UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2018, or

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

Commission file number: 000-09341

SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

UTAH
87-0345941
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
5300 South 360 West, Suite 250, Salt Lake City, Utah
84123
(Address of principal executive offices)
(Zip Code)
   
 (801) 264-1060
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [X] No [  ]

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

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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class A Common Stock, $2.00 par value
14,569,321
Title of Class
Number of Shares Outstanding as of May 15, 2018
   
Class C Common Stock, $2.00 par value
2,089,372
Title of Class
Number of Shares Outstanding as of May 15, 2018

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q

QUARTER ENDED MARCH 31, 2018

Table of Contents
   
Page No.
 
Part I  - Financial Information
 
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited)
3-4
     
 
Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2018 and 2017 (unaudited)
5
     
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)
6
     
 
Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2018 and March 31, 2017 (unaudited)
7
     
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)
8
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
10
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
46
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
50
     
Item 4.
Controls and Procedures
50
     
 
Part II - Other Information
 
     
Item 1.
Legal Proceedings
50
     
Item 1A.
Risk Factors
51
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
51
     
Item 3.
Defaults Upon Senior Securities
51
     
Item 4.
Mine Safety Disclosures
51
     
Item 5.
Other Information
51
     
Item 6.
Exhibits
51
     
 
Signature Page
53


2

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

Part I - Financial Information

Item 1.   Financial Statements.

Assets
 
March 31
2018
(Unaudited)
   
December 31
2017
 
Investments:
           
Fixed maturity securities, held to maturity, at amortized cost
 
$
231,474,083
   
$
228,397,623
 
Equity securities at estimated fair value
   
5,889,151
     
6,037,855
 
Mortgage loans held for investment (net of allowances for loan losses of $1,696,371 and $1,768,796 for 2018 and 2017)
   
204,989,906
     
204,210,885
 
Real estate held for investment (net of accumulated depreciation of $15,540,213 and $18,788,869 for 2018 and 2017)
   
105,063,331
     
141,298,706
 
Other investments and policy loans (net of allowances for doubtful accounts of $931,029 and $846,641 for 2018 and 2017)
   
45,550,795
     
45,895,472
 
Accrued investment income
   
3,886,170
     
3,644,077
 
Total investments
   
596,853,436
     
629,484,618
 
Cash and cash equivalents
   
101,728,202
     
45,315,661
 
Loans held for sale at estimated fair value
   
124,866,313
     
133,414,188
 
Receivables (net of allowances for doubtful accounts of $1,569,422 and $1,544,518 for 2018 and 2017)
   
9,398,972
     
10,443,869
 
Restricted assets (including $800,510 and $809,958 for 2018 and 2017 at estimated fair value)
   
11,146,540
     
11,830,621
 
Cemetery perpetual care trust investments (including $648,381 and $682,315 for 2018 and 2017 at estimated fair value)
   
3,806,645
     
4,623,563
 
Receivable from reinsurers
   
13,263,304
     
13,394,603
 
Cemetery land and improvements
   
9,920,554
     
9,942,933
 
Deferred policy and pre-need contract acquisition costs
   
82,496,322
     
80,625,304
 
Mortgage servicing rights, net
   
21,554,050
     
21,376,937
 
Property and equipment, net
   
7,713,599
     
8,069,380
 
Value of business acquired
   
6,389,260
     
6,588,759
 
Goodwill
   
2,765,570
     
2,765,570
 
Other
   
6,069,569
     
4,297,048
 
                 
Total Assets
 
$
997,972,336
   
$
982,173,054
 


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


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

   
March 31
2018
(Unaudited)
   
