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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 quarterly period ended September 30, 2020

[ ] 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.)

121 West Election Road, Suite 100, Draper, Utah	84020
(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 [X] 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 [X] 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 [X]

Emerging growth company [ ]

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

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

Yes [ ] No[X]

As of November 10, 2020, the registrant had 16,573,341 shares of Class A Common Stock, $2.00 par value, outstanding and 2,589,783 shares of Class C Common Stock, $2.00 par value, outstanding.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2020

Table of Contents

		Page No.
	Part I - Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3-4
	Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2020 and 2019 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity as of September 30, 2020 and September 30, 2019 (unaudited)	7-8
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (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	57
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64
Item 4.	Controls and Procedures	64
	Part II - Other Information
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	66
	Signature Page	68

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Part I - Financial Information

Item 1. Financial Statements.

Assets	September 30 2020 (Unaudited)	December 31 2019
Investments:
Fixed maturity securities, available for sale, at estimated fair value	$ 344,917,387	$ 355,977,820
Equity securities at estimated fair value	11,215,606	7,271,165
Mortgage loans held for investment (net of allowances for loan losses of $2,046,481 and $1,453,037 for 2020 and 2019)	245,609,527	236,694,546
Real estate held for investment (net of accumulated depreciation of $13,497,759 and $12,788,739 for 2020 and 2019)	123,002,683	102,756,946
Real estate held for sale	7,990,181	14,097,627
Other investments and policy loans (net of allowances for doubtful accounts of $1,602,483 and $1,448,026 for 2020 and 2019)	68,008,150	60,245,269
Accrued investment income	5,712,998	4,833,232
Total investments	806,456,532	781,876,605
Cash and cash equivalents	151,686,960	127,754,719
Loans held for sale at estimated fair value	445,878,979	213,457,632
Receivables (net of allowances for doubtful accounts of $1,698,836 and $1,724,156 for 2020 and 2019)	10,423,683	9,236,330
Restricted assets (including $3,663,945 and $2,985,347 for 2020 and 2019 at estimated fair value)	16,242,387	13,935,317
Cemetery perpetual care trust investments (including $2,408,995 and $2,581,124 for 2020 and 2019 at estimated fair value)	5,387,732	4,411,864
Receivable from reinsurers	15,849,961	15,747,768
Cemetery land and improvements	9,117,882	9,519,950
Deferred policy and pre-need contract acquisition costs	98,432,491	94,701,920
Mortgage servicing rights, net	28,387,476	17,155,529
Property and equipment, net	12,636,951	14,600,394
Value of business acquired	9,188,492	9,876,647
Goodwill	3,519,588	3,519,588
Other	33,988,873	18,649,812

Total Assets	$ 1,647,197,987	$ 1,334,444,075

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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

	September 30 2020 (Unaudited)	December 31 2019
Liabilities and Stockholders' Equity
Liabilities
Future policy benefits and unpaid claims	$ 840,604,906	$ 825,600,918
Unearned premium reserve	3,404,592	3,621,697
Bank and other loans payable	424,932,007	217,572,612
Deferred pre-need cemetery and mortuary contract revenues	13,045,307	12,607,978
Cemetery perpetual care obligation	4,038,169	3,933,719
Accounts payable	5,185,265	5,056,983
Other liabilities and accrued expenses	68,639,787	50,652,591
Income taxes	31,301,997	18,686,972
Total liabilities	1,391,152,030	1,137,733,470

Stockholders' Equity
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding	-	-
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 16,559,987 shares in 2020 and 16,107,779 shares in 2019	33,119,974	32,215,558
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding	-	-
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,549,383 shares in 2020 and 2,500,887 shares in 2019	5,098,766	5,001,774
Additional paid-in capital	49,355,124	46,091,112
Accumulated other comprehensive income, net of taxes	19,909,604	13,726,514
Retained earnings	149,428,819	101,256,229
Treasury stock at cost - 189,390 Class A shares in 2020 and 490,823 Class A shares in 2019	(866,330)	(1,580,582)

Total stockholders' equity	256,045,957	196,710,605

Total Liabilities and Stockholders' Equity	$ 1,647,197,987	$ 1,334,444,075

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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
Revenues:
Insurance premiums and other considerations	$ 23,766,576	$ 19,832,492	$ 68,982,561	$ 58,504,712
Net investment income	14,709,142	10,478,566	41,072,386	31,061,069
Net mortuary and cemetery sales	5,371,715	3,526,416	14,530,584	11,205,774
Gains (losses) on investments and other assets	800,507	(519,673)	(173,461)	261,095
Mortgage fee income	98,559,624	39,735,752	212,209,718	97,161,190
Other	2,997,001	2,326,106	7,853,468	7,124,836
Total revenues	146,204,565	75,379,659	344,475,256	205,318,676

Benefits and expenses:
Death benefits	16,026,897	9,937,711	43,021,247	29,264,410
Surrenders and other policy benefits	1,056,318	636,366	2,964,984	2,266,275
Increase in future policy benefits	4,892,972	5,980,721	18,534,848	17,407,962
Amortization of deferred policy and pre-need acquisition costs and value of business acquired	4,239,935	3,477,160	10,781,658	9,678,912
Selling, general and administrative expenses:
Commissions	37,761,992	16,714,061	81,555,823	40,243,042
Personnel	21,700,446	16,287,957	60,959,099	47,018,553
Advertising	1,607,138	1,361,745	3,842,296	3,566,823
Rent and rent related	1,797,161	1,749,402	5,074,755	5,377,869
Depreciation on property and equipment	516,243	421,970	1,550,526	1,294,576
Costs related to funding mortgage loans	3,057,276	1,917,390	7,392,373	4,831,604
Other	11,701,986	9,355,218	33,080,916	25,154,712
Interest expense	2,363,169	2,078,733	6,063,218	5,353,177
Cost of goods and services sold-mortuaries and cemeteries	899,101	701,403	2,401,592	2,044,937
Total benefits and expenses	107,620,634	70,619,837	277,223,335	193,502,852

