ended September 30, 2023, Compared to Three month period ended September 30, 2022

 

Total revenues decreased by $3,235,000, or 3.9%, to $80,242,000 for the three month period ended September 30, 2023, from $83,477,000 for the comparable period in 2022. Contributing to this decrease in total revenues was a $4,888,000 decrease in other revenues and a $3,672,000 decrease in mortgage fee income, which were partially offset by a $2,669,000 increase in insurance premiums and other considerations, a $1,247,000 increase in gains on investments and other assets, a $764,000 increase in net mortuary and cemetery sales, and a $645,000 increase in net investment income.

 

Mortgage fee income decreased by $3,672,000, or 12.8%, to $24,936,000, for the three month period ended September 30, 2023, from $28,608,000 for the comparable period in 2022. This decrease was primarily due to a $11,316,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market due to the decline in origination activity because of increasing interest rates, which was partially offset by a $4,023,000 increase in the fair value of loans held for sale, a $1,854,000 increase in loan fees and interest income net of an increase in the provision for loan loss reserve and a $1,767,000 increase in the fair value of loan commitments.

 

Insurance premiums and other considerations increased by $2,669,000, or 10.2%, to $28,907,000 for the three month period ended September 30, 2023, from $26,238,000 for the comparable period in 2022. This increase was primarily due to an increase of $2,737,000 in first year premiums, which was partially offset by a decrease of $68,000 in renewal premiums.

 

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Net investment income increased by $645,000, or 3.5%, to $19,248,000 for the three month period ended September 30, 2023, from $18,603,000 for the comparable period in 2022. This increase was primarily attributable to a $1,054,000 increase in fixed maturity securities income, a $568,000 increase in interest on cash and cash equivalents, a $125,000 decrease in investment expenses, a $122,000 increase in insurance assignment income, a $32,000 increase in other investment income, and a $28,000 increase in equity securities income, which were partially offset by a $635,000 decrease in mortgage loan interest, a $627,000 decrease in real estate income, and a $22,000 decrease in policy loan interest.

 

Net mortuary and cemetery sales increased by $764,000, or 11.8%, to $7,234,000 for the three month period ended September 30, 2023, from $6,470,000 for the comparable period in 2022. This increase was primarily due to a $771,000 increase in cemetery pre-need sales and a $110,000 increase in cemetery at-need sales, which were partially offset by a $117,000 decrease in mortuary at-need sales.

 

Losses on investments and other assets decreased by $1,247,000, or 57.2%, to $932,000 for the three month period ended September 30, 2023, from $2,179,000 for the comparable period in 2022. This decrease in losses on investments and other assets was primarily due to a $764,000 increase in gains on real estate, a $518,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities, and a $25,000 increase in gains on fixed maturity securities, which were partially offset by a $60,000 decrease in gains on other assets mostly attributable to the Company discontinuing its use of call and put option derivatives in the first quarter of 2023.

 

Other revenues decreased by $4,888,000, or 85.2%, to $849,000 for the three month period ended September 30, 2023, from $5,737,000 for the comparable period in 2022. This decrease was primarily attributable to a decrease in servicing fee revenue because of the sale of certain mortgage servicing rights in October 2022.

 

Total benefits and expenses were $75,083,000, or 93.6% of total revenues, for the three month period ended September 30, 2023, as compared to $86,780,000, or 104.0% of total revenues, for the comparable period in 2022.

 

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $2,898,000 or 12.8%, to $25,622,000 for the three month period ended September 30, 2023, from $22,724,000 for the comparable period in 2022. This increase was primarily the result of a $2,087,000 increase in future policy benefits, a $681,000 increase in death benefits, and a $130,000 increase in surrender and other policy benefits.

 

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $581,000, or 11.5%, to $4,481,000 for the three month period ended September 30, 2023, from $5,062,000 for the comparable period in 2022. This decrease was primarily due to increased payment consistency from premium-paying products.

 

Selling, general and administrative expenses decreased by $13,005,000, or 23.4%, to $42,652,000 for the three month period ended September 30, 2023, from $55,657,000 for the comparable period in 2022. This decrease was primarily the result of a $4,537,000 decrease in commissions, a $4,158,000 decrease in personnel expenses, a $4,053,000 decrease in other expenses, a $378,000 decrease in advertising expense, a $46,000 decrease in depreciation on property and equipment, and a $23,000 decrease in rent and rent related expenses which were partially offset by a $192,000 increase in costs related to funding mortgage loans.

 

Interest expense decreased by $985,000, or 46.1%, to $1,152,000 for the three month period ended September 30, 2023, from $2,137,000 for the comparable period in 2022. This decrease was primarily due to a decrease of $975,000 in interest expense on mortgage warehouse lines of credit for loans held for sale and a decrease of $10,000 in interest expense on bank loans.

 

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Nine month period ended September 30, 2023, Compared to Nine month period ended September 30, 2022

 

Total revenues decreased by $37,881,000, or 13.5%, to $243,589,000 for the nine month period ended September 30, 2023, from $281,470,000 for the comparable period in 2022. Contributing to this decrease in total revenues was a $41,979,000 decrease in mortgage fee income, a $13,389,000 decrease in other revenues, and a $52,000 decrease in net mortuary and cemetery sales, which were partially offset by a $7,427,000 increase in net investment income, a $7,196,000 increase in insurance premiums and other considerations, and a $2,916,000 increase in gains on investments and other assets.