December 31
2017
 
Liabilities and Stockholders' Equity
           
Liabilities
           
Future policy benefits and unpaid claims
 
$
605,543,124
   
$
604,746,951
 
Unearned premium reserve
   
4,123,289
     
4,222,410
 
Bank and other loans payable
   
151,451,152
     
157,450,925
 
Deferred pre-need cemetery and mortuary contract revenues
   
12,150,924
     
12,873,068
 
Cemetery perpetual care obligation
   
3,729,150
     
3,710,740
 
Accounts payable
   
3,411,619
     
3,613,100
 
Other liabilities and accrued expenses
   
30,063,978
     
29,655,087
 
Income taxes
   
21,593,873
     
17,332,783
 
Total liabilities
   
832,067,109
     
833,605,064
 
                 
Stockholders' Equity
               
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 14,569,321 shares in 2018 and 14,535,577 shares in 2017
   
29,138,642
     
29,071,154
 
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,089,372 shares in 2018 and 2,089,374 shares in 2017
   
4,178,744
     
4,178,748
 
Additional paid-in capital
   
38,255,340
     
38,125,042
 
Accumulated other comprehensive income, net of taxes
   
-
     
603,170
 
Retained earnings
   
95,041,166
     
77,520,951
 
Treasury stock at cost - 468,770 Class A shares in 2018 and 537,203 Class A shares in 2017
   
(708,665
)
   
(931,075
)
                 
Total stockholders' equity
   
165,905,227
     
148,567,990
 
                 
Total Liabilities and Stockholders' Equity
 
$
997,972,336
   
$
982,173,054
 

See accompanying notes to condensed consolidated financial statements (unaudited).
4


SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

   
Three Months Ended
 March 31
 
   
2018
   
2017
 
Revenues:
           
Insurance premiums and other considerations
 
$
18,810,358
   
$
17,357,124
 
Net investment income
   
10,074,431
     
9,016,376
 
Net mortuary and cemetery sales
   
3,232,729
     
3,358,973
 
Gains on investments and other assets
   
22,020,939
     
145,330
 
Other than temporary impairments on investments
   
-
     
(52,139
)
Mortgage fee income
   
25,460,160
     
38,974,760
 
Other
   
2,477,492
     
2,028,873
 
Total revenues
   
82,076,109
     
70,829,297
 
                 
Benefits and expenses:
               
Death benefits
   
9,608,098
     
8,794,598
 
Surrenders and other policy benefits
   
810,128
     
857,531
 
Increase in future policy benefits
   
5,584,936
     
5,568,042
 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
   
3,109,933
     
2,264,039
 
Selling, general and administrative expenses:
               
Commissions
   
11,282,401
     
16,355,048
 
Personnel
   
16,566,688
     
18,589,687
 
Advertising
   
1,029,591
     
1,310,674
 
Rent and rent related
   
1,963,350
     
2,223,996
 
Depreciation on property and equipment
   
477,031
     
625,812
 
Costs related to funding mortgage loans
   
1,369,281
     
2,219,649
 
Other
   
6,810,324
     
7,346,493
 
Interest expense
   
1,761,677
     
1,254,039
 
Cost of goods and services sold-mortuaries and cemeteries
   
515,490
     
521,919
 
Total benefits and expenses
   
60,888,928
     
67,931,527
 
                 
Earnings before income taxes
   
21,187,181
     
2,897,770
 
Income tax expense
   
(4,261,258
)
   
(1,037,770
)
                 
Net earnings
 
$
16,925,923
   
$
1,860,000
 
                 
Net earnings per Class A Equivalent common share (1)
 
$
1.05
   
$
0.12
 
                 
Net earnings per Class A Equivalent common share-assuming dilution (1)
 
$
1.04
   
$
0.11
 
                 
Weighted-average Class A equivalent common share outstanding (1)
   
16,171,412
     
15,827,495
 
                 
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)
   
16,347,777
     
16,320,830
 

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

See accompanying notes to condensed consolidated financial statements (unaudited).
5

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three Months Ended
March 31
 
   
2018
   
2017
 
Net earnings
 
$
16,925,923
   
$
1,860,000
 
Other comprehensive income:
               