Earnings before income taxes	38,583,931	4,759,822	67,251,921	11,815,824
Income tax expense	(9,279,162)	(1,142,408)	(15,965,656)	(2,788,038)

Net earnings	$ 29,304,769	$ 3,617,414	$ 51,286,265	$ 9,027,786

Net earnings per Class A Equivalent common share (1)	$1.55	$0.19	$2.73	$0.49

Net earnings per Class A Equivalent common share-assuming dilution (1)	$1.51	$0.19	$2.68	$0.48

Weighted-average Class A equivalent common share outstanding (1)	18,873,886	18,551,116	18,760,884	18,560,874

Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)	19,433,619	18,755,091	19,164,890	18,769,435

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

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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
Net earnings	$ 29,304,769	$ 3,617,414	$ 51,286,265	$ 9,027,786
Other comprehensive income:
Unrealized gains on fixed maturity securities available for sale	$ 3,810,906	-	7,810,537	-
Unrealized gains on restricted assets	23,323	-	28,309	-
Unrealized losses on cemetery perpetual care trust investments	(16,883)	-	(11,114)	-
Foreign currency translation adjustments	84	(340)	(196)	1,707
Other comprehensive income, before income tax	3,817,430	(340)	7,827,536	1,707
Income tax benefit (expense)	(801,915)	85	(1,644,446)	(426)
Other comprehensive income, net of income tax	3,015,515	(255)	6,183,090	1,281
Comprehensive income	$ 32,320,284	$ 3,617,159	$ 57,469,355	$ 9,029,067

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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Nine Months Ended September 30, 2020
	Class A Common Stock	Class C Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive Income	Retained Earnings	Treasury Stock	Total

January 1, 2020	$ 32,215,558	$ 5,001,774	$ 46,091,112	$ 13,726,514	$ 101,256,229	$ (1,580,582)	$ 196,710,605

Net earnings	-	-	-	-	1,424,449	-	1,424,449
Other comprehensive loss	-	-	-	(8,852,313)	-	-	(8,852,313)
Stock-based compensation expense	-	-	65,877	-	-	-	65,877
Exercise of stock options	44,822	-	(33,930)	-	-	-	10,892
Sale of treasury stock	-	-	218,280	-	-	264,081	482,361
Purchase of treasury stock	-	-	-	-	-	(129,608)	(129,608)
Stock dividends	2,322	(1,020)	2,292	-	(3,594)	-	-
Conversion Class C to Class A	22,324	(22,324)	-	-	-	-	-
March 31, 2020	$ 32,285,026	$4,978,430	$ 46,343,631	$ 4,874,201	$ 102,677,084	$ (1,446,109)	$ 189,712,263

Net earnings	-	-	-	-	20,557,047	-	20,557,047
Other comprehensive income	-	-	-	12,019,888	-	-	12,019,888
Stock-based compensation expense	-	-	101,520	-	-	-	101,520
Exercise of stock options	22,726	-	(22,726)	-	-	-	-
Sale of treasury stock	-	-	319,676	-	-	664,546	984,222
Purchase of treasury stock	-	-	-	-	-	(760,713)	(760,713)
Stock dividends	807,356	124,460	2,175,790	-	(3,107,607)	-	(1)
Conversion Class C to Class A	-	-	-	-	-	-	-
June 30, 2020	$ 33,115,108	$ 5,102,890	$ 48,917,891	$ 16,894,089	$ 120,126,524	$ (1,542,276)	$ 222,614,226

Net earnings	-	-	-	-	29,304,769	-	29,304,769
Other comprehensive income	-	-	-	3,015,515	-	-	3,015,515
Stock-based compensation expense	-	-	104,562	-	-	-	104,562
Sale of treasury stock	-	-	330,939	-	-	886,452	1,217,391
Purchase of treasury stock	-	-	-	-	-	(210,506)	(210,506)
Stock dividends	742	-	1,732	-	(2,474)	-	-
Conversion Class C to Class A	4,124	(4,124)	-	-	-	-	-
September 30, 2020	$ 33,119,974	$5,098,766	$ 49,355,124	$ 19,909,604	$ 149,428,819	$ (866,330)	$256,045,957

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited) (Continued)

	Nine Months Ended September 30, 2019
	Class A Common Stock	Class C Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive Income	Retained Earnings	Treasury Stock	Total

January 1, 2019	$ 30,609,596	$ 4,387,286	$ 41,821,778	$ (2,823)	$ 95,201,732	$ (206,396)	171,811,173

Net earnings	-	-	-	-	1,930,318	-	1,930,318
Other comprehensive income	-	-	-	820	-	-	820
Stock-based compensation expense	-	-	64,704	-	-	-	64,704
Exercise of stock options	8,936	-	8,444	-	-	-	17,380
Sale of treasury stock	-	-	295,153	-	-	42,343	337,496
Purchase of treasury stock	-	-	-	-	-	(112,404)	(112,404)
Stock dividends	282	(4)	489	-	(769)	-	(2)
Conversion Class C to Class A	6,560	(6,560)	-	-	-	-	-
March 31, 2019	$ 30,625,374	$ 4,380,722	$ 42,190,568	$ (2,003)	$ 97,131,281	$ (276,457)	$ 174,049,485

Net earnings	-	-	-	-	3,480,054	-	3,480,054
Other comprehensive income	-	-	-	716		-	716
Stock-based compensation expense	-	-	65,037	-	-	-	65,037
Exercise of stock options	20,274	-	9,519	-	-	-	29,793
Sale of treasury stock	-	-	92,605	-	-	25,190	117,795
Purchase of treasury stock	-	-	-	-	-	(174,704)	(174,704)
Conversion Class C to Class A	12	(14)	2	-	-	-	-
June 30, 2019	$ 30,645,660	$ 4,380,708	$ 42,357,731	$ (1,287)	$100,611,335	$ (425,971)	$ 177,568,176