 

Mortgage fee income decreased by $41,979,000, or 35.3%, to $77,004,000, for the nine month period ended September 30, 2023, from $118,983,000 for the comparable period in 2022. This decrease was primarily due to a $48,451,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market due to the decline in origination activity because of increasing interest rates and a $2,650,000 decrease in loan fees and interest income net of an increase in the provision for loan loss reserve, which were partially offset by a $7,257,000 increase in the fair value of loans held for sale and a $1,865,000 increase in the fair value of loan commitments.

 

Insurance premiums and other considerations increased by $7,196,000, or 9.2%, to $85,687,000 for the nine month period ended September 30, 2023, from $78,491,000 for the comparable period in 2022. This increase was primarily due to an increase of $6,755,000 in first year premiums and an increase of $441,000 in renewal premiums.

 

Net investment income increased by $7,427,000, or 14.9%, to $57,195,000 for the nine month period ended September 30, 2023, from $49,769,000 for the comparable period in 2022. This increase was primarily attributable to a $3,762,000 increase in fixed maturity securities income, a $1,953,000 increase in interest on cash and cash equivalents, a $1,008,000 decrease in investment expenses, a $583,000 increase in real estate income, a $205,000 increase in income from other investments, a $116,000 increase in mortgage loan interest, and a $66,000 increase in equity securities income, which were partially offset by a $138,000 decrease in insurance assignment income and a $128,000 decrease in policy loan income.

 

Net mortuary and cemetery sales decreased by $52,000, or 0.3%, to $20,874,000 for the nine month period ended September 30, 2023, from $20,926,000 for the comparable period in 2022. This decrease was primarily due to a $729,000 decrease in cemetery at-need sales and a $589,000 decrease in mortuary at-need sales, which were partially offset by a $1,266,000 increase in cemetery pre-need sales.

 

Losses on investments and other assets decreased by $2,916,000, or 99.8%, to $5,000 for the nine month period ended September 30, 2023, from $2,921,000 for the comparable period in 2022. This decrease in losses on investments and other assets was primarily due to a $4,011,000 decrease in losses on equity securities mostly attributable to increases in the fair value of these equity securities, which were partially offset by a $439,000 increase in losses on fixed maturity securities, a $292,000 decrease in gains on other invested assets, a $238,000 decrease in gains on real estate, and a $126,000 decrease in gains on call and put option derivatives due to the Company discontinuing is use of call and put option derivatives in the first quarter of 2023.

 

Other revenues decreased by $13,389,000, or 82.5%, to $2,832,000 for the nine month period ended September 30, 2023, from $16,221,000 for the comparable period in 2022. This decrease was primarily attributable to a decrease in servicing fee revenue because of the sale of certain mortgage servicing rights in October 2022.

 

Total benefits and expenses were $228,696,000, or 93.9% of total revenues, for the nine month period ended September 30, 2023, as compared to $275,599,000, or 97.9% of total revenues, for the comparable period in 2022.

 

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $6,098,000 or 8.7%, to $76,394,000 for the nine month period ended September 30, 2023, from $70,296,000 for the comparable period in 2022. This increase was primarily the result of a $5,270,000 increase in future policy benefits and a $1,092,000 increase in death benefits, which were partially offset by a $264,000 decrease in surrender and other policy benefits.

 

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Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $104,000, or 0.8%, to $13,615,000 for the nine month period ended September 30, 2023, from $13,511,000 for the comparable period in 2022. 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 $51,346,000, or 28.2%, to $131,052,000 for the nine month period ended September 30, 2023, from $182,398,000 for the comparable period in 2022. This decrease was primarily the result of a $22,426,000 decrease in commissions, a $14,067,000 decrease in personnel expenses, a $12,136,000 decrease in other expenses, a $1,817,000 decrease in advertising expense, a $1,009,000 decrease in costs related to funding mortgage loans, and a $114,000 decrease in depreciation on property and equipment, which were partially offset by a $223,000 increase in rent and rent related expenses.

 

Interest expense decreased by $1,744,000, or 30.3%, to $4,020,000 for the nine month period ended September 30, 2023, from $5,764,000 for the comparable period in 2022. This decrease was primarily due to a decrease of $2,152,000 in interest expense on mortgage warehouse lines of credit for loans held for sale, which was partially offset by an increase of $408,000 in interest expense on bank loans.

 

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 sale or maturity of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees from mortgage loans held for sale that are sold to investors into the secondary market. It should be noted that current conditions in the financial markets and economy may affect the realization of these expected cash flows. 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, debt service, and to meet current operating expenses. As of September 30, 2023, the Company’s subsidiary SecurityNational Mortgage was not in compliance with the net income covenants under its Warehouse Lines of Credit and has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event SecurityNational Mortgage is required to repay the outstanding advances of approximately $10,200,000 on the Warehouse Line of Credit that has not provided a covenant waiver, SecurityNational Mortgage has sufficient cash and borrowing capacity on the Warehouse Lines of Credit that have provided covenant waivers to fund its origination activities. The Company has done an internal analysis of the funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its business model. The Company continues to negotiate other warehouse lines of credit with other lenders.