Unrealized gains on equity securities
   
-
     
29,871
 
Unrealized gains on derivative instruments
   
-
     
1,595
 
Other comprehensive income, before income tax
   
-
     
31,466
 
Income tax expense
   
-
     
(10,174
)
Other comprehensive income, net of income tax
   
-
     
21,292
 
Comprehensive income
 
$
16,925,923
   
$
1,881,292
 

See accompanying notes to condensed consolidated financial statements (unaudited).
6

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

   
Class A
 Common Stock
   
Class C
Common Stock
   
Additional
Paid-in
 Capital
   
Accumulated
 Other
 Comprehensive
 Income
   
Retained
 Earnings
   
Treasury
Stock
   
Total
 
                                           
Balance at December 31, 2016
 
$
27,638,012
   
$
3,804,458
   
$
34,813,246
   
$
264,822
   
$
67,409,204
   
$
(1,370,611
)
 
$
132,559,131
 
                                                         
Net earnings
   
-
     
-
     
-
     
-
     
1,860,000
     
-
     
1,860,000
 
Other comprehensive income
   
-
     
-
     
-
     
21,292
     
-
     
-
     
21,292
 
Grant of stock options
   
-
     
-
     
101,996
     
-
     
-
     
-
     
101,996
 
Sale of treasury stock
   
-
     
-
     
178,002
     
-
     
-
     
146,065
     
324,067
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(185,470
)
   
(185,470
)
Stock dividends
   
930
     
4
     
2,350
     
-
     
(3,284
)
   
-
     
-
 
Conversion Class C to Class A
   
1,214
     
(1,214
)
   
-
     
-
     
-
     
-
     
-
 
Balance at March 31, 2017
 
$
27,640,156
   
$
3,803,248
   
$
35,095,594
   
$
286,114
   
$
69,265,920
   
$
(1,410,016
)
 
$
134,681,016
 
                                                         
Balance at December 31, 2017
 
$
29,071,154
   
$
4,178,748
   
$
38,125,042
   
$
603,170
   
$
77,520,951
   
$
(931,075
)
 
$
148,567,990
 
                                                         
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)
   
-
     
-
     
-
     
(603,170
)
   
603,170
     
-
     
-
 
Net earnings
   
-
     
-
     
-
     
-
     
16,925,923
     
-
     
16,925,923
 
Grant of stock options
   
-
     
-
     
58,087
     
-
     
-
     
-
     
58,087
 
Exercise of stock options
   
63,968
     
-
     
(22,115
)
   
-
     
-
     
-
     
41,853
 
Sale of treasury stock
   
-
     
-
     
88,964
     
-
     
-
     
222,410
     
311,374
 
Stock dividends
   
3,520
     
(4
)
   
5,362
     
-
     
(8,878
)
   
-
     
-
 
Balance at March 31, 2018
 
$
29,138,642
   
$
4,178,744
   
$
38,255,340
   
$
-
   
$
95,041,166
   
$
(708,665
)
 
$
165,905,227
 

See accompanying notes to condensed consolidated financial statements (unaudited).
7

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

   
Three Months Ended
March 31
 
   
2018
   
2017
 
Cash flows from operating activities:
           
     Net cash provided by operating activities
 
$
8,712,560
   
$
30,431,376
 
Cash flows from investing activities:
               
Purchases of fixed maturity securities
   
(7,155,114
)
   
(2,575,997
)
Calls and maturities of fixed maturity securities
   
3,604,516
     
830,595
 
Purchases of equity securities
   
(1,084,398
)
   
(4,190,458
)
Sales of equity securities
   
922,402
     
4,092,734
 
Purchases of short-term investments
   
-
     
(3,053,797
)
Sales of short-term investments
   
-
     
2,266,915
 
Net changes in restricted assets
   
(48,832
)
   
(77,151
)
Net changes in perpetual care trusts
   
2,376,461
     
(23,039
)
Mortgage loans, other investmensts and policy loans made
   
(132,321,562
)
   
(108,649,435
)
Payments received for mortgage loans, other investments and policy loans
   
131,816,474
     
127,506,014
 
Purchase of property and equipment
   
(169,564
)
   