Net earnings	-	-	-	-	3,617,414	-	3,617,414
Other comprehensive loss	-	-	-	(255)	-	-	(255)
Stock-based compensation expense	-	-	65,746	-	-	-	65,746
Exercise of stock options	8,936	127,628	114,376	-	-	-	250,940
Sale of treasury stock	-	-	88,162	-	-	35,400	123,562
Purchase of treasury stock	-	-	-	-	-	(553,193)	(553,193)
Conversion Class C to Class A	-	-	-	-	-	-	-
September 30, 2019	$ 30,654,596	$ 4,508,336	$ 42,626,015	$ (1,542)	$104,228,749	$ (943,764)	$ 181,072,390

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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30
	2020	2019
Cash flows from operating activities:
Net cash used in operating activities	$(164,589,158)	$ (62,865,938)

Cash flows from investing activities:
Purchases of fixed maturity securities	(56,899,073)	(27,227,180)
Sales, calls and maturities of fixed maturity securities	75,523,084	19,444,922
Purchases of equity securities	(6,492,243)	(3,521,610)
Sales of equity securities	2,011,568	1,691,231
Net changes in restricted assets	(2,650,188)	(514,574)
Net changes in perpetual care trusts	(870,485)	(111,076)
Mortgage loans held for investment, other investments and policy loans made	(486,189,616)	(421,682,247)
Payments received for mortgage loans held for investment, other investments and policy loans	478,445,833	410,303,611
Purchases of property and equipment	(1,111,360)	(931,691)
Sales of property and equipment	-	51,104
Purchases of real estate	(27,528,643)	(6,465,802)
Sales of real estate	13,052,416	8,291,147
Cash paid for purchase of subsidiaries, net of cash acquired	-	(3,261,788)
Net cash used in investing activities	(12,708,707)	(23,933,953)

Cash flows from financing activities:
Investment contract receipts	8,656,037	9,628,472
Investment contract withdrawals	(13,759,734)	(13,282,143)
Proceeds from stock options exercised	10,892	298,113
Purchases of treasury stock	(1,100,827)	(840,301)
Repayment of bank and other loans	(251,041,466)	(139,046,605)
Proceeds from bank borrowings	329,672,821	149,304,399
Net change in warehouse line borrowings for loans held for sale	128,600,308	62,987,462
Net cash provided by financing activities	201,038,031	69,049,397

Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	23,740,166	(17,750,494)

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	137,735,673	150,936,673

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$ 161,475,839	$ 133,186,179

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest	$ 5,917,344	$ 5,292,868
Income taxes (net of refunds)	4,995,073	3,350,434

Non Cash Operating, Investing and Financing Activities:
Transfer of loans held for sale to mortgage loans held for investment	$ 9,170,610	$ -
Right-of-use assets obtained in exchange for operating lease liabilities	4,796,580	13,441,537
Benefit plans funded with treasury stock	2,683,974	578,853
Mortgage loans held for investment foreclosed into real estate held for investment	686,124	1,410,499
Accrued real estate construction costs and retainage	347,826	689,291
Right-of-use assets obtained in exchange for finance lease liabilities	8,494	255,147
Mortgage loans held for investment foreclosed into receivables	-	155,347

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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

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

	Nine Months Ended September 30
	2020	2019
Cash and cash equivalents	$ 151,686,960	$ 123,178,762
Restricted assets	8,468,191	9,166,838
Cemetery perpetual care trust investments	1,320,688	840,579

Total cash, cash equivalents, restricted cash and restricted cash equivalents	$ 161,475,839	$ 133,186,179

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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, 2019, 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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

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

2)Recent Accounting Pronouncements

Accounting Standards Adopted in 2020

ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. The Company adopted this standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s financial statements. See Note 8 for the Company’s fair value disclosures.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

2)Recent Accounting Pronouncements (Continued)

Accounting Standards Adopted in 2019

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

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

The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets. The Company compiled an inventory of its leases, determined the appropriate discount rates and has determined the impact of this standard which is not material to the Company’s results of operations, but has an effect on the balance sheet presentation for leased assets and obligations. The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019. This standard did not impact the Company’s accounting for leases where the Company is the lessor.

Accounting Standards Issued But Not Yet Adopted

ASU No. 2016-13: “Financial 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 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 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. In November 2019, the FASB issued an update to ASU No. 2016-13 that made the ASU effective for the Company on January 1, 2023. The Company is in the process of evaluating the potential impact of this standard, especially as it relates to mortgage loans held for investment.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

2)Recent Accounting Pronouncements (Continued)

ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the 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 ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that made the ASU effective for the Company on January 1, 2025. The Company is in the process of evaluating the potential impact of this standard.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments

The Company’s investments as of September 30, 2020 are summarized as follows:

	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
September 30, 2020:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies	$ 92,395,468	$ 2,059,112	$ -	$ 94,454,580

Obligations of states and political subdivisions	5,765,286	322,859	(1,792)	6,086,353

Corporate securities including public utilities	189,323,616	24,248,838	(2,137,953)	211,434,501

Mortgage-backed securities	31,887,810	1,313,395	(499,496)	32,701,709

Redeemable preferred stock	269,214	3,530	(32,500)	240,244

Total fixed maturity securities available for sale	$ 319,641,394	$ 27,947,734	$ (2,671,741)	$ 344,917,387

Equity securities at estimated fair value:

Common stock:

Industrial, miscellaneous and all other	$ 11,304,152	$ 1,845,615	$ (1,934,161)	$ 11,215,606

Total equity securities at estimated fair value	$ 11,304,152	$ 1,845,615	$ (1,934,161)	$ 11,215,606