 

During the nine month periods ended September 30, 2023 and 2022, the Company’s operations provided cash of $18,384,000 and $109,318,000, respectively. The decrease in cash provided by operations was due primarily to decreased proceeds from the sale of mortgage loans held for sale.

 

The Company expects to pay out liabilities under its funeral plans over the long term given the nature of those plans. Funeral plans are small face value life insurance policies that payout upon a person’s death to cover funeral burial costs; policyholders generally keep these policies in force until, and do not surrender prior to, death. Because of the long-term nature of these liabilities, the Company can hold to maturity or for the targeted investment period its corresponding bond, real estate, and mortgage loan investments, thus reducing the risk of liquidating these long-term investments because of any sudden changes in their fair values.

 

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

 

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The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans. The warehoused mortgage loans are typically held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the Company’s life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $341,252,000 (at estimated fair value) and $345,598,000 (at estimated fair value) as of September 30, 2023 and December 31, 2022, respectively. This represented 38.5% and 36.4% of the total investments of the Company as of September 30, 2023, and December 31, 2022, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. As of September 30, 2023, 1.9% (or $6,307,000) and as of December 31, 2022, 2.2% (or $7,833,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.

 

The Company’s life insurance subsidiaries are 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. As of September 30, 2023 and December 31, 2022, 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 $406,325,000 as of September 30, 2023, as compared to $454,499,000 as of December 31, 2022. This decrease was primarily due to a decrease of $53,281,000 in bank loans and other loans payable, which was partially offset by a $5,107,000 increase in stockholders’ equity. Stockholders’ equity as a percent of total capitalization was 73.3% and 64.4% as of September 30, 2023, and December 31, 2022, respectively.

 

Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2022 was 4.3% as compared to a lapse rate of 4.8% for 2021. The 2023 lapse rate to date has been approximately the same as 2022.

 

The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $103,984,000 and $94,254,000 as of September 30, 2023, and December 31, 2022, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities.

 

Banking Environment

 

On March 10, 2023 and March 12, 2023, Silicon Valley Bank and Signature Bank were placed in receivership with the Federal Deposit Insurance Corporation (FDIC). Normal banking activities resumed shortly thereafter. On May 1, 2023, First Republic Bank was placed in receivership with the FDIC and was immediately purchased by a national bank.

 

The Company does not maintain any deposit or other accounts or credit facilities with Silicon Valley Bank, Signature Bank or First Republic Bank. The Company may periodically transfer funds to these banks to pay for services rendered by third party vendors that continue to maintain banking relationships with these banks. The Company continues to monitor the banking industry and its relationships with regional and community banks.

 

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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 September 30, 2023, 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 September 30, 2023, 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 not been any significant 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.

 

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Part II - Other Information

 

Item 1. Legal Proceedings.

 

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

 

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

 

On December 27, 2022, the Company executed a 10b5-1 agreement with a broker to repurchase shares of the Company’s Class A Common Stock. Under the terms of the agreement, the broker is permitted to repurchase up to 1,000,000 shares of the Company’s Class A Common Stock. The agreement is subject to the daily time, price and volume conditions of Rule 10b-18. The initial term of the agreement is for one year.

 

The following table shows the Company’s repurchase activity during the three month period ended September 30, 2023 under the 10b5-1 agreement.

 

Period  (a) Total Number of Class A Shares Purchased   (b) Average Price Paid per Class A Share (1)   (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 (2) 
7/1/2023-7/31/2023   -   $-    -    318,043 
8/1/2023-8/31/2023   -    -    -    318,043 
9/1/2023-9/30/2023   -    -    -    318,043 
                     
Total   -   $-    -    318,043 

 

 

 

  (1) Includes fees and commissions paid on stock repurchases.
  (2) In September 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 Company amended the Stock Repurchase Plan on December 4, 2020. The amendment authorized the repurchase of a total of 1,000,000 shares of the Company’s Class A Common Stock in the open market. Any repurchased shares of Class A common stock are to be held as treasury shares to be used as the Company’s employer matching contribution to the Employee 401(k) Retirement Savings Plan and for shares held in the Deferred Compensation Plan.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

During the three-month period ended September 30, 2023, none of the Company’s directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.

 

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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.

 

(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 Amended and Restated Articles of Incorporation (1)
  3.2 Amended and Restated Bylaws (2)
  31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
  31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
  32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101.INS Inline XBRL Instance Document
  101.SCH Inline XBRL Taxonomy Extension Schema Document
  101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
  101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
  101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
  104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

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

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

 

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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: November 14, 2023   /s/ Scott M. Quist
    Scott M. Quist
    Chairman, President and Chief Executive Officer
    (Principal Executive Officer)

 

Dated: November 14, 2023   /s/ Garrett S. Sill
    Garrett S. Sill
    Chief Financial Officer and Treasurer
    (Principal Financial Officer and Principal Accounting Officer)

 

73