(312,640
)
Sale of property and equipment
   
48,314
     
-
 
Purchase of real estate
   
(768,942
)
   
(3,103,471
)
Sale of real estate
   
58,476,379
     
2,891,887
 
      Net cash provided by investing activities
   
55,696,134
     
15,602,157
 
                 
Cash flows from financing activities:
               
Investment contract receipts
   
2,867,412
     
3,051,883
 
Investment contract withdrawals
   
(4,410,074
)
   
(4,468,624
)
Proceeds from stock options exercised
   
41,853
     
-
 
Purchase of treasury stock
   
-
     
(185,470
)
Repayment of bank loans
   
(27,369,431
)
   
(673,454
)
Proceeds from borrowing on bank loans
   
421,042
     
7,255,187
 
Net change in warehouse line borrowings
   
(309,286
)
   
(6,376,739
)
Net change in line of credit borrowings
   
21,250,000
     
1,250,000
 
      Net cash used in financing activities
   
(7,508,484
)
   
(147,217
)
                 
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
   
56,900,210
     
45,886,316
 
                 
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
   
54,501,923
     
46,942,293
 
                 
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
 
$
111,402,133
   
$
92,828,609
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid (received) during the year for:
               
Interest (net of amount capitalized)
 
$
1,617,074
   
$
1,234,420
 
Income taxes (net of refunds)
   
164
     
(3,215
)
                 
Non Cash Operating, Investing and Financing Activities:
               
Accrued real estate construction costs and retainage
 
$
26,769
   
$
6,794,065
 
Transfer of loans held for sale to mortgage loans held for investment
   
139,464
     
5,032,147
 
Benefit plans funded with treasury stock
   
311,374
     
324,067
 
Mortgage loans foreclosed into real estate
   
225,166
     
204,839
 


8


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

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

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


See accompanying notes to condensed consolidated financial statements (unaudited).
9

 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2018 (Unaudited)
1)  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10‑Q and Articles 8 and 10 of Regulation S‑X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2017, included in the Company's Annual Report on Form 10-K (file number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The presentation of certain amounts in the prior year have been reclassified to conform to the 2018 presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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

2)  Recent Accounting Pronouncements

Accounting Standards Adopted in 2018

Accounting Standards Update ("ASU") No. 2017-01: "Business Combinations (Topic 805): Clarifying the Definition of a Business" – Issued in January 2017, ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a "set," that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. While the Company's acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by the Company would have been considered asset acquisitions under the new standard. As a result, transaction costs may be capitalized more often since the Company expects some of its future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill that was previously allocated to businesses that were sold or held for sale will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses. ASU 2017-01 was adopted by the Company on January 1, 2018 and it will be applied prospectively to transactions occurring after the adoption date, as applicable.   

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

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

2)  Recent Accounting Pronouncements (Continued)
 
ASU No. 2016-01: "Financial Instruments – Overall (Topic 825-10)" – Issued in January 2016, ASU 2016-01 changes the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. The Company adopted this standard on January 1, 2018 using the modified retrospective approach with the cumulative effect of the adoption made to the balance sheet as of the date of adoption. Thus, the adoption resulted in a reclassification of the related accumulated net unrealized gains of $603,170 included in accumulated other comprehensive income as of December 31, 2017 to retained earnings. Under previous guidance, changes in fair value for investments of this nature were recognized in accumulated other comprehensive income as a component of stockholders' equity.  Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. The Company holds equity securities that were previously measured at fair value with changes in fair value recognized through other comprehensive income. Upon adoption of ASU 2016-01 the Company now recognizes the changes in the fair value of these equity securities through earnings as part of gains on investments and other assets on the condensed consolidated statements of earnings, thus increasing the volatility of the Company's earnings. The adoption of this standard does not significantly affect the Company's comprehensive income or stockholders' equity.