Mortgage loans held for investment at amortized cost:
Residential	$ 80,051,914
Residential construction	120,298,836
Commercial	49,378,938
Less: Unamortized deferred loan fees, net	(905,018)
Less: Allowance for loan losses	(2,066,481)
Less: Net discounts	(1,148,662)

Total mortgage loans held for investment	$ 245,609,527

Real estate held for investment - net of accumulated depreciation:
Residential	$ 25,166,274
Commercial	97,836,409

Total real estate held for investment	$ 123,002,683

Real estate held for sale:
Residential	$ 3,455,244
Commercial	4,534,937

Total real estate held for sale	$ 7,990,181

Other investments and policy loans at amortized cost:
Policy loans	$ 14,234,935
Insurance assignments	45,858,660
Federal Home Loan Bank stock (1)	4,066,600
Other investments	5,450,438
Less: Allowance for doubtful accounts	(1,602,483)

Total policy loans and other investments	$ 68,008,150

Accrued investment income	$ 5,712,998

Total investments	$ 806,456,532


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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

The Company’s investments as of December 31, 2019 are summarized as follows:

	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
December 31, 2019:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies	$ 142,740,641	$ 632,185	$ (25,215)	$ 143,347,611

Obligations of states and political subdivisions	7,450,366	87,812	(9,026)	7,529,152

Corporate securities including public utilities	156,599,184	16,768,449	(463,413)	172,904,220

Mortgage-backed securities	31,475,280	597,395	(240,177)	31,832,498

Redeemable preferred stock	364,339	-	-	364,339

Total fixed maturity securities available for sale	$ 338,629,810	$ 18,085,841	$ (737,831)	$ 355,977,820

Equity securities at estimated fair value:

Common stock:

Industrial, miscellaneous and all other	$ 6,900,537	$ 1,139,799	$ (769,171)	$ 7,271,165

Total equity securities at estimated fair value	$ 6,900,537	$ 1,139,799	$ (769,171)	$ 7,271,165

Mortgage loans held for investment at amortized cost:
Residential	$ 113,043,965
Residential construction	89,430,237
Commercial	38,718,220
Less: Unamortized deferred loan fees, net	(2,391,567)
Less: Allowance for loan losses	(1,453,037)
Less: Net discounts	(653,272)

Total mortgage loans held for investment	$ 236,694,546

Real estate held for investment - net of accumulated depreciation:
Residential	$ 12,530,306
Commercial	90,226,640

Total real estate held for investment	$ 102,756,946

Real estate held for sale:
Residential	$ 8,021,306
Commercial	6,076,321

Total real estate held for sale	$ 14,097,627

Other investments and policy loans at amortized cost:
Policy loans	$ 14,762,805
Insurance assignments	41,062,965
Federal Home Loan Bank stock (1)	894,300
Other investments	4,973,225
Less: Allowance for doubtful accounts	(1,448,026)

Total policy loans and other investments	$ 60,245,269

Accrued investment income	$ 4,833,232

Total investments	$ 781,876,605


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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities available for sale, which were carried at estimated fair value, at September 30, 2020 and December 31, 2019. The unrealized losses were primarily related to interest rate fluctuations and uncertainties relating to COVID-19. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

	Unrealized Losses for Less than Twelve Months	Fair Value	Unrealized Losses for More than Twelve Months	Fair Value	Total Unrealized Loss	Fair Value
At September 30, 2020
Obligations of States and Political Subdivisions	$ 1,792	$ 207,330	$ -	$ -	$ 1,792	$ 207,330
Corporate Securities	1,305,034	28,511,620	832,919	3,366,248	2,137,953	31,877,868
Mortgage and other asset-backed securities	476,698	5,601,677	22,798	401,217	499,496	6,002,894
Redeemable preferred stock	32,500	217,500	-	-	32,500	217,500
Total unrealized losses	$ 1,816,024	$ 34,538,127	$ 855,717	$ 3,767,465	$ 2,671,741	$ 38,305,592

At December 31, 2019
U.S. Treasury Securities and Obligations
of U.S. Government Agencies	$ 20,211	$ 30,629,288	$ 5,004	$ 10,000,400	$ 25,215	$ 40,629,688
Obligations of States and Political Subdivisions	9,026	3,062,889	-	-	9,026	3,062,889
Corporate Securities	118,746	7,184,311	344,667	3,950,509	463,413	11,134,820
Mortgage and other asset-backed securities	205,470	13,266,443	34,707	502,769	240,177	13,769,212
Total unrealized losses	$ 353,453	$ 54,142,931	$ 384,378	$ 14,453,678	$ 737,831	$ 68,596,609

There were 113 securities with fair value of 93.5% of amortized cost at September 30, 2020. There were 93 securities with fair value of 98.9% of amortized cost at December 31, 2019. No credit losses have been recognized for the three and nine months ended September 30, 2020 and 2019.

On a quarterly basis, the Company evaluates its fixed maturity securities available for sale. 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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

	Amortized Cost	Estimated Fair Value
Due in 1 year	$ 50,670,550	$ 51,171,942
Due in 2-5 years	74,293,341	77,094,479
Due in 5-10 years	85,128,399	92,517,720
Due in more than 10 years	77,392,080	91,191,293
Mortgage-backed securities	31,887,810	32,701,709
Redeemable preferred stock	269,214	240,244
Total	$ 319,641,394	$ 344,917,387

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $90,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at September 30, 2020. These securities are used as collateral on any cash borrowings from the FHLB. As of September 30, 2020, the Company owed $88,000,000 to the FHLB and its estimated remaining maximum borrowing capacity was $384,000.