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

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

The standard primarily impacts the manner in which the Company recognizes a) certain nonrefundable up-front fees and b) incremental costs to acquire new pre-need funeral trust contracts and pre-need and at-need cemetery contracts (i.e., selling costs). The nonrefundable fees will continue to be deferred and recognized as revenue when the underlying goods and services are delivered to the customer. The incremental selling costs will continue to be deferred and amortized by specific identification to the delivery of the underlying goods and services. Additionally, the amounts due from customers for undelivered performance obligations on cancelable pre-need contracts represent contract assets, which are required to be netted with deferred pre-need cemetery and mortuary contract revenues, instead of receivables on the Company's consolidated balance sheets.
11

 
Accounting Standards Issued But Not Yet Adopted

ASU No. 2016-13: "Financial Instruments – Credit Losses (Topic 326)" – Issued in June 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current general accepted accounting principles ("GAAP") and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. The new authoritative guidance will be effective for the Company on January 1, 2020. The Company is in the process of evaluating the potential impact of this standard.

ASU No. 2016-02: "Leases (Topic 842)" - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification ("ASC") Topic 840, "Leases", and was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new authoritative guidance will be effective for the Company on January 1, 2019. The Company is in the process of evaluating the potential impact of this standard, which is not expected to be material to the Company's results of operations but will have an effect on the balance sheet presentation for leased assets and obligations.

The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company's results of operations or financial position.
12

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


3)  Investments

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

   

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

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

3)  Investments (Continued)

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

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

 
14

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

3)  Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities held to maturity, which are carried at amortized cost, at March 31, 2018 and December 31, 2017. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

   
Unrealized
Losses for
Less than
Twelve Months
   
Fair Value
   
Unrealized
Losses for
More than
Twelve Months
   
Fair Value
   
Total
Unrealized
Loss
   
Fair Value
 
At March 31, 2018
                                   
U.S. Treasury Securities and Obligations of U.S. Government Agencies
 
$
897,420
   
$
51,456,932
   
$
63,356
   
$
623,360
   
$
960,776
   
$
52,080,292
 
Obligations of states and political subdivisions
   
17,903
     
1,419,010
     
127,648
     
2,690,329
     
145,551
     
4,109,339
 
Corporate securities
   
620,598
     
33,678,083
     
684,528
     
11,365,056
     
1,305,126
     
45,043,139
 
Mortgage and other asset-backed securities
   
107,265
     
2,102,664
     
141,754
     
1,658,340
     
249,019
     
3,761,004
 
Redeemable preferred stock
   
344
     
11,268
     
-
     
-
     
344
     
11,268
 
Total unrealized losses
 
$
1,643,530
   
$
88,667,957
   
$
1,017,286
   
$
16,337,085
   
$
2,660,816
   
$
105,005,042
 
                                                 
At December 31, 2017
                                               
U.S. Treasury Securities and Obligations of U.S. Government Agencies
 
$
532,010
   
$
51,606,699
   
$
47,413
   
$
643,380
   
$
579,423
   
$
52,250,079
 
Obligations of states and political subdivisions
   
296
     
214,882
     
70,717
     
2,225,021
     
71,013
     
2,439,903
 
Corporate securities
   
167,786
     
11,551,865
     
839,718
     
13,193,258
     
1,007,504
     
24,745,123
 
Mortgage and other asset-backed securities
   
56,756
     
2,516,660
     
105,375
     
1,676,494
     
162,131
     
4,193,154
 
Redeemable preferred stock
   
191
     
11,421
     
-
     
-
     
191
     
11,421
 
Total unrealized losses
 
$
757,039
   
$
65,901,527
   
$
1,063,223
   
$
17,738,153
   
$
1,820,262
   
$
83,639,680
 

There were 238 securities with fair value of 97.5% of amortized cost at March 31, 2018. There were 141 securities with fair value of 97.9% of amortized cost at December 31, 2017. During the three months ended March 31, 2018 and 2017 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $-0- and $52,139, respectively.