Investment Related Earnings

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

	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
Fixed maturity securities:
Gross realized gains	$ 50,171	$ 113,849	$ 201,130	$ 362,475
Gross realized losses	(39,130)	(16,814)	(51,219)	(121,829)

Equity securities:
Gains (losses) on securities sold	95,331	85,998	(12,141)	138,662
Unrealized gains and (losses) on securities held at the end of the period	511,168	(98,635)	(512,629)	676,589

Other assets:
Gross realized gains	1,480,053	472,691	1,985,817	2,265,914
Gross realized losses	(1,297,086)	(1,076,762)	(1,784,419)	(3,060,716)
Total	$ 800,507	$ (519,673)	$ (173,461)	$ 261,095

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

On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Proceeds received from the sale of fixed maturity available for sale securities for the nine months ended September 30, 2020, were $2,967,531, and resulted in gross realized gains and gross realized losses of $149,641 and $1,043, respectively. The carrying amount of held to maturity securities sold for the nine months ended September 30, 2019 was $2,724,199 and the net realized loss related to these sales was $12,394.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

Major categories of net investment income are as follows:

	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
Fixed maturity securities	$ 3,191,064	$ 2,563,481	$ 9,258,850	$ 7,596,035
Equity securities	126,369	74,629	329,534	227,280
Mortgage loans held for investment	6,918,081	4,558,232	18,154,123	13,187,416
Real estate held for investment	2,998,806	2,259,064	8,940,072	6,266,286
Policy loans	264,422	113,541	755,914	308,583
Insurance assignments	4,561,574	3,851,804	13,244,176	11,970,755
Other investments	-	-	25,421	106,678
Cash and cash equivalents	65,460	398,997	385,848	1,363,873
Gross investment income	18,125,776	13,819,748	51,093,938	41,026,906
Investment expenses	(3,416,634)	(3,341,182)	(10,021,552)	(9,965,837)
Net investment income	$ 14,709,142	$ 10,478,566	$ 41,072,386	$ 31,061,069

Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $129,347 and $102,888 for the three months ended September 30, 2020 and 2019, respectively, and $380,079 and $323,404 for the nine months ended September 30, 2020 and 2019, respectively.

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

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

Securities on deposit with regulatory authorities as required by law amounted to $9,735,147 at September 30, 2020 and $9,633,818 at December 31, 2019. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.

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

Real Estate Held for Investment and Held for Sale

The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development and 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 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 5 states. These properties include office buildings, an assisted living facility, a funeral home, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company also holds undeveloped land that may be

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $70,054,000 and $87,815,000 as of September 30, 2020 and December 31, 2019, respectively. The associated bank loan carrying values totaled approximately $46,681,000 and $54,917,000 as of September 30, 2020 and December 31, 2019, respectively.

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

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

	Net Ending Balance		Total Square Footage
	September 30 2020	December 31 2019	September 30 2020	December 31 2019
Louisiana	$ 5,889,327	$ 6,009,079	125,114	125,114
Mississippi	2,932,976	2,951,478	21,521	21,521
Utah (1)	89,014,106	81,266,083	462,730	465,230

	$ 97,836,409	$ 90,226,640	609,365	611,865

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

	Net Ending Balance		Total Square Footage
	September 30 2020	December 31 2019	September 30 2020	December 31 2019
Arizona (1)	$ -	$ 2,500	-	-
Kansas	4,000,000	4,800,000	222,679	222,679
Mississippi	234,937	318,322	12,300	12,300
Nevada	-	655,499	-	4,800
Texas (2)	300,000	300,000	-	-

	$ 4,534,937	$ 6,076,321	234,979	239,779

(1) Undeveloped land
(2) Improved commercial pad

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

Residential Real Estate Held for Investment and Held for Sale

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

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

As of September 30, 2020, SNRE manages 19 residential properties in 5 states across the United States.

The net ending balance of foreclosed residential real estate included in residential real estate held for investment and sale is $6,256,000 and $12,434,000 as of September 30, 2020 and December 31, 2019, respectively.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

	Net Ending Balance
	September 30 2020	December 31 2019
Florida	$ 1,261,975	$ 2,487,723
Nevada	686,124	293,516
Utah (1)	22,931,994	9,462,886
Washington	286,181	286,181
	$ 25,166,274	$ 12,530,306

(1) Includes subdivision land developments

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

	Net Ending Balance
	September 30 2020	December 31 2019
California	-	640,452
Florida	1,104,936	1,300,641
Nevada	293,516	-
Ohio	10,000	10,000
Utah	2,046,792	5,880,213
Washington	-	190,000
	$ 3,455,244	$ 8,021,306

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

Real Estate Owned and Occupied by the Company

The primary business units of the Company occupy a portion of the real estate owned by the Company. As of September 30, 2020, real estate owned and occupied by the Company is summarized as follows:

Location	Business Segment	Approximate Square Footage	Square Footage Occupied by the Company
121 W. Election Rd., Draper, UT	Corporate Offices, Life Insurance and Cemetery/Mortuary Operations	78,979	18%
5201 Green Street, Salt Lake City, UT (1)	Life Insurance and Mortgage Operations	39,157	73%
1044 River Oaks Dr., Flowood, MS	Life Insurance Operations	19,694	28%
1818 Marshall Street, Shreveport, LA (1)(2)	Life Insurance Operations	12,274	100%
909 Foisy Street, Alexandria, LA (1)(2)	Life Insurance Sales	8,059	100%
812 Sheppard Street, Minden, LA (1)(2)	Life Insurance Sales	1,560	100%
1550 N 3rd Street, Jena, LA (1)(2)	Life Insurance Sales	1,737	100%

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

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

Mortgage Loans Held for Investment

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine 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 September 30, 2020, the Company had 62%, 11%, 8%, 3%, 5% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, and Arizona, respectively. At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively.

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

Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding. Generally, the Company will fund a loan not to exceed 80% of the loan’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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company’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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

	Commercial	Residential	Residential Construction	Total
September 30, 2020
Allowance for credit losses:
Beginning balance - January 1, 2020	$ 187,129	$ 1,222,706	$ 43,202	$ 1,453,037
Charge-offs	-	-	-	-
Provision	-	613,444	-	613,444
Ending balance - September 30, 2020	$ 187,129	$ 1,836,150	$ 43,202	$ 2,066,481

Ending balance: individually evaluated for impairment	$ -	$ 238,997	$ -	$ 238,997

Ending balance: collectively evaluated for impairment	$ 187,129	$ 1,597,153	$ 43,202	$ 1,827,484

Mortgage loans:
Ending balance	$ 49,378,938	$ 80,051,914	$ 120,298,836	$ 249,729,688

Ending balance: individually evaluated for impairment	$ 3,414,719	$ 5,193,865	$ 630,574	$ 9,239,158

Ending balance: collectively evaluated for impairment	$ 45,964,219	$ 74,858,049	$ 119,668,262	$ 240,490,530

December 31, 2019
Allowance for credit losses:
Beginning balance - January 1, 2019	$ 187,129	$ 1,125,623	$ 35,220	$ 1,347,972
Charge-offs	-	(32,692)	-	(32,692)
Provision	-	129,775	7,982	137,757
Ending balance - December 31, 2019	$ 187,129	$ 1,222,706	$ 43,202	$ 1,453,037

Ending balance: individually evaluated for impairment	$ -	$ 195,993	$ -	$ 195,993

Ending balance: collectively evaluated for impairment	$ 187,129	$ 1,026,713	$ 43,202	$ 1,257,044

Mortgage loans:
Ending balance	$ 38,718,220	$ 113,043,965	$ 89,430,237	$ 241,192,422

Ending balance: individually evaluated for impairment	$ 4,488,719	$ 3,752,207	$ 655,000	$ 8,895,926

Ending balance: collectively evaluated for impairment	$ 34,229,501	$ 109,291,758	$ 88,775,237	$ 232,296,496

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

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

	30-59 Days Past Due	60-89 Days Past Due	Greater Than 90 Days (1)	In Process of Foreclosure (1)	Total Past Due	Current	Total Mortgage Loans	Allowance for Loan Losses	Unamortized deferred loan fees, net	Unamortized discounts, net	Net Mortgage Loans
September 30, 2020
Commercial	$ 255,858	$ 495,937	$ 3,414,719	$ -	$ 4,166,514	$ 45,212,424	$ 49,378,938	$ (187,129)	$ (43,338)	$ (828,049)	$ 48,320,422
Residential	5,261,818	1,930,361	3,745,621	1,448,244	12,386,044	67,665,870	80,051,914	(1,836,150)	(521,661)	(320,613)	77,373,490
Residential Construction	276,403	1,630,000	630,574	-	2,536,977	117,761,859	120,298,836	(43,202)	(340,019)	-	119,915,615

Total	$ 5,794,079	$ 4,056,298	$ 7,790,914	$ 1,448,244	$ 19,089,535	$ 230,640,153	$ 249,729,688	$ (2,066,481)	$ (905,018)	$ (1,148,662)	$ 245,609,527

December 31, 2019
Commercial	$ 1,872,000	$ -	$ 4,488,719	$ -	$ 6,360,719	$ 32,357,501	$ 38,718,220	$ (187,129)	$ (88,918)	$ (653,272)	$ 37,788,901
Residential	10,609,296	4,085,767	2,100,742	1,651,465	18,447,270	94,596,695	113,043,965	(1,222,706)	(1,567,581)	-	110,253,678
Residential Construction	-	-	655,000	-	655,000	88,775,237	89,430,237	(43,202)	(735,068)	-	88,651,967

Total	$ 12,481,296	$ 4,085,767	$ 7,244,461	$ 1,651,465	$ 25,462,989	$ 215,729,433	$ 241,192,422	$ (1,453,037)	$ (2,391,567)	$ (653,272)	$ 236,694,546

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

Impaired Mortgage Loans Held for Investment

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

	Recorded Investment	Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
September 30, 2020
With no related allowance recorded:
Commercial	$ 3,414,719	$ 3,414,719	$ -	$ 1,772,817	$ -
Residential	3,435,710	3,435,710	-	4,235,285	-
Residential construction	630,574	630,574	-	673,383	-

With an allowance recorded:
Commercial	$ -	$ -	$ -	$ -	$ -
Residential	1,758,155	1,758,155	238,997	1,186,545	-
Residential construction	-	-	-	-	-

Total:
Commercial	$ 3,414,719	$ 3,414,719	$ -	$ 1,772,817	$ -
Residential	5,193,865	5,193,865	238,997	5,421,830	-
Residential construction	630,574	630,574	-	673,383	-

December 31, 2019
With no related allowance recorded:
Commercial	$ 4,488,719	$ 4,488,719	$ -	$ 1,499,043	$ -
Residential	2,254,189	2,254,189	-	3,367,151	-
Residential construction	655,000	655,000	-	1,457,278	-

With an allowance recorded:
Commercial	$ -	$ -	$ -	$ -	$ -
Residential	1,498,018	1,498,018	195,993	665,270	-
Residential construction	-	-	-	-	-

Total:
Commercial	$ 4,488,719	$ 4,488,719	$ -	$ 1,499,043	$ -
Residential	3,752,207	3,752,207	195,993	4,032,421	-
Residential construction	655,000	655,000	-	1,457,278	-

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3)Investments (Continued)

Credit Risk Profile Based on Performance Status

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

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

	Commercial		Residential		Residential Construction		Total
	September 30, 2020	December 31, 2019	September 30, 2020	December 31, 2019	September 30, 2020	December 31, 2019	September 30, 2020	December 31, 2019

Performing	$ 45,964,219	$ 34,229,501	$ 74,858,049	$ 109,291,758	$ 119,668,262	$ 88,775,237	$ 240,490,530	$ 232,296,496
Non-performing	3,414,719	4,488,719	5,193,865	3,752,207	630,574	655,000	9,239,158	8,895,926

Total	$ 49,378,938	$ 38,718,220	$ 80,051,914	$ 113,043,965	$ 120,298,836	$ 89,430,237	$ 249,729,688	$ 241,192,422

Non-Accrual Mortgage Loans Held for Investment

Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans totals approximately $397,000 and $203,000 as of September 30, 2020 and December 31, 2019, respectively.