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

The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.
15

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

3)  Investments (Continued)
 
The amortized cost and estimated fair value of fixed maturity securities held to maturity, at March 31, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Estimated Fair
Value
 
Held to Maturity:
           
Due in 1 year
 
$
17,978,827
   
$
18,098,867
 
Due in 2-5 years
   
67,126,658
     
67,514,026
 
Due in 5-10 years
   
53,791,068
     
55,097,433
 
Due in more than 10 years
   
79,848,168
     
86,370,967
 
Mortgage-backed securities
   
12,105,727
     
12,125,550
 
Redeemable preferred stock
   
623,635
     
652,099
 
Total held to maturity
 
$
231,474,083
   
$
239,858,942
 

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

Equity Securities

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

 
Unrealized
Losses for
Less than
Twelve Months
 
No. of
Investment
Positions
 
Unrealized
Losses for
More than
Twelve Months
 
No. of
Investment
Positions
 
Total
Unrealized
Losses
 
At December 31, 2017
                   
Industrial, miscellaneous and all other
 
$
213,097
     
98
   
$
419,572
     
81
   
$
632,669
 
Total unrealized losses
 
$
213,097
     
98
   
$
419,572
     
81
   
$
632,669
 
Fair Value
 
$
847,718
           
$
1,329,213
           
$
2,176,931
 


The average fair value of the equity securities was 77.5% of the original investment as of December 31, 2017. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations, new factors, including changes in the business environment, can change the Company's previous intent to continue holding a security.

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

See Note 2 regarding the adoption of ASU 2016-01 on January 1, 2018. The Company now recognizes the changes (unrealized gains and losses) in the fair value of these equity securities through earnings as part of realized gains on investments and other assets on the condensed consolidated statements of earnings instead of other comprehensive income on the condensed consolidated balance sheets.
16

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

3)  Investments (Continued)
 
The Company's net gains from investments and other assets, including realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments are summarized as follows:
 
   
Three Months Ended
March 31
 
   
2018
   
2017
 
Fixed maturity securities held to maturity:
           
Gross realized gains
 
$
28,133
   
$
2,434
 
Gross realized losses
   
(308,931
)
   
-
 
Other than temporary impairments
   
-
     
(52,139
)
                 
Equity securities:
               
Gross realized gains
   
-
     
60,978
 
Gross realized losses
   
-
     
(4,556
)
Gains and losses during 2018 on securities sold in 2018
   
14,650
     
-
 
Unrealized gains and losses on securities held at the end of the period
   
(372,042
)
   
-
 
                 
Other assets:
               
Gross realized gains
   
22,951,723
     
456,275
 
Gross realized losses
   
(292,594
)
   
(369,801
)
Total
 
$
22,020,939
   
$
93,191
 
                 
(1) Includes a one-time gain of $22,252,000 from the sale of Dry Creek at East Village apartments.
 
 
The net realized gains and losses on the sale of securities are recorded on the trade date, and the cost of the securities sold is determined using the specific identification method.

The carrying amount of held to maturity securities sold was $472,883 and $28,073 for the three months March 31, 2018 and 2017, respectively.  The net realized loss related to these sales was $306,851 for the three months ended March 31, 2018 and the net realized gain related to these sales was $2,434 for the three months ended March 31, 2017. Although the intent is to buy and hold a fixed maturity security to maturity, the Company will sell a security prior to maturity if conditions have changed within the entity that issued the security to increase the risk of default to an unacceptable level.
17

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

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

   
Three Months Ended
March 31
 
   
2018
   
2017
 
Fixed maturity securities held to maturity
 
$
2,529,841
   
$
2,424,805
 
Equity securities
   
58,292
     
54,786
 
Mortgage loans held for investment
   
4,531,927
     
3,410,761
 
Real estate held for investment
   
2,670,440
     
2,894,331
 
Policy loans
   
102,866
     
116,845
 
Insurance assignments
   
3,860,937
     
3,364,642
 
Other investments
   
53,673
     
7,543
 
Cash and cash equivalents
   
137,368
     
91,012
 
Gross investment income
   
13,945,344
     
12,364,725
 
Investment expenses
   
(3,870,913
)
   