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

	As of September 30 2020	As of December 31 2019
Commercial	$ 3,414,719	$ 4,488,719
Residential	5,193,865	3,752,207
Residential construction	630,574	655,000
Total	$ 9,239,158	$ 8,895,926

4)Loans Held for Sale

The Company has elected the fair value option for loans held for sale. 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 mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings. There is one loan with an unpaid principal balance of $190,560 that is 90 or more days past due and on a nonaccrual status as of September 30, 2020. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

4)Loans Held for Sale (Continued)

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

	As of September 30 2020	As of December 31 2019

Aggregate fair value	$ 445,878,979	$ 213,457,632
Unpaid principal balance	428,860,105	206,417,122
Unrealized gain	17,018,874	7,040,510

Mortgage Fee Income

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

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

	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
Loan fees	$ 20,630,052	$ 8,438,471	$ 40,167,476	$ 22,162,455
Interest income	3,348,929	2,127,775	7,630,993	5,032,505
Secondary gains	70,627,864	27,574,294	151,215,666	66,434,923
Change in fair value of loan commitments	3,901,086	378,899	12,454,218	1,915,223
Change in fair value of loans held for sale	1,404,131	1,411,322	4,231,347	2,065,978
Provision for loan loss reserve	(1,352,438)	(195,009)	(3,489,982)	(449,894)
Mortgage fee income	$ 98,559,624	$ 39,735,752	$ 212,209,718	$ 97,161,190

Loan Loss Reserve

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

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

	As of September 30 2020	As of December 31 2019
Balance, beginning of period	$ 4,046,288	$ 3,604,869
Provision on current loan originations (1)	3,489,982	643,284
Charge-offs, net of recaptured amounts	(4,527,157)	(201,865)
Balance, end of period	$ 3,009,113	$ 4,046,288

(1) Included in mortgage fee income

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

4)Loans Held for Sale (Continued)

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

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

5)Stock Compensation Plans

The Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”). Compensation expense for options issued of $104,562 and $65,746 has been recognized for these plans for the three months ended September 30, 2020 and 2019, respectively, and $271,959 and $195,487 has been recognized for these plans for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the total unrecognized compensation expense related to the options issued was $126,071, which is expected to be recognized over the vesting period of one year.

The fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model. The Company estimates the expected life of the options using the simplified method. Future volatility is estimated based upon the weighted historical volatility of the Company’s Class A common stock over a period equal to the expected life of the options. The risk-free interest rate for the expected life of the options is based upon the Federal Reserve Board’s daily interest rates in effect at the time of the grant.

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

	Number of Class A Shares	Weighted Average Exercise Price	Number of Class C Shares	Weighted Average Exercise Price

Outstanding at January 1, 2020	1,086,053	$ 4.41	594,132	$ 5.36
Adjustment for effect of stock dividends	27,968		19,354
Granted	77,000		180,000
Exercised	(78,803)		-
Cancelled	-		-
Outstanding at September 30, 2020	1,112,218	$ 4.28	793,486	$ 4.88

As of September 30, 2020:
Options exercisable	1,053,033	$ 4.39	652,805	$ 5.14

As of September 30, 2020:
Available options for future grant	325,372		266,500

Weighted average contractual term of options
outstanding at September 30, 2020	5.72 years		5.94 years

Weighted average contractual term of options
exercisable at September 30, 2020	5.51 years		5.49 years

Aggregated intrinsic value of options
outstanding at September 30, 2020 (1)	$2,242,693		$1,115,985

Aggregated intrinsic value of options
exercisable at September 30, 2020 (1)	$2,228,291		$894,505


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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

5)Stock Compensation Plans (Continued)

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

	Number of Class A Shares	Weighted Average Exercise Price	Number of Class C Shares	Weighted Average Exercise Price

Outstanding at January 1, 2019	1,011,274	$ 4.49	577,280	$ 5.15
Granted	2,000		-
Exercised	(19,796)		(63,814)
Cancelled	-		-
Outstanding at September 30, 2019	993,478	$ 4.50	513,466	$ 5.33

As of September 30, 2019:
Options exercisable	955,195	$ 4.46	489,840	$ 5.34

As of September 30, 2019:
Available options for future grant	299,351		146,425

Weighted average contractual term of options
outstanding at September 30, 2019	5.40 years		3.63 years

Weighted average contractual term of options
exercisable at September 30, 2019	5.34 years		3.37 years

Aggregated intrinsic value of options
outstanding at September 30, 2019 (1)	$765,360		$106,646

Aggregated intrinsic value of options
exercisable at September 30, 2019 (1)	$765,360		$106,646


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

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the nine months September 30, 2020 and 2019 was $191,309 and $112,340, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

6)Earnings Per Share

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

		Three Months Ended September 30		Nine Months Ended September 30
		2020	2019	2020	2019
Numerator:
	Net earnings	$ 29,304,769	$ 3,617,414	$ 51,286,265	$ 9,027,786
Denominator:
	Basic weighted-average shares outstanding	18,873,886	18,551,116	18,760,884	18,560,874
Effect of dilutive securities:
	Employee stock options	559,733	203,975	404,006	208,561

	Diluted weighted-average shares outstanding	19,433,619	18,755,091	19,164,890	18,769,435

Basic net earnings per share		$1.55	$0.19	$2.73	$0.49

Diluted net earnings per share		$1.51	$0.19	$2.68	$0.48

Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the nine months September 30, 2020 and 2019, there were -0- and 864,915 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.