(3,348,349
)
Net investment income
 
$
10,074,431
   
$
9,016,376
 
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $110,802 and $115,501 for the three months ended March 31, 2018 and 2017, respectively.
Net investment income on real estate consists primarily of rental revenue.
Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities.
Securities on deposit with regulatory authorities as required by law amounted to $9,247,333 at March 31, 2018 and $9,264,977 at December 31, 2017. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.
There were no investments, aggregated by issuer, in excess of 10% of shareholders' equity (before net unrealized gains and losses on equity securities) at March 31, 2018, other than investments issued or guaranteed by the United States Government.

Real Estate Held for Investment
The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development and mortgage foreclosures.
Commercial Real Estate Held for Investment
The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company's goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors.
The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets.  The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.
The Company currently owns and operates 12 commercial properties in 8 states. These properties include industrial warehouses, office buildings, retail centers, and undeveloped land, and the redevelopment and expansion of its corporate campus ("Center53") in Salt Lake City, Utah. The Company does use debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.
18

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

3)  Investments (Continued)
The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $64,864,000 and $64,704,000 as of March 31, 2018 and December 31, 2017, respectively. The associated bank loan carrying values totaled approximately $41,309,000 and $40,994,000 as of March 31, 2018 and December 31, 2017, respectively.
 
The following is a summary of the Company's commercial real estate held for investment for the periods presented:

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

The Company owns a portfolio of residential homes primarily as a result of loan foreclosures.  The strategy has been to lease these homes to produce cash flow, and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns.
The Company established Security National Real Estate Services ("SNRE") to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country.
As of March 31, 2018, SNRE manages 101 residential properties in 7 states across the United States.
The net ending balance of residential real estate that serves as collateral for a bank borrowing was approximately    $-0- and $34,431,000, as of March 31, 2018 and December 31, 2017, respectively. The associated bank loan carrying value was approximately $-0- and $26,773,000 as of March 31, 2018 and December 31, 2017, respectively. This real estate relates to the Company's Dry Creek at East Village apartment complex sold in March 2018.
The net ending balance of foreclosed residential real estate included in residential real estate held for investment is $31,349,678 and $33,372,228 as of March 31, 2018 and December 31, 2017, respectively.
19

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

3)  Investments (Continued)
 
The following is a summary of the Company's residential real estate held for investment for the periods presented:

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


Real Estate Owned and Occupied by the Company

The primary business units of the Company occupy a portion of the real estate owned by the Company.  Currently, the Company occupies nearly 70,000 square feet, or approximately 10% of the overall commercial real estate holdings.

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

Location
Business Segment
 
Approximate
 Square Footage
   
Square Footage Occupied by the Company
 
5300 South 360 West, Salt Lake City, UT (1)
Corporate Offices, Life Insurance and Cemetery/Mortuary Operations
   
36,000
     
100
%
5201 Green Street, Salt Lake City, UT
Mortgage Operations
   
36,899
     
34
%
1044 River Oaks Dr., Flowood, MS
Life Insurance Operations
   
21,521
     
27
%
121 West Election Road, Draper, UT
Mortgage Sales
   
78,978
     
19
%
                   
(1) This asset is included in property and equipment on the condensed consolidated balance sheets
         

20

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

3)   Investments (Continued)

Mortgage Loans Held for Investment

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from three months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors' ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At March 31, 2018, the Company had 42%, 16%, 12%, 10%, 6%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, Arizona, and Tennessee, respectively.

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

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

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company's historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them.

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

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

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

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

Residential construction (including land acquisition and development) – Underwritten in accordance with the Company's underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing.  Additionally, land is underwritten according to the Company's policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity.
21

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

3)   Investments (Continued)

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

Allowance for Credit Losses and Recorded Investment in Mortgage Loans
 
                         
   
Commercial
   
Residential
   
Residential Construction
   
Total
 
March 31, 2018
                       
Allowance for credit losses:
                       
Beginning balance - January 1, 2018
 
$
187,129
   
$
1,546,447
   
$
35,220
   
$
1,768,796
 
   Charge-offs
   
-
     
-
     
-
     
-
 
   Provision
   
-
     
(72,425
)
   
-
     
(72,425
)
Ending balance - March 31, 2018
 
$
187,129
   
$
1,474,022
   
$
35,220
   
$
1,696,371
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
292,220
   
$
-
   
$
292,220
 
                                 
Ending balance: collectively evaluated for impairment
 
$
187,129
   
$
1,181,802
   
$
35,220
   
$
1,404,151
 
                                 
Mortgage loans:
                               
Ending balance
 
$
52,384,376
   
$
101,665,364
   
$
54,254,054
   
$
208,303,794
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
5,362,963
   
$
-
   
$
5,362,963
 
                                 
Ending balance: collectively evaluated for impairment
 
$
52,384,376
   
$
96,302,401
   
$
54,254,054
   
$
202,940,831
 
                                 
December 31, 2017
                               
Allowance for credit losses:
                               
Beginning balance - January 1, 2017
 
$
187,129
   
$
1,461,540
   
$
100,114
   
$
1,748,783
 
   Charge-offs
   
-
     
(351,357
)
   
(64,894
)
   
(416,251
)
   Provision
   
-
     
436,264
     
-
     
436,264
 
Ending balance - December 31, 2017
 
$
187,129
   
$
1,546,447
   
$
35,220
   
$
1,768,796
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
237,560
   
$
-
   
$
237,560
 
                                 
Ending balance: collectively evaluated for impairment
 
$
187,129
   
$
1,308,887
   
$
35,220
   
$
1,531,236
 
                                 
Mortgage loans:
                               
Ending balance
 
$
54,954,865
   
$
102,527,111
   
$
50,157,533
   
$
207,639,509
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
4,923,552
   
$
461,834
   
$
5,385,386
 
                                 
Ending balance: collectively evaluated for impairment
 
$
54,954,865
   
$
97,603,559
   
$
49,695,699
   
$
202,254,123
 

22

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

3)   Investments (Continued)
 
The following is a summary of the aging of mortgage loans held for investment for the periods presented:

Age Analysis of Mortgage Loans Held for Investment
 
                                                             
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days (1)
   
In Process of Foreclosure (1)
   
Total
Past Due
   
Current
   
Total
Mortgage Loans
   
Allowance for
Loan Losses
   
Unamortized deferred loan fees, net
   
Net Mortgage
Loans
 
March 31, 2018
                                                       
Commercial
 
$
5,211,276
   
$
-
   
$
-
   
$
-
   
$
5,211,276
   
$
47,173,100
   
$
52,384,376
   
$
(187,129
)
 
$
(67,717
)
 
$
52,129,530
 
Residential
   
7,223,352
     
1,150,067
     
2,800,231
     
2,562,732
     
13,736,382
     
87,928,982
     
101,665,364
     
(1,474,022
)
   
(1,125,974
)
   
99,065,368
 
Residential Construction
   
441,310
     
-
     
-
     
-
     
441,310
     
53,812,744
     
54,254,054
     
(35,220
)
   
(423,826
)
   
53,795,008
 
                                                                                 
Total
 
$
12,875,938
   
$
1,150,067
   
$
2,800,231
   
$
2,562,732
   
$
19,388,968
   
$
188,914,826
   
$
208,303,794
   
$
(1,696,371
)
 
$
(1,617,517
)
 
$
204,989,906
 
                                                                                 
December 31, 2017
                                                                         
Commercial
 
$
1,943,495
   
$
-
   
$
-
   
$
-
   
$
1,943,495
   
$
53,011,370
   
$
54,954,865
   
$
(187,129
)
 
$
(67,411
)
 
$
54,700,325
 
Residential
   
6,613,479
     
495,347
     
3,591,333
     
1,332,219