7)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, 2019. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.

Factors Management Used to Identify the Enterprise’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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

7)Business Segment Information (Continued)

	Life Insurance	Cemetery/ Mortuary	Mortgage	Intercompany Eliminations	Consolidated
For the Three Months Ended
September 30, 2020
Revenues from external customers	$ 39,261,044	$ 5,495,990	$ 101,447,531	$ -	$ 146,204,565
Intersegment revenues	2,952,836	79,096	168,890	(3,200,822)	-
Segment profit before income taxes	4,807,280	1,322,303	32,454,348	-	38,583,931
		-
For the Three Months Ended

September 30, 2019
Revenues from external customers	$ 29,824,686	$ 3,570,419	$ 41,984,554	$ -	$ 75,379,659
Intersegment revenues	1,465,778	106,638	120,891	(1,693,307)	-
Segment profit before income taxes	1,263,836	213,198	3,282,788	-	4,759,822

For the Nine Months Ended
September 30, 2020
Revenues from external customers	$ 110,255,399	$ 14,815,991	$ 219,403,866	$ -	$ 344,475,256
Intersegment revenues	5,677,189	272,409	559,923	(6,509,521)	-
Segment profit before income taxes	5,408,482	2,975,556	58,867,883	-	67,251,921

Identifiable Assets	1,232,786,760	55,339,760	443,756,079	(88,204,200)	1,643,678,399
Goodwill	2,765,570	754,018	-	-	3,519,588
Total Assets	1,235,552,330	56,093,778	443,756,079	(88,204,200)	1,647,197,987

For the Nine Months Ended
September 30, 2019
Revenues from external customers	$ 88,937,110	$ 12,472,711	$ 103,908,855	$ -	$ 205,318,676
Intersegment revenues	3,441,497	336,911	372,170	(4,150,578)	-
Segment profit before income taxes	4,568,178	2,421,845	4,825,801	-	11,815,824

Identifiable Assets	941,739,161	84,250,592	243,272,631	(110,132,588)	1,159,129,796
Goodwill	2,765,570	754,018	-	-	3,519,588
Total Assets	944,504,731	85,004,610	243,272,631	(110,132,588)	1,162,649,384

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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 the financial assets and financial liabilities.

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

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

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 investments), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

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

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

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 Endowment 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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)

The items shown under Level 3 are valued as follows:

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

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

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

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

It should be noted that for replacement cost, when determining the fair value of 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 comparables and property condition when determining fair value.

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at September 30, 2020.

	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturity securities available for sale	$ 344,917,387	$ -	$ 342,627,234	$ 2,290,153
Equity securities	11,215,606	11,215,606	-	-
Loans held for sale	445,878,979	-	-	445,878,979
Restricted assets (1)	1,470,114	-	1,470,114	-
Restricted assets (2)	2,193,831	2,193,831	-	-
Cemetery perpetual care trust investments (1)	576,292	-	576,292	-
Cemetery perpetual care trust investments (2)	1,832,703	1,832,703	-	-
Derivatives - loan commitments (3)	17,945,259	-	-	17,945,259
Total assets accounted for at fair value on a recurring basis	$ 826,030,171	$ 15,242,140	$ 344,673,640	$ 466,114,391

Liabilities accounted for at fair value on a recurring basis
Derivatives - call options (4)	$ (126,193)	$ (126,193)	$ -	$ -
Derivatives - loan commitments (4)	(2,999,809)	-	-	(2,999,809)
Total liabilities accounted for at fair value on a recurring basis	$ (3,126,002)	$ (126,193)	$ -	$ (2,999,809)

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)

	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturity securities available for sale	$ 355,977,820	$ -	$ 352,761,438	$ 3,216,382
Equity securities	7,271,165	7,271,165	-	-
Loans held for sale	213,457,632	-	-	213,457,632
Restricted assets (1)	1,008,867	-	1,008,867	-
Restricted assets (2)	1,976,480	1,976,480	-	-
Cemetery perpetual care trust investments (1)	975,673	-	975,673	-
Cemetery perpetual care trust investments (2)	1,605,451	1,605,451	-	-
Derivatives - loan commitments (3)	2,722,580	-	-	2,722,580
Total assets accounted for at fair value on a recurring basis	$ 584,995,668	$ 10,853,096	$ 354,745,978	$ 219,396,594

Liabilities accounted for at fair value on a recurring basis
Derivatives - call options (4)	$ (62,265)	$ (62,265)	$ -	$ -
Derivatives - put options (4)	(22,282)	(22,282)	-	-
Derivatives - loan commitments (4)	(231,347)	-	-	(231,347)
Total liabilities accounted for at fair value on a recurring basis	$ (315,894)	$ (84,547)	$ -	$ (231,347)

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

8)Fair Value of Financial Instruments (Continued)

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

			Significant	Range of Inputs
	Fair Value at	Valuation	Unobservable	Minimum	Maximum	Weighted
	9/30/2020	Technique	Input(s)	Value	Value	Average
Loans held for sale	$ 445,878,979	Market approach	Investor contract pricing as a percentage of unpaid principal balance	99.0%	110.0%	104.0%

Derivatives - loan commitments (net)	14,945,451	Market approach	Fall-out factor	1.0%	92.0%	80.0%
			Initial-Value	N/A	N/A	N/A
			Servicing	0 bps	133 bps	67 bps

Fixed maturity securities available for sale	2,290,153	Broker quotes	Pricing quotes	$ 91.49	$ 123.46	$ 117.45

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

			Significant	Range of Inputs
	Fair Value at	Valuation	Unobservable	Minimum	Maximum	Weighted
	12/31/2019	Technique	Input(s)	Value	Value	Average
Loans held for sale